-----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, ACkpQIn1vFEaTHDMFsfUYIqkYuUo3sH6GFANLcdrSJcZdNgO6R5B5GEDExQps/Kw hgHf4dOHJhWaD/weYbt4vw== 0000700565-03-000107.txt : 20030513 0000700565-03-000107.hdr.sgml : 20030513 20030513103553 ACCESSION NUMBER: 0000700565-03-000107 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030513 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: 03694217 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_mar03.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 March 31, 2003 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 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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) YES [X] NO [ ] As of May 13, 2003, 3,158,169 common shares, $4.00 par value, were outstanding. PART I ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets (unaudited) March 31, December 31, (In thousands, except share data) 2003 2002 ------------- ------------- Assets Cash and due from banks: Non-interest bearing $ 21,864 $ 22,437 Interest bearing 18,636 19,995 Federal funds sold 29,000 27,225 ------------- ------------- Cash and cash equivalents 69,500 69,657 Investment securities: Available-for-sale, at fair value 153,174 166,415 Held-to-maturity, at amortized cost (estimated fair value of $1,824 and $1,927 at March 31, 2003 and December 31, 2002, respectively) 1,797 1,902 Loans 506,756 499,864 Less allowance for loan losses (3,841) (3,723) ------------- ------------- Net loans 502,915 496,141 Premises and equipment, net 17,005 16,916 Accrued interest receivable 4,919 6,362 Goodwill, net 9,034 9,034 Intangible assets, net 4,559 4,743 Other assets 4,886 5,070 ------------- ------------- Total assets $767,789 $ 776,240 ============= ============= Liabilities and Stockholders' Equity Deposits: Non-interest bearing $ 84,694 $ 84,025 Interest bearing 530,951 529,427 ------------- ------------- Total deposits 615,645 613,452 Accrued interest payable 1,481 1,793 Securities sold under agreements to repurchase 38,119 44,184 Other borrowings 39,425 44,625 Other liabilities 5,202 5,379 ------------- ------------- Total liabilities 699,872 709,433 ------------- ------------- Stockholders' equity: Common stock, $4 par value; authorized 6,000,000 shares; issued 3,634,507 shares in 2003 and 3,603,737 shares in 2002 14,538 14,415 Additional paid-in capital 15,153 14,450 Retained earnings 48,257 45,896 Deferred compensation 1,746 1,589 Accumulated other comprehensive income 1,985 2,373 Less treasury stock at cost, 472,123 shares in 2003 and 414,562 shares in 2002 (13,762) (11,916) ------------- ------------- Total stockholders' equity 67,917 66,807 ------------- ------------- Total liabilities and stockholders' equity $767,789 $776,240 ============= ============= See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Income (unaudited) Three months ended (In thousands, except per share data) March 31, 2003 2002 ------------- ------------- Interest income: Interest and fees on loans $ 8,008 $ 8,419 Interest on investment securities 1,602 1,906 Interest on federal funds sold 54 30 Interest on deposits with other financial institutions 56 10 ------------- ------------- Total interest income 9,720 10,365 Interest expense: Interest on deposits 2,698 3,381 Interest on securities sold under agreements to repurchase 64 86 Interest on Federal Home Loan Bank advances 418 450 Interest on federal funds purchased - 1 Interest on debt 60 33 ------------- ------------- Total interest expense 3,240 3,951 ------------- ------------- Net interest income 6,480 6,414 Provision for loan losses 250 125 ------------- ------------- Net interest income after provision for loan losses 6,230 6,289 Other income: Trust revenues 456 478 Brokerage commissions 57 58 Insurance commissions 411 191 Service charges 1,038 737 Securities gains, net 370 43 Mortgage banking revenue 549 326 Other 549 490 ------------- ------------- Total other income 3,430 2,323 Other expense: Salaries and employee benefits 3,314 3,006 Net occupancy and equipment expense 1,063 971 Amortization of other intangible assets 184 179 Stationery and supplies 144 155 Legal and professional 231 238 Marketing and promotion 132 159 Other 998 923 ------------- ------------- Total other expense 6,066 5,631 ------------- ------------- Income before income taxes 3,594 2,981 Income taxes 1,232 972 ------------- ------------- Net income $ 2,362 $ 2,009 ============= ============= Per share data: Basic earnings per share $.74 $.59 Diluted earnings per share $.73 $.59 ============= ============= Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, (In thousands) 2003 2002 ------------- ------------- Cash flows from operating activities: Net income $ 2,362 $ 2,009 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 250 125 Depreciation, amortization and accretion, net 771 832 Gain on sale of securities, net (370) (43) Loss on sale of other real property owned, net 16 6 Gain on sale of mortgage loans held for sale, net (514) (291) Origination of mortgage loans held for sale (35,912) (19,593) Proceeds from sale of mortgage loans held for sale 39,375 22,688 (Increase) decrease in other assets 1,611 (879) Increase in other liabilities 618 1,330 ------------- ------------- Net cash provided by operating activities 8,207 6,184 ------------- ------------- Cash flows from investing activities: Capitalization of mortgage servicing rights (1) (1) Purchases of premises and equipment (569) (335) Net increase in loans (9,973) (1,359) Proceeds from sales of securities available-for-sale 13,815 4,039 Proceeds from maturities of: Securities available-for-sale 29,900 7,600 Securities held-to-maturity 15,105 246 Purchases of securities available-for-sale (45,755) (12,728) Purchases of securities held-to-maturity (90) (45) Net cash provided by acquisition - 15 ------------- ------------- Net cash provided by (used in) investing activities 2,432 (2,568) ------------- ------------- Cash flows from financing activities: Net increase (decrease) in deposits 2,193 (7,687) Decrease in repurchase agreements (6,065) (9,309) Decrease in short-term FHLB advances (5,000) - Increase in long-term FHLB advances - 5,000 Increase in other borrowings - 239 Repayment of short-term debt (200) - Proceeds from issuance of common stock 392 259 Purchase of treasury stock (1,689) (524) Dividends paid on common stock (427) (330) ------------- ------------- Net cash used in financing activities (10,796) (12,352) ------------- ------------- Decrease in cash and cash equivalents (157) (8,736) Cash and cash equivalents at beginning of period 69,657 33,096 ------------- ------------- Cash and cash equivalents at end of period $69,500 $24,360 ============= ============= Additional disclosures of cash flow information: Cash paid during the period for: Interest $ 3,552 $ 4,389 Income taxes 254 218 Loans transferred to real estate owned 422 479 Dividends reinvested in common stock 108 116 ============= ============= Notes to Consolidated Financial Statements (Unaudited) Website The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission ("SEC") can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC. 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"), The Checkley Agency, Inc. ("Checkley") 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"). 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 March 31, 2003, and 2002, and all such adjustments are of a normal recurring nature. The results of the interim period ended March 31, 2003, are not necessarily indicative of the results expected for the year ending December 31, 2003. 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 2002 Annual Report on Form 10-K. Recent Accounting Pronouncements The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets," ("SFAS 142") as of January 1, 2002,and the provisions of SFAS No. 147, "Acquisitions of Certain Financial Institutions," ("SFAS 147") as of October 1, 2002, retroactive to January 1, 2002. As of January 1, 2002, the Company had unamortized goodwill of $9 million, which was subject to the transition provisions of SFAS 142 and SFAS 147, and is no longer being amortized. The Company also had $2.1 million of intangible assets for an acquisition of a branch whereby the liabilities assumed were greater than the assets obtained and was not considered an acquisition of a business, $1.3 million of core deposit intangibles, and $217,000 of intangible assets arising from the rights to service mortgage loans for others, all which continue to be amortized. In January 2002, the Company added an additional $1.9 million of amortizable intangibles as a result of the acquisition of Checkley. The following table presents gross carrying amount and accumulated amortization by major intangible asset class as of March 31, 2003 and December 31, 2002 (in thousands):

Total amortization expense for the periods ended March 31, 2003 and 2002 was as follows (in thousands): 2003 2002 ------------ ------------ Intangibles from branch acquisitions $ 50 $ 50 Core deposit intangibles 73 78 Mortgage servicing rights 13 19 Customer list intangibles 48 32 ------------ ------------ $184 $179 ============ ============ Aggregate amortization expense 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 3/31/03 $184 Estimated amortization expense: For period 4/1/03-12/31/03 $535 For period ended 12/31/04 $614 For period ended 12/31/05 $578 For period ended 12/31/06 $579 For period ended 12/31/07 $515 For period ended 12/31/08 $454 In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002 on January 1, 2003, as required. The adoption did not have a material effect on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123" ("SFAS 148"). SFAS 148 permits two additional transition methods for entities that adopt the fair value based method of accounting for stock-based employee compensation. The Statement also requires new disclosures about the ramp-up effect of stock-based employee compensation on reported results, and requires that those effects be disclosed more prominently by specifying the form, content and location of those disclosures. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company applies APB Opinion No. 25 in accounting for the Stock Investment 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. The Company has presented pro forma compensation cost based on the fair value at grant date for its stock options under SFAS No. 123, "Accounting for Stock-Based Compensation" in the table below (in thousands, except per share data). The Company has not decided yet if it will adopt a change to the fair value based method of accounting. March 31, 2003 2002 ------------ ------------ Net income: As reported $2,362 $2,009 Pro forma 2,310 1,969 Basic Earnings Per Share: As reported $.74 $.59 Pro forma .72 .58 Diluted Earnings Per Share: As reported $.73 $.59 Pro forma .72 .58 In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This Interpretation provides guidance on disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements were effective for financial statement periods after December 15, 2002. The Company adopted the initial measurement and recognition provisions applicable to guarantees issued or modified after December 31, 2002 on January 1, 2003, as required. The adoption did not have a material impact on the Company's financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidated Variable Interest Entities." The objective of this Interpretation is to provide guidance on how to identify a variable interest entity and determine when the assets, liabilities, non-controlling interests, and results of operations of a variable interest in an entity need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the variable interest entity is such that the company will absorb a majority of the variable interest entity's losses and/or receive a majority of the entity's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this Interpretation are effective upon issuance. The Company does not expect the provisions of FIN 46 to have a material impact on its financial position or results of operations. Comprehensive Income The Company's comprehensive income for the three-month periods ended March 31, 2003 and 2002 was as follows (in thousands): March 31, 2003 2002 ------------ ------------ Net income $2,362 $2,009 Other comprehensive income: Unrealized loss during the period (265) (42) Less realized gain during the period (370) (43) Tax effect 246 33 ------------ ------------ Comprehensive income $1,973 $1,957 ============ ============ Earnings Per Share Basic earnings per share ("EPS") is calculated as net income divided by 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-month periods ended March 31, 2003 and 2002 were as follows: Three months ended March 31, 2003 2002 ------------ ------------ Basic Earnings per Share: Net income $2,362,000 $2,009,000 Weighted average common shares outstanding 3,186,961 3,384,619 ============ ============ Basic earnings per common share $ .74 $ .59 ============ ============ Diluted Earnings per Share: Weighted average common shares outstanding 3,186,961 3,384,619 Assumed conversion of stock options 35,189 18,574 ------------ ------------ Diluted weighted average common shares outstanding 3,222,150 3,403,193 ============ ============ Diluted earnings per common share $ .73 $ .59 ============ ============ Mergers and Acquisitions On January 29, 2002, the Company acquired all of the issued and outstanding stock of Checkley, an insurance agency headquartered in Mattoon, Illinois. Checkley was purchased for cash with a portion ($750,000) paid at closing and the remainder ($1,000,000) to be paid, pursuant to a promissory note, over a five-year period ending January 2007. Checkley operates as a separate subsidiary of the Company and provides customers with commercial property, casualty, life, auto and home insurance. In order to facilitate this acquisition, the Company became a financial holding company under the 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. 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, March 31, 2003 and 2002. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report. Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as discussions of the Company's pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many uncertainties including: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Overview Net income for the three months ended March 31, 2003 was $2,362,000 ($.73 diluted EPS), an increase of $353,000 from $2,009,000 ($.59 diluted EPS) for the same period in 2002. A summary of the factors that contributed to the changes in net income is shown in the table below. (In thousands) 2003 vs. 2002 ----------------- Net interest income $ (59) Other income, including securities transactions 1,107 Other expenses (435) Income taxes (260) ----------------- Increase in net income $ 353 ================= The following table shows the Company's annualized performance ratios for the three months ended March 31, 2003 and 2002, as compared to the performance ratios for the year ended December 31, 2002: March 31, March 31, December 31, 2003 2002 2002 ------------ ------------ ------------- Return on average assets 1.24% 1.15 1.11% Return on average equity 13.92% 12.26% 11.82% Average equity to average assets 8.89% 9.35% 9.36% 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 three months ended March 31, 2003, as compared to the same period in 2002 (in thousands): For the three months ended March 31, 2003 compared to 2002 Increase / (Decrease) Total Rate/ Change Volume Rate Volume(4) ----------------------------------- Earning Assets: Interest-bearing deposits $ 46 $ 75 $ (3) $ (26) Federal funds sold 24 47 (9) (14) Investment securities: Taxable (288) 64 (336) (16) Tax-exempt (1) (24) (8) (16) - Loans (2)(3) (411) 583 (925) (69) ----------------------------------- Total interest income (653) 761 (1,289) (125) ----------------------------------- Interest-Bearing Liabilities: Interest-bearing deposits Demand deposits (163) 48 (197) (14) Savings deposits (94) 24 (105) (13) Time deposits (426) 301 (645) (82) Securities sold under agreements to repurchase (22) 21 (34) (9) FHLB advances (32) (14) (18) - Federal funds purchased (1) (1) (1) 1 Other debt 27 27 - - ----------------------------------- Total interest expense (711) 406 (1,000) (117) ----------------------------------- Net interest income $ 58 $ 355 $ (289) $(8) ==================================== (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 $58,000, or ..9% to $6,644,000 for the three months ended March 31, 2003, from $6,586,000 for the same period in 2002. The increase in net interest income was primarily due to a larger growth in net interest earning assets than interest-bearing deposits. For the three months ended March 31, 2003, average earning assets increased by $67,743,000, or 10.5%, and average interest-bearing liabilities increased $59,106,000, or 10.7%, compared with average balances for the same period in 2002. Changes in average balances are shown below: < Average loans increased by $32.5 million or 6.9% in 2003 as compared to 2002. < Average securities increased by $5 million or 3.1% in 2003 as compared to 2002. < Average interest-bearing deposits increased by $48.1 million or 10.1% in 2003 as compared to 2002. < Average securities sold under agreements to repurchase increased by $8.1 million or 24.8% in 2003 as compared to 2002. < Average borrowings and other debt increased by $3.1 million or 7.8% in 2003 as compared to 2002. < Net interest margin has decreased to 3.74% in 2003 from 4.10% in 2002. Provision for Loan Losses The provision for loan losses for the three months ended March 31, 2003 was $250,000 compared to $125,000 for the same period in 2002. The increase in the provision was a result of an increased risk in the loan portfolio, uncertain economic conditions, and an increase in charge-offs. Net charge-offs were $132,000 for the three months ended March 31, 2003 and $76,000 during the same period in 2002. For information on loan loss experience and nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections below. 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 ended March 31, 2003 and 2002 (in thousands): Three months ended March 31, 2003 2002 $ Change -------------- ------------ ------------- Trust $456 $478 $ (22) Brokerage 57 58 (1) Insurance commissions 411 191 220 Service charges 1,038 737 301 Security gains 370 43 327 Mortgage banking 549 326 223 Other 549 490 59 -------------- ------------ ------------- Total other income $3,430 $2,323 $1,107 ============== ============ ============= Explanations for the three months ended March 31, 2003 as compared to the same period in 2002: < Trust revenues decreased $22,000 or 4.6% to $456,000 from $478,000. Trust assets, reported at market value, were $313 million at March 31, 2003 compared to $303 million at March 31, 2002. While there was an increase in trust assets as a result of additional accounts, the overall decline in equity prices in the United States has resulted in a greater reduction in levels of fees collected and overall 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 decreased $1,000 or 1.7% to $57,000 from $58,000 as a result of decreased sales with the decline in the stock market. < Insurance commissions increased $220,000 or 115.2% to $411,000 from $191,000. The increase is due to operating Checkley, which was acquired January 29, 2002, for the entire period in 2003. In addition, increased sales of business property and casualty insurance has increased revenues. < Fees from service charges increased $301,000 or 40.8% to $1,038,000 from $737,000. This was primarily the result of increased overdraft fees after implementation of a new program called Payment Privilege in July 2002. Under Payment Privilege, overdrafts up to a limit of $500 are paid for qualifying customers in exchange for a fee. A greater number of overdrafts paid has resulted in an increase in fee income. < Sales of investment securities resulted in a net gain of $370,000, as compared to a net gain of $43,000 for the same quarter in 2002. The net gain in 2003 resulted primarily from the sale of $14 million of available-for-sale securities. < Mortgage banking income increased $223,000 or 68.4% to $549,000 from $326,000. This increase was due to the volume of fixed rate loans originated and sold by First Mid Bank. The increase in volume is largely attributed to the decrease in mortgage lending rates. Loans sold balances are as follows: < $38.9 million (representing 437 loans) for the 1st quarter of 2003. < $22.4 million (representing 255 loans) for the 1st quarter of 2002. 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 increased $59,000 or 12.0% to $549,000 from $490,000. This increase was primarily due to fees from ATM usage and placement of additional ATMs late in 2002. 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 ended March 31, 2003 and 2002 (in thousands): Three months ended March 31, ---------------------------------------- 2003 2002 $ Change ------------- ------------ ------------- Salaries and benefits $ 3,314 $ 3,006 $ 308 Occupancy and equipment 1,063 971 92 Amortization of intangibles 184 179 5 Stationery and supplies 144 155 (11) Legal and professional fees 231 238 (7) Marketing and promotion 132 159 (27) Other operating expenses 998 923 75 ------------- ------------ ------------- Total other expense $ 6,066 $ 5,631 $ 435 ============= ============ ============= Explanations for the three months ended March 31, 2003 as compared to the same period in 2002: < Salaries and employee benefits, the largest component of other expense, increased $308,000 or 10.2% to $3,314,000 from $3,006,000. This increase can be explained by merit increases for continuing employees, an increase in the number of employees due to the acquisition of Checkley in January 2002, and addition of de novo branches in November 2002. There were 324 full-time equivalent employees at March 31, 2003 compared to 305 at March 31, 2002. < Occupancy and equipment expense increased $92,000 or 9.5% to $1,063,000 from $971,000. This increase included building maintenance, utilities and rent expense for Checkley, and Champaign and Maryville branches added in November 2002. < Other operating expenses increased $75,000 or 8.1% to $998,000 in 2003 from $923,000 in 2002. This increase was primarily a result of an increase in expenses related to repossessed assets. < All other categories of operating expenses decreased a net of $48,000 or 8.2% to $507,000 from $552,000. Income Taxes Total income tax expense amounted to $1,232,000 (34.3% effective tax rate) for the three months ended March 31, 2003, compared to $972,000 (32.6% effective tax rate) for the same period in 2002. The increase in the effective tax rate in 2003 compared to 2002 is due to an increase in non-deductible loan interest income and a decrease in deductible interest income from U.S. Treasury securities, resulting in a larger amount of non-deductible interest income and greater state income tax expense. Analysis of Balance Sheets Loans The loan portfolio (net of unearned interest) is the largest category of the Company's earning assets. The following table summarizes the composition of the loan portfolio as of March 31, 2003 and December 31, 2002 (in thousands): March 31, December 31, 2003 2002 -------------- ------------- Real estate - residential $109,902 $116,588 Real estate - agricultural 47,461 47,210 Real estate - commercial 192,323 176,235 -------------- ------------- Total real estate - mortgage $349,686 $340,033 Commercial and agricultural 125,800 127,065 Installment 29,860 31,119 Other 1,410 1,647 -------------- ------------- Total loans $506,756 $499,864 ============== ============= At March 31, 2003, the Company had loan concentrations in agricultural industries of $85.8 million, or 16.9%, of outstanding loans and $90.7 million, or 18.1%, at December 31, 2002. In addition, the Company has a loan concentration to "operators of non-residential buildings" of $16.7 million or 3.1% of outstanding loans at March 31, 2003, and $12.5 or 2.5% of outstanding loans at December 31, 2002. The Company had no further loan concentrations in excess of 25% of Tier 1 risk-based capital. 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 commercial real estate lending and long-term commitment to residential real estate lending. The balance of real estate loans held for sale amounted to $4,121,000 and $7,070,000 as of March 31, 2003 and December 31, 2002, respectively. The following table presents the balance of loans outstanding as of March 31, 2003, by maturities (dollars in thousands): Maturity (1) -------------------------------------------- Over 1 One year through Over or less (2) 5 years 5 years Total -------------------------------------------- Real estate - residential $ 51,812 $ 55,037 $3,053 $109,902 Real estate - agricultural 7,540 32,328 7,593 47,461 Real estate - commercial 47,231 120,827 24,264 192,322 -------------------------------------------- Total real estate - mortgage $106,583 $208,192 $ 34,910 $349,685 Commercial and agricultural 90,346 33,378 2,076 125,800 Installment 16,033 13,783 44 29,860 Other 187 512 712 1,411 -------------------------------------------- Total loans $213,149 $255,865 $ 37,742 $506,756 ============================================ (1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts. As of March 31, 2003, loans with maturities over one year consisted of approximately $213,422,000 in fixed rate loans and $80,185,000 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 (c) 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 March 31, 2003 and December 31, 2002 (in thousands): March 31, December 31, 2003 2002 ------------- ------------- Nonaccrual loans $3,143 $2,961 Renegotiated loans which are performing in accordance with revised terms 90 188 ------------- ------------- Total nonperforming Loans $3,233 $3,149 ============= ============= At March 31, 2003, approximately $1,479,000 of the nonperforming loans resulted from collateral-dependent loans to one borrower. The $182,000 increase in nonaccrual loans during the three months ended March 31, 2003, resulted from the net of $1,159,000 of loans put on nonaccrual status, $882,000 of loans made current or paid-off and $95,000 of loans transferred to other real estate owned. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $88,000 for the three months ended March 31, 2003 and $158,000 for the year ended December 31, 2002. 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 March 31, 2003 the Company's loan portfolio included $85.8 million of loans to borrowers whose businesses are directly related to agriculture. The balance decreased by $4.9 million from $90.7 million at December 31, 2002. While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio. Analysis of the allowance for loan losses as of March 31, 2003 and 2002, and of changes in the allowance for the three month periods ended March 31, 2003 and 2002, was as follows (dollars in thousands): Three months ended March 31, 2003 2002 ------------- ------------- Average loans outstanding, net of unearned income $500,767 $468,308 Allowance-beginning of period $ 3,723 $ 3,702 Charge-offs: Real estate-mortgage 12 31 Commercial, financial & agricultural 114 25 Installment 26 33 ------------- ------------- Total charge-offs 152 89 Recoveries: Real estate-mortgage - - Commercial, financial & agricultural 11 1 Installment 9 12 ------------- ------------- Total recoveries 20 13 ------------- ------------- Net charge-offs 132 76 ------------- ------------- Provision for loan losses 250 125 ------------- ------------- Allowance-end of period $ 3,841 $ 3,751 ============= ============= Ratio of annualized net charge offs to average loans .11% .07% ============= ============= Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period) .76% .80% ============= ============= Ratio of allowance for loan losses to nonperforming loans 118.8% 129.0% ============= ============= 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 March 31, 2003 and December 31, 2002 (in thousands): March 31, December 31, 2003 2002 --------------------- --------------------- Weighted Weighted Average Average Amount Yield Amount Yield --------- ----------- --------- ----------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 78,423 3.39% $ 76,342 3.80% Obligations of states and political subdivisions 27,551 4.62% 27,597 4.63% Mortgage-backed securities 29,881 4.17% 44,697 3.72% Other securities 15,877 5.45% 15,807 5.86% --------- ----------- --------- ----------- Total securities $151,732 3.98% $164,443 4.12% ========= =========== ========= =========== At March 31, 2003, the Company's investment portfolio showed an increase in U.S. Treasury securities and obligations of U.S. government corporations and agencies and other securities and a decrease in mortgage-backed 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 March 31, 2003 and December 31, 2002 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 March 31, 2003 and the weighted average yield for each range of maturities. Mortgage-backed securities are included based on 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 March 31, 2003. Investment securities carried at approximately $130,708,000 and $141,462,000 at March 31, 2003 and December 31, 2002, 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 three months ended March 31, 2003 and for the year ended December 31, 2002 (dollars in thousands): March 31, December 31, 2003 2002 ---------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate ---------- ----------- ---------- ----------- Demand deposits: Non-interest-bearing $ 80,856 - $ 79,082 - Interest-bearing 211,168 1.00% 200,653 1.33% Savings 54,875 .73% 51,634 1.55% Time deposits 260,553 3.18% 242,301 3.63% ---------- ----------- ---------- ----------- Total average deposits $607,452 1.78% $573,670 2.14% ========== =========== ========== =========== The following table sets forth the maturity of time deposits of $100,000 or more at March 31, 2003 and December 31, 2002 (in thousands): March 31, December 31, 2003 2002 --------------- ------------- 3 months or less $ 26,323 $ 29,085 Over 3 through 6 months 12,673 18,926 Over 6 through 12 months 14,484 13,715 Over 12 months 31,750 32,225 --------------- ------------- Total $ 85,230 $ 93,951 =============== ============= 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 March 31, 2003 and December 31, 2002 is presented below (in thousands): March 31, December 31, 2003 2002 ------------- ------------- Securities sold under agreements to repurchase $38,119 $44,184 Federal Home Loan Bank advances: Fixed term - due in one year or less 5,000 5,000 Fixed term - due after one year 25,300 30,300 Debt: Loans due in one year or less 8,525 8,525 Loans due after one year 600 800 ------------- ------------- Total $77,544 $88,809 ============= ============= Average interest rate at end of period 2.68% 2.53% Maximum outstanding at any month-end Securities sold under agreements to repurchase $42,348 $44,588 Federal Home Loan Bank advances: Overnight - 400 Fixed term - due in one year or less 5,000 8,000 Fixed term - due after one year 30,300 30,300 Federal funds purchased - 3,250 Debt: Loans due in one year or less 8,525 9,525 Loans due after one year 600 800 ------------- ------------- Total $86,773 $96,863 ============= ============= Averages for the period (YTD) Securities sold under agreements to repurchase $40,720 $34,389 Federal Home Loan Bank advances: Overnight - 521 Fixed term - due in one year or less 5,000 6,153 Fixed term - due after one year 28,522 30,300 Federal funds purchased 56 299 Debt: Loans due in one year or less 8,525 5,350 Loans due after one year 661 738 ------------- ------------- Total $83,484 $77,750 ============= ============= Average interest rate during the period 2.49% 3.10% FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. The fixed term advances consist of $30.3 million as follows: < $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 March 31, 2003, outstanding loan balances include $8,325,000 on a revolving credit agreement with The Northern Trust Company with a floating interest rate of 1.25% over the Federal funds rate (2.54% as of March 31, 2003) and that is set to mature on October 24, 2003. The loan has a maximum available balance of $15 million. The loan is secured by all of the common stock of First Mid Bank. The credit agreement contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and also contains requirements for prior lending 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 March 31, 2003 and at December 31, 2002. The balance also includes a $600,000 balance remaining on a promissory note 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 (4.25% as of March 31, 2003) and principal payable annually over five years, with a final maturity of January 2007. Interest Rate Sensitivity The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of 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 embedded in the balance sheet. The following table sets forth the Company's interest rate repricing gaps for selected maturity periods at March 31, 2003 (in thousands):

The static GAP analysis shows that at March 31, 2003, the Company was asset sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates, if any, could have a positive effect on net interest income. Conversely, future decreases in interest rates could have an adverse 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 March 31, 2003, the Company's stockholders' equity had increased $1,110,000 or 1.7% to $67,917,000 from $66,807,000 as of December 31, 2002. During the first three months of 2003, net income contributed $2,362,000 to equity before the payment of dividends to common stockholders. The change in market value of available-for-sale investment securities decreased stockholders' equity by $388,000, net of tax. Additional purchases of treasury stock decreased stockholders' equity by $1,689,000. 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 March 31, 2003 and December 31, 2002, the Company and First Mid Bank have met all capital adequacy requirements. As of March 31, 2003, 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 categorization.

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: 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 2002 Annual Report on 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 approved the repurchase of $3 million of additional shares of the Company's common stock. In August 2002, the Board approved the repurchase of $5 million of additional shares of the Company's common stock, bringing the aggregate total to 8% of the Company's common stock plus $8 million of additional shares. During the three-month period ending March 31, 2003, the Company repurchased 57,561 shares (1.8%) at a total price of $1,689,000. Since 1998, the Company has repurchased a total of 469,123 shares at a total price of $11,992,000. As of March 31, 2003, the Company was authorized per all repurchase programs to purchase $2,215,000 in additional 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 of Chicago, 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 March 31, 2003, the First Mid Bank's ratios of Total Capital to Risk-Weighted Assets of 11.64% and Tier 1 Capital to Total Assets of 7.71% 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 March 31, 2003, the excess collateral at the Federal Home Loan Bank will support approximately $27 million of additional advances. < First Mid Bank also receives deposits from the State of Illinois. The receipt of these funds is subject to competitive bid and requires collateral to be pledged at the time of placement. < First Mid Bank is also a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged. < In addition, the Company has a revolving credit agreement in the amount of $15 million with The Northern Trust Company. The Company has an outstanding balance of $8,325,000 as of March 31, 2003, and $6,675,000 in available funds. The credit agreement matures on October 24, 2003. 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 March 31, 2003. 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 stockholders. The following table summarizes significant contractual obligations and other commitments at March 31, 2003 (in thousands): Less than More than Total 1 year 1-3 years 3-5 years 5 years ---------- ----------- ------------ ------------ ----------- Time deposits $256,889 $151,920 $67,925 $36,800 $244 Debt 9,325 8,525 400 400 - Other borrowings 79,484 66,484 5,000 5,000 3,000 Operating leases 2,540 301 535 412 1,292 ---------- ----------- ------------ ------------ ----------- $348,238 $227,230 $73,860 $42,612 $4,536 ========== =========== ============ ============ =========== For the three-month period ended March 31, 2003, net cash of $8.2 million and $2.4 million was provided from operating activities and investing activities, respectively, while financing activities used net cash of $10.8 million. Thus, cash and cash equivalents increased by $.2 million since year-end 2002. Generally, during 2003, 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 2002. 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. First Mid enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements of credit, and interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments. The off-balance sheet financial instruments whose contract amounts represent credit risk at March 31, 2003 and December 31, 2002 were as follows (in thousands): March 31, December 31, 2003 2002 ------------- -------------- Unused commitments including lines of credit: Commercial real estate $ 50,795 $31,506 Commercial operating 33,073 31,160 Home equity 10,011 9,509 Other 17,137 13,753 ------------- -------------- Total $111,016 $85,928 ============= ============== Standby letters of credit $2,440 $997 ============= ============== Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded within ninety days. Lines of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long as there is no violation of any condition established in the loan agreement. Both commitments to originate credit and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the lines and some commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties. Standby letters of credit are primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers. The maximum amount of credit that would be extended under letters of credit is equal to the total off-balance sheet contract amount of such instrument. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the market risk faced by the Company since December 31, 2002. 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, 2002. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls. PART II ITEM 1. LEGAL PROCEEDINGS Since First Mid Bank acts as a depository of funds, it is named from time to time as a defendant in lawsuits (such as garnishment proceedings) involving claims as 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 AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 the Certifications that immediately precedes the exhibits filed. (b) Reports on Form 8-K: The Company filed Form 8-K on January 29, 2003 regarding the Company's financial statements as of December 31, 2002. The Company filed Form 8-K on April 24, 2003 regarding the Company's financial statements as of March 31, 2003. SIGNATURES Pursuant to the requirements 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. FIRST MID-ILLINOIS BANCSHARES, INC. (Registrant) /s/ William S. Rowland /s/ Michael L. Taylor - --------------------------------- --------------------------------- William S. Rowland Michael L. Taylor President and Chief Executive Officer Chief Financial Officer Date: May 13, 2003 Date: May 13, 2003 CERTIFICATION I, William S. Rowland, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Mid-Illinois Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date May 13, 2003 By /s/ William S. Rowland William S. Rowland, President and Chief Executive Officer CERTIFICATION I, Michael L. Taylor, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Mid-Illinois Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date May 13, 2003 By /s/ Michael L. Taylor Michael L. Taylor, Chief Financial Officer Exhibit Index to Quarterly Report on Form 10-Q Exhibit Number Description and Filing or Incorporation Reference - -------------------------------------------------------------------------------- 11.1 Statement re: Computation of Earnings Per Share (Filed herewith on page 7) 99.1 President and 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 March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William S. Rowland, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 13, 2003 /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 March 31, 2003 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. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 13, 2003 /s/ Michael L. Taylor Michael L. Taylor Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----