-----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, NqJy+4NbnOiN3UFjJeSi8l/7jL6cF2fLKYAgLUsDL9DjMWxsjVsAkU0wnKzmUyft jid9a1B+mFwPc8VLw1RG5w== 0000700565-02-000017.txt : 20020813 0000700565-02-000017.hdr.sgml : 20020813 20020813151333 ACCESSION NUMBER: 0000700565-02-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13368 FILM NUMBER: 02729440 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-Q 1 form10q_jun2002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 Commission file number: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Registrant as specified in its charter) Delaware (State of incorporation) 37-1103704 (I.R.S. employer identification no.) 1515 Charleston Avenue, Mattoon, Illinois 61938 (Address and zip code of principal executive offices) (217) 234-7454 (Registrant's telephone number, including area code) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of August 13, 2002, 3,395,852 common shares, $4.00 par value, were outstanding. The outstanding shares have been adjusted to reflect a three-for-two stock split paid on November 16, 2001. (See Notes to Consolidated Financial Statements). PART I ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets (unaudited) June 30, December 31, (In thousands, except share data) 2002 2001 --------- ------------ Assets Cash and due from banks: Non-interest bearing $ 17,440 $ 23,471 Interest bearing 336 5,400 Federal funds sold 7,500 4,225 --------- --------- Cash and cash equivalents 25,276 33,096 Investment securities: Available-for-sale, at fair value 159,059 160,096 Held-to-maturity, at amortized cost (estimated fair value of $2,042 and $2,136 at June 30, 2002 and December 31, 2001, respectively) 2,016 2,071 Loans 482,583 473,243 Less allowance for loan losses (3,713) (3,702) --------- --------- Net loans 478,870 469,541 Premises and equipment, net 16,353 16,656 Accrued interest receivable 5,745 6,790 Goodwill, net 10,849 11,094 Intangible assets, net 2,969 1,298 Other assets 5,818 5,337 --------- --------- Total assets $ 706,955 $ 705,979 ========= ========= Liabilities and Stockholders' Equity Deposits: Non-interest bearing $ 79,998 $ 80,265 Interest bearing 473,871 479,155 --------- --------- Total deposits 553,869 559,420 Accrued interest payable 1,804 2,370 Securities sold under agreements to repurchase 33,851 38,879 Other borrowings 43,640 37,625 Other liabilities 4,795 3,760 --------- --------- Total liabilities 637,959 642,054 --------- --------- Stockholders' Equity: Common stock, $4 par value; authorized 6,000,000 shares; issued 3,599,934 shares in 2002 and 3,546,060 shares in 2001 14,400 14,184 Additional paid-in-capital 14,362 13,288 Retained earnings 42,649 39,500 Deferred compensation 1,487 1,392 Accumulated other comprehensive income 1,986 740 Less treasury stock at cost, 198,750 shares in 2002 and 174,216 shares in 2001 (5,888) (5,179) --------- --------- --------- --------- Total stockholders' equity 68,996 63,925 --------- --------- Total liabilities and stockholders' equity $ 706,955 $ 705,979 ========= ========= See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Income (unaudited) (In thousands, except per share data) Three months ended Six months ended June 30, June 30, 2002 2001 2002 2001 ------- ------- ------- ------- Interest income: Interest and fees on loans $ 8,402 $ 9,347 $16,821 $18,362 Interest on investment securities 1,872 2,162 3,778 4,383 Interest on federal funds sold 45 53 75 87 Interest on deposits with other financial institutions 1 1 11 2 ------- ------- ------- ------- Total interest income 10,320 11,563 20,685 22,834 ------- ------- ------- ------- Interest expense: Interest on deposits 2,993 4,972 6,374 10,024 Interest on securities sold under agreements to repurchase 86 251 172 543 Interest on Federal Home Loan Bank advances 480 419 930 823 Interest on federal funds purchased 1 6 2 12 Interest on debt 52 62 85 136 ------- ------- ------- ------- Total interest expense 3,612 5,710 7,563 11,538 ------- ------- ------- ------- Net interest income 6,708 5,853 13,122 11,296 ------- ------- ------- ------- Provision for loan losses 150 150 275 300 ------- ------- ------- ------- Net interest income after provision for loan losses 6,558 5,703 12,847 10,996 ------- ------- ------- ------- Other income: Trust revenues 450 471 928 971 Brokerage commissions 76 65 134 112 Insurance commissions 313 29 504 79 Service charges 780 800 1,517 1,516 Securities gains, net 73 82 116 140 Mortgage banking revenue 360 296 667 474 Other 407 477 897 924 ------- ------- ------- ------- Total other income 2,459 2,220 4,763 4,216 ------- ------- ------- ------- Other expense: Salaries and employee benefits 3,096 2,750 6,102 5,302 Net occupancy and equipment expense 1,009 958 1,980 1,909 Amortization of goodwill 122 226 244 436 Amortization of other intangible assets 124 83 234 167 Stationery and supplies 123 181 278 337 Legal and professional 258 253 496 488 Marketing and promotion 150 231 309 389 Other 1,188 930 2,110 1,749 ------- ------- ------- ------- Total other expense 6,070 5,612 11,753 10,777 ------- ------- ------- ------- Income before income taxes 2,947 2,311 5,857 4,435 Income taxes 985 696 1,930 1,355 ------- ------- ------- ------- Net income $ 1,962 $ 1,615 $ 3,927 $ 3,080 ======= ======= ======= ======= Per share data: Basic earnings per share $ .58 $ .48 $ 1.16 $ .91 Diluted earnings per share $ .57 $ .48 $ 1.15 $ .91 ======= ======= ======= ======= See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Cash Flows (unaudited) (In thousands) June 30, 2002 2001 -------- -------- Cash flows from operating activities: Net income $ 3,927 $ 3,080 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses 275 300 Depreciation, amortization and accretion, net 1,751 1,472 Gain on sale of securities, net (116) (140) Loss on sale of other real property owned, net 16 2 Gain on sale of mortgage loans held for sale, net (512) (381) Origination of mortgage loans held for sale (37,115) (31,156) Proceeds from sale of mortgage loans held for sale 39,905 26,600 Decrease in other investment 250 - (Increase) decrease in other assets (2,060) 1,599 Increase (decrease) in other liabilities 1,630 (529) -------- -------- Net cash provided by operating activities 7,951 847 -------- -------- Cash flows from investing activities: Capitalization of mortgage servicing rights (1) (40) Purchases of premises and equipment (624) (788) Net increase in loans (11,882) (3,606) Proceeds from sales of securities available-for-sale 10,646 6,850 Proceeds from maturities of: Securities available-for-sale 17,476 51,084 Securities held-to-maturity 301 - Purchases of securities available-for-sale (25,349) (42,367) Purchases of securities held-to-maturity (84) (299) Net cash provided by acquisition 15 606 -------- -------- Net cash provided by (used in) investing activities (9,502) 11,440 -------- -------- Cash flows from financing activities: Net increase (decrease) in deposits (5,551) 6,351 Increase (decrease) in repurchase agreements (5,028) 167 Decrease in short-term FHLB advances -- (15,000) Increase in long-term FHLB advances 5,000 3,000 Increase in other borrowings 220 - Proceeds from issuance of common stock 367 173 Purchase of treasury stock (614) (443) Dividends paid on common stock (663) (590) -------- -------- Net cash used in financing activities (6,269) (6,342) -------- -------- Increase (decrease) in cash and cash equivalents (7,820) 5,945 -------- -------- Cash and cash equivalents at beginning of period 33,096 24,840 -------- -------- Cash and cash equivalents at end of period $ 25,276 $ 30,785 ======== ======== Additional disclosures of cash flow information Interest $ 8,129 $ 11,147 Income Taxes 2,052 1,525 Loans transferred to real estate owned 338 40 Dividends reinvested in common stock 925 777 ======== ======== Notes to Consolidated Financial Statements (Unaudited) Summary of Significant Accounting Policies Basis of Accounting and Consolidation The unaudited consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. ("Company") and its wholly-owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-Illinois Insurance Services, Inc. ("First Mid Insurance") and The Checkley Agency, Inc. ("Checkley"). All significant inter-company balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments, which in the opinion of management are necessary for a fair presentation of the results of the interim periods ended June 30, 2002 and 2001, and all such adjustments are of a normal recurring nature. The results of the interim period ended June 30, 2002, are not necessarily indicative of the results expected for the year ending December 31, 2002. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements and related footnote disclosures. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2001 Form 10-K. Stock Split On November 16, 2001, the Registrant effected a three-for-two stock split in the form of a 50 percent stock dividend. Par value remained at $4 per share. The stock split increased the Company's outstanding common shares from 2,250,714 to 3,376,071 shares. All 2001 share and per share amounts have been restated giving retroactive recognition to the stock split. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141, "Business Combinations," ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations. SFAS 141 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted the provisions of SFAS 141 as of July 1, 2001, and SFAS 142 as of January 1, 2002. Goodwill and intangible assets, acquired in business combinations completed before July 1, 2001, continued to be amortized and tested for impairment prior to the full adoption of SFAS 142. Since its adoption of SFAS 142 as of January 1, 2002, the Company was required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS 141 for recognition separate from goodwill. The Company was also required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset was identified as having an indefinite useful life, the Company was required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Impairment is measured as the excess of the carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss is measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the SFAS 142 transitional goodwill impairment evaluation, SFAS 142 required the Company to perform an assessment of whether there is an indication that goodwill was impaired as of the date of adoption. To accomplish this, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. To the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit, an indication would exist that the reporting unit goodwill might be impaired and the Company would perform the second step of the transitional impairment test to determine whether a transitional impairment loss existed. The Company performed the testing of goodwill for impairment as required by June 30, 2002. The second step was not required to be completed as the Company determined that its goodwill was not impaired. As of January 1, 2002, the date of adoption of SFAS 142, the Company had unamortized goodwill in the amount of $11.1 million, of which $4 million was subject to the transition provisions of SFAS 142 and is no longer being amortized. The remaining $7.1 million is for acquisition of branches whereby the liabilities assumed were greater than the assets obtained and continues to be amortized. The Company also had core deposit intangibles of $1.3 million, which also continue to be amortized. In January 2002, the Company added an additional $1.9 million of amortizable intangibles as a result of the acquisition of Checkley. The following table presents gross carrying amount and accumulated amortization by major intangible asset class as of June 30, 2002 and December 31, 2001 (in thousands):

Aggregate amortization for the current year and estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands). Aggregate amortization expense: For period ended 6/30/02 $478 Estimated amortization expense: For the period 7/1/02-12/31/02 $485 For year ended 12/31/03 $960 For year ended 12/31/04 $859 For year ended 12/31/05 $840 For year ended 12/31/06 $840 For year ended 12/31/07 $786 The adoption of SFAS 142 resulted in a net income increase of $206,000 or $.06 in basic and diluted earnings per share for the six months ended June 30, 2002. For the six months ended June 30, 2002, amortization expense related to core deposit intangibles was $155,000, amortization expense related to other intangibles was $79,000 and amortization expense related to goodwill from branch acquisitions was $244,000. For the six months ended June 30, 2001, amortization expense related to goodwill no longer amortizable due to adoption of SFAS 142 was $192,000, amortization expense related to core deposit intangibles was $167,000 and amortization expense related to goodwill from branch acquisitions was $244,000. Comprehensive Income The Company's comprehensive income for the three and six month periods ended June 30, 2002 and 2001 is as follows: Three months ended Six months ended June 30, June 30, ------------------ ------------------ (In thousands) 2002 2001 2002 2001 ------- ------- ------- ------- Net income $ 1,962 $ 1,615 $ 3,927 $ 3,080 ------- ------- ------- ------- Other comprehensive income: Unrealized gain during the period 2,191 381 2,149 2,290 Less realized gain during the period (73) (82) (116) (140) Tax effect (821) (116) (788) (833) ------- ------- ------- ------- Comprehensive income $ 3,259 $ 1,798 $ 5,172 $ 4,397 ======= ======= ======= ======= Earnings Per Share A three-for-two common stock split was effected on November 16, 2001, in the form of a distribution of a 50% stock dividend for the stockholders of record at the close of business on October 26, 2001. Accordingly, information with respect to shares of common stock and earnings per share has been restated for 2001 periods presented to fully reflect the stock split. Income for basic earnings per share is based on the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of common shares outstanding, increased by the assumed conversion of the Company's stock options, unless anti-dilutive. The components of basic and diluted earnings per common share for the three and six month periods ended June 30, 2002 and 2001 are as follows:

Merger and Acquisition On April 20, 2001, First Mid Bank acquired all of the outstanding stock of American Bank of Illinois located in Highland, Illinois, for $3.7 million in cash. This acquisition added approximately $30.8 million to total deposits, $24.9 million to loans, $2 million to securities, $1.7 million to premises and equipment and $1.4 million to intangible assets. The acquisition was accounted for using the purchase method of accounting whereby the acquired assets and liabilities were recorded at fair value as of the acquisition date and the excess cost over fair value of net assets was recorded as goodwill. The consolidated financial statements include the results of operations of American Bank of Illinois since the acquisition date. On January 29, 2002, the Company acquired all of the issued and outstanding stock of Checkley, an insurance agency headquartered in Mattoon, Illinois. Checkley was purchased for cash with a portion ($750,000) paid at closing and the remainder ($1,000,000) to be paid over a five-year earn-out agreement ending January 2007. Checkley operates as a separate subsidiary of the Company and provides customers with commercial property, casualty, life, auto and home insurance. In order to facilitate this acquisition, the Company became a financial holding company under the Gramm-Leach-Bliley Act on December 14, 2001. The results of Checkley's operations are included in the consolidated financial statements since the acquisition date. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands): At January 29, 2002: - ---------------------------------------------------------- Current assets $643 Property and equipment 76 Intangible assets 1,904 --------------------- Total assets acquired 2,623 --------------------- Current liabilities (771) Debt (20) --------------------- Total liabilities (791) --------------------- Net assets acquired $1,832 ===================== The Company estimates that $1,904,000 of acquired intangible assets were obtained. The identifiable intangible assets were allocated to customer lists to be amortized over a period of ten years. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries as of, and for the periods ended, June 30, 2002 and 2001. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as discussions of the Company's pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many uncertainties including: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Overview Net income for the three months ended June 30, 2002 was $1,962,000 ($.57 diluted EPS), an increase of $347,000 from $1,615,000 ($.48 diluted EPS) for the same period in 2001. Net income for the six months ended June 30, 2002 was $3,927,000 ($1.15 diluted EPS), an increase of $847,000 from $3,080,000 ($.91 diluted EPS) for the same period in 2001. The adoption of SFAS 142 resulted in a net income increase of $103,000 or $.03 in basic and diluted earnings per share for the three months ended June 30, 2002. For the six months ended June 30, 2002, net income increased $206,000 or $.06 in basic and diluted earnings per share. A summary of the factors that contributed to the changes in net income is shown in the table below. 2002 vs. 2001 Three months Six months (In thousands) Ended June 30 Ended June 30 --------------- --------------- Net interest income $ 855 $1,851 Other income, including securities transactions 239 547 Other expenses (458) (976) Income taxes (289) (575) --------------- --------------- Increase in net income $ 347 $ 847 =============== =============== The following table shows the Company's annualized performance ratios for the three months ended June 30, 2002 and 2001, as compared to the performance ratios for the year ended December 31, 2001: June 30, June 30, December 31, 2002 2001 2001 -------- -------- ------------ Return on average assets 1.12% .95% .97% Return on average equity 11.77% 10.28% 10.56% Average equity to average assets 9.54% 9.26% 9.20% Results of Operations Net Interest Income The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds. For purposes of the following discussion and analysis, the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes. The adjustment is referred to as the tax-equivalent adjustment. The Company's average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands):

(1) Interest income and rates are presented on a tax-equivalent basis ("TE") assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans are not material and 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 six months ended June 30, 2002, as compared to the same period in 2001 (in thousands): For the six months ended June 30, 2002 compared to 2001 Increase / (Decrease) ---------- ---------- --------- ---------- Total Rate/ Change Volume Rate Volume (4) Earning Assets: Interest-bearing deposits $ 9 $ 39 $ (1) $ (29) Federal funds sold (12) 138 (58) (92) Investment securities: Taxable (575) 334 (833) (76) Tax-exempt (1) (44) (56) 13 (1) Loans (2)(3) (1,541) 1,309 (2,664) (186) ---------- ---------- --------- ---------- Total interest income (2,163) 1,764 (3,543) (384) ---------- ---------- --------- ---------- Interest-Bearing Liabilities: Interest-bearing deposits Demand deposits (1,031) 366 (1,211) (186) Savings deposits (48) 124 (136) (36) Time deposits (2,571) (503) (2,218) 150 Securities sold under agreements to repurchase (371) 136 (406) (101) FHLB advances 107 238 (102) (29) Federal funds purchased (10) (8) (6) 4 Long-term debt (51) 27 (65) (13) Total interest expense (3,975) 380 (4,144) (211) ---------- ---------- --------- ---------- Net interest income $1,812 $1,384 $ 601 $ (173) ========== ========== ========= ========== (1) Interest income and rates are presented on a tax-equivalent basis, assuming a federal income tax rate of 34%. (2) Loan fees are included in interest income and are not material. (3) Nonaccrual loans are not material and have been included in the average balances. (4) The changes in rate/volume are computed on a consistent basis by multiplying the change in rates with the change in volume. On a tax equivalent basis, net interest income increased $1,812,000, or 15.5% to $13,468,000 for the six months ended June 30, 2002, from $11,656,000 for the same period in 2001. The increase in net interest income was primarily due to a growth in net interest earning assets and an increase in net interest spread. For the six months ended June 30, 2002, average earning assets increased by $47,945,000, or 8.0%, and average interest-bearing liabilities increased $34,302,000, or 6.6%, compared with average balances for the same period in 2001. Changes in average balances, as a percent of average earnings assets, are shown below: < average loans (as a percent of average earnings assets) decreased .7% to 73.2% for the six months ended June 30, 2002, from 73.9% for the same period in 2001. < average securities (as a percent of average earnings assets) decreased .4% to 25.1% for the six months ended June 30, 2002, from 25.5% for the same period in 2001. Provision for Loan Losses The provision for loan losses for the six months ended June 30, 2002 and 2001 was $275,000 and $300,000, respectively. For information on loan loss experience and nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections later in this document. Other Income An important source of the Company's revenue is derived from other income. The following table sets forth the major components of other income for the three months and six months ended June 30, 2002 and 2001 (in thousands): Three months ended Six months ended June 30, June 30, 2002 2001 $ Change 2002 2001 $ Change -------- -------- ---------- ------- -------- --------- Trust $450 $471 $ (21) $928 $971 $ (43) Brokerage 76 65 (15) 134 112 22 Insurance commissions 313 29 284 504 79 425 Service charges 780 800 (20) 1,517 1,516 1 Security gains 73 82 (9) 116 140 (24) Mortgage banking 360 296 64 667 474 193 Other 407 477 (70) 897 924 (27) -------- -------- ---------- ------- -------- --------- Total other income $2,459 $2,220 $239 $4,763 $4,216 $ 547 ======== ======== ========== ======= ======== ========= Explanations for the three months ended June 30, 2002 as compared to the same period in 2001: < Trust revenues decreased $21,000 or 4.5% to $450,000 from $471,000. Trust assets, reported at market value, were $293 million at June 30, 2002 compared to $298 million at June 30, 2001. Approximately 50% of trust revenue is market value dependent. The overall decline in equity prices in the United States has resulted in reduced levels of trust revenue. Absent an increase in overall equity prices, management does not expect increases in trust revenue other than that generated through new business. < Revenues from brokerage increased $11,000 or 16.9% to $76,000 from $65,000 due to an increase in annuity sales. < Insurance commissions increased $284,000 or 979.3% to $313,000 from $29,000. This increase is due to the acquisition of Checkley in January 2002. < Fees from service charges decreased $20,000 or 2.5% to $780,000 from $800,000. This was primarily the result of higher deposit balances left in transaction accounts that reduced minimum balance service charge income. < Sales of investment securities resulted in a net gain of $73,000, as compared to a net gain of $82,000 for the same quarter in 2001. The net gain in 2002 resulted from sales of several available-for-sale securities. < Mortgage banking income increased $64,000 or 21.6% to $360,000 from $296,000. This increase was due to higher margins received on loans originated and sold by First Mid Bank. Loans sold balances are as follows: < $17.0 million (representing 180 loans) for the 2nd quarter 2002. < $17.9 million (representing 206 loans) for the 2nd quarter 2001. First Mid Bank generally releases the servicing rights on loans sold into the secondary market. Accordingly, capitalized originated mortgage servicing rights are not material to the consolidated financial statements. < Other income decreased $70,000 or 14.7% to $407,000 from $477,000. This is primarily the result of lower fees received on late charges. Explanations for the six months ended June 30, 2002 as compared to the same period in 2001: < Trust revenues decreased $43,000 or 4.4% to $928,000 from $971,000. Trust assets, reported at market value, were $293 million at June 30, 2002 and $298 million at June 30, 2001. Approximately 50% of trust revenue is market value dependent. The overall decline in equity prices in the United States has resulted in reduced levels of trust revenue. Absent an increase in overall equity prices, management does not expect increases in trust revenue other than that generated through new business. < Revenues from brokerage increased $22,000 or 19.6% to $134,000 from $112,000. This was primarily due to increased annuity sales. < Insurance commissions increased $425,000 or 538.0% to $504,000 from $79,000. This increase is due to the acquisition of Checkley in January 2002. < Fees from service charges increased $1,000 or .1% to $1,517,000 from $1,516,000. < Sales of investment securities resulted in a net gain of $116,000 as compared to $140,000 for the same period in 2001. Each period had sales of several securities in the available-for-sale portfolio to improve the overall portfolio mix and the margin. < Mortgage banking income increased $193,000 or 40.7% to $667,000 from $474,000. This increase was due to a higher number of fixed rate loans originated and sold by First Mid Bank as a result of lower interest rates. Loans sold balances are as follows: < $39.4 million (representing 435 loans) for the 6 months in 2002. < $26.2 million (representing 303 loans) for the 6 months in 2001. < Other income decreased $27,000 or 2.9% to $897,000 from $924,000 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 three months and six months ended June 30, 2002 and 2001 (in thousands):

Explanations for the three months ended June 30, 2002 as compared to the same period in 2001: < Salaries and employee benefits, the largest component of other expense, increased $346,000 or 12.6% to $3,096,000 from $2,750,000. This increase can be explained by merit increases for continuing employees and an increase in the number of employees due to the acquisition of Checkley in January 2002. There were 310 full-time equivalent employees at June 30, 2002 compared to 293 at June 30, 2001. < Occupancy and equipment expense increased $51,000 or 5.3% to $1,009,000 from $958,000. This increase included building maintenance, utilities and rent expense for Checkley. < Amortization of goodwill expense decreased due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Goodwill totaling $4 million at January 1, 2002 is no longer being amortized. However, the Company continues to amortize goodwill for acquisition of branches whereby the fair value of liabilities assumed were greater than the assets obtained, which totaled $7.1 million at January 1, 2002. Amortization of other intangibles expense increased $41,000 as a result of the acquisition of Checkley ($47,000), partially offset by the reduction of core deposit intangible expense ($6,000). < Other operating expenses increased $258,000 or 27.7%. This increase is almost entirely the result of a $249,500 write-off of an investment in a venture capital fund. During the second quarter, management determined that the probability of recovery of the investment was remote and, accordingly, charged off the investment through a direct charge to earnings. The Company has no other such investments. < All other categories of operating expenses decreased a net of $134,000 or 20.2% to $531,000 from $665,000. This decrease is due to higher expenses during the three months ended June 30, 2001 as a result of the acquisition of American Bank of Illinois in April 2001. Explanations for the six months ended June 30, 2002 as compared to the same period in 2001: < Salaries and employee benefits, the largest component of other expense, increased $800,000 or 15.1% to $6,102,000 from $5,302,000. This increase can be explained by merit increases for continuing employees and an increase in the number of employees due to the acquisition of Checkley in January 2002 and American Bank of Illinois in April 2001. < Occupancy and equipment expense increased $71,000 or 3.7% to $1,980,000 from $1,909,000. This increase included building maintenance, utilities and depreciation expense for all buildings. < Amortization of goodwill expense decreased due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Goodwill totaling $4 million at January 1, 2002 is no longer being amortized. However, the Company continues to amortize goodwill for acquisition of branches whereby the fair value of liabilities assumed were greater than the assets obtained, which totaled $7.1 million at January 1, 2002. Amortization of other intangibles expense increased $67,000 as a result of the acquisition of Checkley ($79,000), partially offset by the reduction of core deposit intangible expense ($12,000). < Other operating expenses increased $361,000 or 20.6%. This increase is almost entirely the result of a $249,500 write-off of an investment in a venture capital fund. During the second quarter, management determined that the probability of recovery of the investment was remote and, accordingly, charged off the investment through a direct charge to earnings. The Company has no other such investments. < All other categories of operating expenses decreased a net of $131,000 or 10.8% to $1,083,000 from $1,214,000. This decrease is due to higher expenses in 2001 as a result of the acquisition of American Bank of Illinois in April 2001. Income Taxes Total income tax expense amounted to $1,930,000 (33.0% effective tax rate) for the six months ended June 30, 2002, compared to $1,355,000 (31.7% effective tax rate) for the same period in 2001. The increase in the effective tax rate is due to increased loan interest income, partially offset by a decrease in interest income from U.S. Treasury securities. Analysis of Balance Sheets Loans The loan portfolio is the largest category of the Company's earning assets. The following table summarizes the composition of the loan portfolio as of June 30, 2002 and December 31, 2001 (in thousands): June 30, December 31, 2002 2001 ----------------- -------------- Real estate - residential $121,176 $136,965 Real estate - agricultural 46,321 41,922 Real estate - commercial 166,664 152,986 ----------------- -------------- Total real estate - mortgage $334,161 $331,873 Commercial and agricultural 114,842 107,620 Installment 31,832 32,522 Other 1,748 1,228 ----------------- -------------- Total loans $482,583 $473,243 ================= ============== At June 30, 2002, the Company had loan concentrations in agricultural industries of $84.2 million, or 17.5%, of outstanding loans and $82.6 million, or 17.5%, at December 31, 2001. The Company had no further loan concentrations in excess of 10% of outstanding loans. Real estate mortgage loans have averaged approximately 70% of the Company's total loan portfolio for the past several years. This is the result of the Company's focus on real estate lending and a historical strong local housing market. The balance of real estate loans held for sale amounted to $3,293,000 and $5,571,000 as of June 30, 2002 and December 31, 2001, respectively. The following table presents the balance of loans outstanding as of June 30, 2002, by maturities (dollars in thousands): Maturity (1) ---------------------------------------------- Over 1 One year through Over or less (2) 5 years 5 years Total ----------- ----------- ----------- ---------- Real estate - residential $ 46,765 $ 70,422 $3,989 $121,176 Real estate - agricultural 6,906 32,751 6,664 46,321 Real estate - commercial 47,285 99,982 19,397 166,664 ----------- ----------- ----------- ---------- Total real estate - mortgage $100,956 $203,155 $ 30,050 $334,161 Commercial and agricultural 74,276 38,206 2,360 114,842 Installment 17,006 14,826 - 31,832 Other 286 876 586 1,748 ----------- ----------- ----------- ---------- Total loans $192,524 $257,063 $ 32,996 $482,583 =========== =========== =========== ========== (1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts. As of June 30, 2002, loans with maturities over one year consisted of approximately $263,694,000 in fixed rate loans and $26,366,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. Rollovers and borrower requests are handled on a case-by-case basis. Nonperforming Loans Nonperforming loans are defined as: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and loans not included in (a) and (b) above which are defined as "renegotiated loans". The Company's policy is to cease accrual of interest on all loans that become ninety days past due as to principal or interest. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The following table presents information concerning the aggregate amount of nonperforming loans at June 30, 2002 and December 31, 2001 (in thousands): June 30, December 31, 2002 2001 -------------- ------------- Nonaccrual loans $1,942 $3,419 Renegotiated loans which are performing in accordance with revised terms 203 188 -------------- ------------- Total Nonperforming Loans $2,145 $3,607 ============== ============= At June 30, 2002, approximately $645,000 of the nonperforming loans resulted from collateral dependent loans to two borrowers. Of the $1,477,000 decrease in nonaccrual loans during the six months ended June 30, 2002, $255,000 resulted from loans transferred to other real estate owned. The remaining $1,222,000 was the net result of loans made current or paid-off and loans put on nonaccrual status. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $94,000 for the six months ended June 30, 2002 and $247,000 for the year ended December 31, 2001. Interest income on these loans that was included in income totaled $9,000 and $16,000 for the same periods. Loan Quality and Allowance for Loan Losses The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover probable losses in the loan portfolio. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an allowance for loan losses that is adequate but not excessive. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Company's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for loan losses. Management considers collateral values in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current economic conditions in the region where the Company operates. Management considers the allowance for loan losses a critical accounting policy. Management recognizes that there are risk factors which are inherent in the Company's loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company's operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company's success. At June 30, 2002 the Company's loan portfolio included $84.2 million of loans to borrowers whose businesses are directly related to agriculture. The balance increased by $1.6 million from $82.6 million at December 31, 2001. While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry, could result in an increase in the level of problem agriculture loans and potentially to loan losses within the agricultural portfolio. Analysis of the allowance for loan losses as of June 30, 2002 and 2001, and of changes in the allowance for the three and six month periods ended June 30, 2002 and 2001, is as follows (dollars in thousands): Three months ended Six months ended June 30, June 30, 2002 2001 2002 2001 --------- --------- --------- --------- Average loans outstanding, net of unearned income $471,736 $440,350 $471,736 $440,350 Allowance-beginning of period $ 3,751 $ 3,403 $ 3,702 $ 3,262 Balance added through acquisitions - 275 - 275 Charge-offs: Real estate-mortgage 111 10 142 10 Commercial, financial & agricultural 33 120 58 124 Installment 55 22 88 46 --------- --------- --------- --------- Total charge-offs 199 152 288 180 Recoveries: Real estate-mortgage - - - - Commercial, financial & agricultural 1 5 2 11 Installment 10 12 22 25 --------- --------- --------- --------- Total recoveries 11 17 24 36 --------- --------- --------- --------- Net charge-offs 188 135 264 144 --------- --------- --------- --------- Provision for loan losses 150 150 275 300 --------- --------- --------- --------- Allowance-end of period $ 3,713 $ 3,693 $ 3,713 $ 3,693 ========= ========= ========= ========= Ratio of annualized net charge offs to average loans .16% .11% .12% .07% ======== ========== ========= ========= Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .77% .80% .77% .80% ======== ========== ========= ========= Ratio of allowance for loan losses to nonperforming loans 173.3% 81.1% 173.3% 81.1% ======== ========== ========= ========= The Company minimizes credit risk by adhering to sound underwriting and credit review policies. Management and the board of directors of the Company review these policies at least annually. 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. The board of directors and management review the status of problem loans and determine the adequacy of the allowance. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. Securities The Company's overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of securities purchased are primarily based on the Company's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the securities as of June 30, 2002 and December 31, 2001 (in thousands): June 30, December 31, 2002 2001 ---------------------- --------------------- % of % of Amount Total Amount Total ---------------------- --------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 63,512 40% $ 60,852 38% Obligations of states and political subdivisions 27,695 18% 29,211 18% Mortgage-backed securities 49,539 31% 54,306 34% Other securities 17,088 11% 16,591 10% ----------- ---------- ----------- ---------- Total securities $157,834 100% $160,960 100% =========== ========== =========== ========== At June 30, 2002, the Company's investment portfolio showed an increase in other securities and in mortgage-backed securities with a decrease in U.S. Treasury securities and obligations of U.S. government corporations and agencies. All other types of securities remained consistent. 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 June 30, 2002 and December 31, 2001 were as follows (in thousands):

The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at amortized cost, at June 30, 2002 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.

The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent yields have been calculated using a 34% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. Government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders' equity at June 30, 2002. Investment securities carried at approximately $131,445,000 and $133,208,000 at June 30, 2002 and December 31, 2001, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. Deposits Funding of the Company's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates for the six months ended June 30, 2002 and for the year ended December 31, 2001 (dollars in thousands): June 30, December 31, 2002 2001 ------------------------------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------------------------------------------- Demand deposits: Non-interest bearing $ 75,269 - $ 69,020 - Interest bearing 192,912 1.38% 182,404 2.40% Savings 50,203 1.61% 41,437 2.23% Time deposits 234,412 3.96% 247,348 5.45% ------------------------------------------- Total average deposits $552,796 2.31% $540,209 3.48% =========================================== The following table sets forth the maturity of time deposits of $100,000 or more at June 30, 2002 and December 31, 2001 (in thousands): June 30, December 31, 2002 2001 -------------------------------------- 3 months or less $ 28,758 $ 25,503 Over 3 through 6 months 19,772 20,228 Over 6 through 12 months 17,764 10,913 Over 12 months 12,938 4,794 -------------------------------------- Total $ 79,232 $ 61,438 ====================================== Repurchase Agreements and Other Borrowings Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. First Mid Bank collateralizes these obligations with certain government securities that are direct obligations of the United States or one of its agencies. First Mid Bank offers these retail repurchase agreements as a cash management service to its corporate customers. Other borrowings consist of Federal Home Loan Bank ("FHLB") advances, federal funds purchased, and loans (short-term or long-term debt) that the Company has outstanding. Information relating to securities sold under agreements to repurchase and other borrowings as of June 30, 2002 and December 31, 2001 is presented below (in thousands): June 30, December 31, 2002 2001 ------------ ------------- Securities sold under agreements to repurchase $33,851 $38,879 Federal Home Loan Bank advances: Fixed term - due in one year or less 8,000 - Fixed term - due after one year 30,300 33,300 Debt: Loans due in one year or less 4,540 4,325 Loans due after one year 800 - ------------ ------------- Total $77,491 $76,504 ============ ============= Average interest rate at end of period 3.16% 3.15% Maximum Outstanding at any Month-end Securities sold under agreements to repurchase $39,086 $40,646 Federal Home Loan Bank advances: Overnight - 12,800 Fixed term - due in one year or less 8,000 5,000 Fixed term - due after one year 30,300 28,300 Federal funds purchased - 2,850 Debt: Loans due in one year or less 4,564 4,325 Loans due after one year 800 - ------------ ------------- Total $82,750 $93,921 ============ ============= Averages for the Period (YTD) Securities sold under agreements to repurchase $32,094 $29,547 Federal Home Loan Bank advances: Overnight 594 2,161 Fixed term - due in one year or less 5,652 3,356 Fixed term - due after one year 30,300 23,349 Federal funds purchased 156 236 Debt: Loans due in one year or less 4,520 4,325 Loans due after one year 676 - ------------ ------------- Total $73,992 $62,974 ============ ============= Average interest rate during the period 3.21% 4.47% FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. The fixed term advances consists of $38.3 million as follows: < $3 million advance at 6.58% with a 2-year maturity, due 10/10/02 < $5 million advance at 2.54% with a 1-year maturity, due 02/28/03 < $5 million advance at 3.45% with a 2-year maturity, due 02/28/04 < $5 million advance at 6.16% with a 5-year maturity, due 03/20/05 < $2.3 million advance at 6.10% with a 5-year maturity, due 04/07/05 < $5 million advance at 6.12% with a 5-year maturity, due 09/06/05 < $5 million advance at 5.34% with a 5-year maturity, due 12/14/05 < $3 million advance at 5.98% with a 10-year maturity, due 03/01/11 < $5 million advance at 4.33% with a 10-year maturity, due 11/23/11 Other debt, both short-term and long-term, represents the outstanding loan balances for the Company. At June 30, 2002, outstanding loan balances include $4,325,000 on a revolving credit agreement with The Northern Trust Company with a floating interest rate of 1.25% over the Federal Funds rate (3.0% as of June 30, 2002) and set to mature November 19, 2002. The balance also includes a $1 million note payable resulting from the acquisition of Checkley with an annual interest rate equal to the prime rate listed in the money rate section of the Wall Street Journal (4.75% as of June 30, 2002) and principal payable annually over five years, with a final maturity of January 2007. The balance also includes a $15,000 note payable on an operating loan assumed with the Checkley acquisition. Interest Rate Sensitivity The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of interest bearing assets differ significantly from the maturity or repricing characteristics of interest bearing liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company's asset/liability management committee oversees the interest rate sensitivity position and directs the overall allocation of funds. In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as "static GAP" analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk imbedded in the balance sheet. The following table sets forth the Company's interest rate repricing gaps for selected maturity periods at June 30, 2002 (in thousands):

The static GAP analysis shows that at June 30, 2002, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates, if any, could have an unfavorable effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, static GAP analysis being one. The Company's asset liability management committee (ALCO) also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with the bank's historical experience and with known industry trends. ALCO meets at least monthly to review the Company's exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and /or rates of the assets and liabilities. Based on all information available, management does not believe that changes in interest rates which might reasonably be expected to occur in the next twelve months will have a material, adverse effect on the Company's net interest income. Capital Resources At June 30, 2002, the Company's stockholders' equity had increased $5,071,000 or 7.9% to $68,996,000 from $63,925,000 as of December 31, 2001. During the first six months of 2002, net income contributed $3,927,000 to equity before the payment of dividends to common stockholders. The change in net unrealized gain/loss on available-for-sale investment securities increased stockholders' equity by $1,246,000, net of tax. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Board of Governors of the Federal Reserve System ("Federal Reserve System"), and First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain 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 minimum leverage ratio of 4%. Management believes that, as of June 30, 2002 and December 31, 2001, the Company and First Mid Bank have met all capital adequacy requirements. As of June 30, 2002, the most recent notification from the primary regulator categorized First Mid Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios must be maintained as set forth in the table. There are no conditions or events since that notification that management believes have changed this category. To Be Well Capitalized Under For Capital rompt Corrective Actual Adequacy Purposes Action Provision -------- ------- -------- ------- ---------------- Amount Ratio Amount Ratio Amount Ratio -------- ------- -------- ------- --------- ------ June 30, 2002 Total Capital (to risk-weighted assets) Company $56,905 11.37% $40,032 > 8.00% N/A N/A - First Mid Bank 57,358 11.56% 39,692 > 8.00% $46,615 >10.00% - - Tier 1 Capital (to risk-weighted assets) Company 53,192 10.63% 20,016 > 4.00% N/A N/A - First Mid Bank 53,645 10.81% 19,846 > 4.00% 29,769 > 6.00% - - Tier 1 Capital (to average assets) Company 53,192 7.74% 27,493 > 4.00% N/A N/A - First Mid Bank 53,645 7.88% 27,235 > 4.00% 34,043 > 5.00% - - December 31, 2001 Total Capital (to risk-weighted assets) Company $54,498 11.23% $38,810 > 8.00% N/A N/A - First Mid Bank 54,139 11.24% 38,521 > 8.00% $48,152 >10.00% - - Tier 1 Capital (to risk-weighted assets) Company 50,796 10.47% 19,405 > 4.00% N/A N/A - First Mid Bank 50,437 10.47% 19,261 > 4.00% 28,891 > 6.00% - - Tier 1 Capital (to average assets) Company 50,796 7.34% 27,669 > 4.00% N/A N/A - First Mid Bank 50,437 7.36% 27,427 > 4.00% 34,284 > 5.00% - - Banks and financial holding companies and bank holding companies are expected to operate at or above the minimum capital requirements. These ratios are in excess of regulatory minimums and allow the Company to operate without capital adequacy concerns. Stock Plans Participants may purchase Company stock under the following four plans of the Company's, the Deferred Compensation Plan, the First Retirement and Savings Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan. For more detailed information on these plans, refer to the Company's 2001 Form 10-K. On August 5, 1998, the Company announced a stock repurchase program of up to 3% of its common stock. In March 2000, the Board approved the repurchase of an additional 5% of the Company's common stock. In September 2001, the Board authorized the repurchase of $3 million of additional shares of the authorized common stock, bringing the aggregate total to 8% of the Company's common stock plus $3 million of additional shares. During the period ending June 30, 2002, the Company repurchased 24,534 shares (.7%) at a total price of $614,000. Since inception, the Company has repurchased 198,750 shares (5.8%) at a total price of $5,888,000. As of June 30, 2002, the Company was authorized per all repurchase programs to purchase an additional 187,413 shares. Treasury stock is further affected by activity in the Deferred Compensation Plan. Liquidity Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of the business. Financial obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing. The Company's liquidity management focuses on the ability to obtain funds economically through assets that may be converted into cash at minimal costs or through other sources. The Company's other sources for cash include overnight Federal Fund lines, Federal Home Loan Bank advances, deposits of the State of Illinois, the ability to borrow at the Federal Reserve Bank, and the Company's operating line of credit with The Northern Trust Company. Details for the sources include: < First Mid Bank has $17 million available in overnight Federal Fund lines, including $10 million from Harris Trust and Savings Bank of Chicago and $7 million from The Northern Trust Company. Availability of the funds is subject to the First Mid Bank's meeting minimum regulatory capital requirements for total capital to risk-weighted assets and tier 1 capital to total assets. As of June 30, 2002, the First Mid Bank's ratios of total capital to risk-weighted assets of 11.56% and tier 1 capital to total assets of 7.88% exceeded minimum regulatory requirements. < First Mid Bank can also borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the Federal Home Loan Bank. Collateral that can be pledged includes one-to-four family residential real estate loans and securities. At June 30, 2002, the excess collateral at the Federal Home Loan Bank will support approximately $26 million of additional advances. < First Mid Bank also receives deposits from the State of Illinois. The receipt of these funds is subject to competitive bid and requires collateral to be pledged at the time of placement. < First Mid Bank is also a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged. < In addition, the Company has a revolving credit agreement in the amount of $10 million with The Northern Trust Company. The Company has an outstanding balance of $4,325,000 as of June 30, 2002, and $5,675,000 in available funds. The credit agreement matures on November 19, 2002. The agreement contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and also contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and also contains requirements for prior lender approval for certain sales of assets, merger activity, the acquisition or issuance of debt, and the acquisition of treasury stock. The Company and First Mid Bank were in compliance with the existing covenants at June 30, 2002. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from: < lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions. < deposit activities, including seasonal demand of private and public funds. < investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Government treasuries and agency securities. < operating activities, including scheduled debt repayments and dividends to shareholders. The following table summarizes significant contractual obligations and other commitments at June 30, 2002 (in thousands): Time Operating Deposits Borrowings* Leases Total -------------- --------------- ------------- ------------ 2002 $175,110 $58,491 $129 $233,730 2003 41,433 5,200 204 46,837 2004 8,511 5,200 204 13,915 2005 6,025 200 152 6,377 2006 2,880 5,200 126 8,206 Thereafter 256 3,200 891 4,347 -------------- --------------- ------------- ------------ Total $234,215 $77,491 $1,706 $313,412 ============== =============== ============= ============ Commitments to extend credit $ 88,550 *Borrowings included at earlier of call date or maturity For the six-month period ended June 30, 2002, net cash of $8.0 million was provided from operating activities, while investing activities and financing activities used net cash of $9.5 million and $6.3 million, respectively. Thus, cash and cash equivalents decreased by $7.8 million since year-end 2001. Generally, during 2002, the decreases in deposits and customer repurchase agreements due to seasonal outflow reduced cash balances. Also, declines in residential real estate loan balances due to the low rate environment were greater than the growth in commercial loans and securities since year-end 2001. Management believes that it has adequate sources of liquidity to meet its contractual obligations as well as to provide for contingencies that might reasonably be expected to occur. Effects of Inflation Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are affected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company's assets and liabilities which are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the market risks faced by the Company since December 31, 2001. For information regarding the Company's market risk, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. PART II ITEM 1. LEGAL PROCEEDINGS Since First Mid Bank acts a depository of funds, it is named from time to time as a defendant in lawsuits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings in which the Company is involved constitute ordinary, routine litigation incidental to the business of the Company and that such litigation will not materially adversely affect the Company's consolidated financial condition. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders was held on May 22, 2002. At the meeting, Kenneth R. Diepholz, Gary W. Melvin and Steven L. Grissom were elected to serve as Class I directors with terms expiring in 2005. Continuing Class III directors (term expiring in 2004) are Charles A. Adams, Daniel E. Marvin, Jr. and Ray Anthony Sparks and continuing Class II directors (term expiring in 2003) are Richard A. Lumpkin and William S. Rowland. The stockholders also approved an amendment to the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. There were 3,068,654 issued and outstanding shares of common stock at the time of the Annual Meeting. The voting at the meeting, on the items listed above, was as follows: Election of Directors For Withheld - --------------------- --- -------- Kenneth R. Diepholz 3,047,246 21,408 Steven L. Grissom 3,042,396 26,258 Gary W. Melvin 3,046,484 22,170 Approval of Amendment to Stock Incentive Plan For Against Withheld --- ------- -------- 2,977,125 77,930 13,599 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Exhibits: The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K: Form 8-K was filed by the Company on May 13, 2002 and Form 8-K/A was filed by the Company on May 17, 2002 regarding the change in auditor of the Company's 401(k) Profit Sharing Plan. Form 8-K was filed by the Company on July 24, 2002 regarding plans of First Mid Bank to open new banking centers in Champaign and Maryville, Illinois, which are subject to regulatory approval. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MID-ILLINOIS BANCSHARES, INC. (Company) /s/ William S. Rowland - -------------------------------------- William S. Rowland President and Chief Executive Officer /s/ Michael L. Taylor - -------------------------------------- Michael L. Taylor Chief Financial Officer Dated: August 13, 2002 Exhibit Index to Form 10-Q Exhibit Number Description and Filing or Incorporation Reference - -------------------------------------------------------------------------------- 11.1 Statement re: Computation of Earnings Per Share (Filed herewith on page 8) 99.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of First Mid-Illinois Bancshares, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William S. Rowland, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: August 13, 2002 /s/ William S. Rowland ------------------------------------- William S. Rowland President and Chief Executive Officer Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of First Mid-Illinois Bancshares, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael L. Taylor, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: August 13, 2002 /s/ Michael L. Taylor ------------------------------------ Michael L. Taylor Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----