-----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, GYXdtR98oOnGYRRqDou2dO7lJI9wF8P3Nb6hVapZUEsC2Z5qirbENwWuLq6RzDiR tLD2HyzYF9l+a20wvcCcDQ== 0000700565-03-000145.txt : 20030813 0000700565-03-000145.hdr.sgml : 20030813 20030813091854 ACCESSION NUMBER: 0000700565-03-000145 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 03839130 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_jun03.txt JUN 2003 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, 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 August 13, 2003, 3,158,483 common shares, $4.00 par value, were outstanding. PART I ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets (unaudited) June 30, December 31, (In thousands, except share data) 2003 2002 ------------ ------------ Assets Cash and due from banks: Non-interest bearing $ 19,746 $ 22,437 Interest bearing 5,762 19,995 Federal funds sold 1,875 27,225 ------------ ------------ Cash and cash equivalents 27,383 69,657 Investment securities: Available-for-sale, at fair value 173,743 166,415 Held-to-maturity, at amortized cost (estimated fair value of $1,821 and $1,927 at June 30, 2003 and December 31, 2002, respectively) 1,797 1,902 Loans 523,258 499,864 Less allowance for loan losses (4,122) (3,723) ------------ ------------ Net loans 519,136 496,141 Premises and equipment, net 16,663 16,916 Accrued interest receivable 5,146 6,362 Goodwill, net 9,034 9,034 Intangible assets, net 4,378 4,743 Other assets 4,730 5,070 ------------ ------------ Total assets $762,010 $ 776,240 ============ ============ Liabilities and Stockholders' Equity Deposits: Non-interest bearing $ 87,739 $ 84,025 Interest bearing 520,425 529,427 ------------ ------------ Total deposits 608,164 613,452 Accrued interest payable 1,628 1,793 Securities sold under agreements to repurchase 38,303 44,184 Other borrowings 39,925 44,625 Other liabilities 3,997 5,379 ------------ ------------ Total liabilities 692,017 709,433 ------------ ------------ Stockholders' equity: Common stock, $4 par value; authorized 6,000,000 shares; issued 3,653,857 shares in 2003 and 3,603,737 shares in 2002 14,615 14,415 Additional paid-in capital 15,625 14,450 Retained earnings 49,589 45,896 Deferred compensation 1,791 1,589 Accumulated other comprehensive income 2,566 2,373 Less treasury stock at cost, 484,613 shares in 2003 and 414,562 shares in 2002 (14,193) (11,916) ------------ ------------ Total stockholders' equity 69,993 66,807 ------------ ------------ Total liabilities and stockholders' equity $762,010 $776,240 ============ ============ See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, --------------------- (In thousands) 2003 2002 ----------- ------------ Cash flows from operating activities: Net income $ 4,484 $ 4,015 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 500 275 Depreciation, amortization and accretion, net 1,527 1,627 Gain on sale of securities, net (370) (116) 30 Loss on sale of other real property owned, net 3016 16 Gain on sale of mortgage loans held for sale, net (1,022) (512) Origination of mortgage loans held for sale (74,815) (37,115) Proceeds from sale of mortgage loans held for sale 76,417 39,905 Decrease in other investments - 250 (Increase) decrease in other assets 1,526 (2,080) Increase (decrease) in other liabilities (806) 1,686 ----------- ------------ Net cash provided by operating activities 7,471 7,951 ----------- ------------ Cash flows from investing activities: Capitalization of mortgage servicing rights (1) (1) Purchases of premises and equipment (710) (624) Net increase in loans (24,075) (11,882) Proceeds from sales of securities available-for-sale 13,815 10,646 Proceeds from maturities of: Securities available-for-sale 57,860 17,476 Securities held-to-maturity 20,105 301 Purchases of securities available-for-sale (98,375) (25,349) Purchases of securities held-to-maturity (144) (84) Net cash provided by acquisition - 15 ----------- ------------ Net cash used in investing activities (31,525) (9,502) ----------- ------------ Cash flows from financing activities: Net decrease in deposits (5,288) (5,551) Decrease in repurchase agreements (5,881) (5,028) Decrease in short-term FHLB advances (5,000) - Increase in long-term FHLB advances - 5,000 Increase in other borrowings - 220 Proceeds from short-term debt 500 - Repayment of short-term debt (200) - Proceeds from issuance of common stock 502 367 Purchase of treasury stock (2,075) (614) Dividends paid on common stock (778) (663) ----------- ------------ Net cash used in financing activities (18,220) (6,269) ----------- ------------ Decrease in cash and cash equivalents (42,274) (7,820) Cash and cash equivalents at beginning of period 69,657 33,096 ----------- ------------ Cash and cash equivalents at end of period $27,383 $25,276 =========== ============ Additional disclosures of cash flow information: Cash paid during the period for: Interest $ 6,509 $ 8,129 Income taxes 2,788 2,052 Loans transferred to real estate owned 108 338 Dividends reinvested in common stock 873 925 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 June 30, 2003, and 2002, and all such adjustments are of a normal recurring nature. The results of the interim period ended June 30, 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 In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 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 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, "Consolidated Variable Interest Entities"("FIN 46"). The objective of FIN 46 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 FIN 46 will be effective July 1, 2003. The Company does not expect the provisions of FIN 46 to have a material impact on its financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Management does not expect the provisions of SFAS 149 will have a material impact on the Company's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), many of which were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Management does not expect the provisions of SFAS 150 will have a material impact on the Company's financial position or results of operations. Comprehensive Income The Company's comprehensive income for the three and six-month periods ended June 30, 2003 and 2002 was as follows (in thousands): Three months ended Six months ended June 30, June 30, --------------------- -------------------- (In thousands) 2003 2002 2003 2002 ---------- ---------- ---------- --------- Net income $2,122 $2,006 $4,484 $4,015 ---------- ---------- ---------- --------- Other comprehensive income: Unrealized gain during the period 951 2,191 686 2,149 Less realized gain during the period - (73) (370) (116) Tax effect (369) (821) (123) (788) ---------- ---------- ---------- --------- Comprehensive income $2,704 $3,303 $4,677 $5,260 ========== ========== ========== ========= 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 and six-month periods ended June 30, 2003 and 2002 were as follows:

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. Goodwill and Intangible Assets The Company has goodwill from business combinations, intangible assets from branch acquisitions, identifiable intangible assets assigned to core deposit relationships and customer lists of insurance agencies acquired, and intangible assets arising from the rights to service mortgage loans for others. As of January 1, 2002, the date of adoption of SFAS 142 and the effective date of SFAS 147, 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 June 30, 2003 and December 31, 2002 (in thousands):

Total amortization expense for the periods ended June 30, 2003 and 2002 was as follows (in thousands): 2003 2002 ---------- ---------- Intangibles from branch acquisitions $100 $100 Core deposit intangibles 145 155 Mortgage servicing rights 25 36 Customer list intangibles 95 79 ---------- ---------- $365 $370 ========== ========== 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 6/30/03 $365 Estimated amortization expense: For period 7/1/03-12/31/03 $354 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 accordance with the provisions of SFAS 142, the Company performed testing of goodwill for impairment as of September 30, 2002 and determined as of that date that goodwill was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets. The provisions of SFAS 142 require annual testing of goodwill and as such, the next testing of goodwill for impairment will be as of September 30, 2003. Stock Incentive Plan The Company accounts for its Stock Incentive Plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting For Stock Issued to Employees," and related interpretations. As such, compensation cost based on fair value at grant date has not been recognized for its stock options in the consolidated financial statements. As required by SFAS 123, "Accounting for Stock-Based Compensation" as amended by SFAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosure," the Company provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants. The following table illustrates the effect on net income if the fair-value-based method had been applied. June 30, 2003 2002 ---------- ---------- Net income: As reported $4,484 $4,015 Pro forma 4,381 3,935 Basic Earnings Per Share: As reported $ 1.41 $ 1.19 Pro forma 1.38 1.16 Diluted Earnings Per Share: As reported $ 1.40 $ 1.18 Pro forma 1.36 1.15 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, 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' 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, 2003 was $2,122,000 ($.67 diluted EPS), an increase of $116,000 from $2,006,000 ($.59 diluted EPS) for the same period in 2002. Net income for the six months ended June 30, 2003 was $4,484,000 ($1.40 diluted EPS), an increase of $469,000 from $4,015,000 ($1.18 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. 2003 vs. 2002 Three months Six months (In thousands) ended June 30 ended June 30 -------------- -------------- Net interest income $(183) $(242) Other income, including securities transactions 639 1,746 Other expenses (266) (701) Income taxes (74) (334) -------------- -------------- Increase in net income $ 116 $ 469 ============== ============== The following table shows the Company's annualized performance ratios for the six months ended June 30, 2003 and 2002, as compared to the performance ratios for the year ended December 31, 2002: June 30, June 30, December 31, 2003 2002 2002 ---------- ---------- ------------- Return on average assets 1.17% 1.15% 1.11% Return on average equity 13.15% 12.03% 11.82% Average equity to average assets 8.89% 9.54% 9.36% Results of Operations Net Interest Income The largest source of 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):

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, 2003, as compared to the same period in 2002 (in thousands): For the six months ended June 30, 2003 compared to 2002 Increase / (Decrease) Total Rate/ Change Volume Rate Volume(4) --------- --------- --------- ---------- Earning Assets: Interest-bearing deposits $ 83 121 $ (3) $ (35) Federal funds sold 22 64 (23) (19) Investment securities: Taxable (565) 152 (683) (34) Tax-exempt (1) (58) (7) (51) - Loans (2)(3) (738) 1,367 (1,934) (171) --------- --------- --------- ---------- Total interest income (1,256) 1,697 (2,694) (259) --------- --------- --------- ---------- Interest-Bearing Liabilities: Interest-bearing deposits Demand deposits (263) 164 (376) (51) Savings deposits (222) 39 (238) (23) Time deposits (620) 410 (949) (81) Securities sold under agreements to repurchase (40) 53 (71) (22) FHLB advances (110) (118) 9 (1) Federal funds purchased (2) (2) (2) 2 Other debt 38 65 (15) (12) --------- --------- --------- ---------- Total interest expense (1,219) 611 (1,642) (188) --------- --------- --------- ---------- Net interest income $ (37) $1,086 $(1,052) $(71) ========= ========= ========= ========== (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 decreased $37,000, or ..3% to $13,431,000 for the six months ended June 30, 2003, from $13,468,000 for the same period in 2002. The decrease in net interest income was primarily due to the greater decline in loan interest rates compared to deposit rates, which resulted in a compression of the interest margin. For the six months ended June 30, 2003, average earning assets increased by $68,472,000, or 10.6%, and average interest-bearing liabilities increased $58,387,000, or 10.6%, compared with average balances for the same period in 2002. Changes in average balances are shown below: > Average loans increased by $38.4 million or 8.1% in 2003 as compared to 2002. > Average securities increased by $6.3 million or 3.9% in 2003 as compared to 2002. > Average interest-bearing deposits increased by $49.3 million or 10.3% in 2003 as compared to 2002. > Average securities sold under agreements to repurchase increased by $9.9 million or 30.9% in 2003 as compared to 2002. > Average borrowings and other debt decreased by $.6 million or 1.4% in 2003 as compared to 2002. > Net interest margin has decreased to 3.77% in 2003 from 4.18% in 2002. Provision for Loan Losses The provision for loan losses for the six months ended June 30, 2003 was $500,000 compared to $275,000 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 nonperforming loans from $2,145,000 as of June 30, 2002 to $5,678,000 as of June 30, 2003. Net charge-offs were $101,000 for the six months ended June 30, 2003 and $264,000 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 and six months ended June 30, 2003 and 2002 (in thousands):

Explanations for the three months ended June 30, 2003 as compared to the same period in 2002: < Trust revenues increased $39,000 or 8.7% to $489,000 from $450,000. Trust assets, reported at market value, were $330 million at June 30, 2003 compared to $293 million at June 30, 2002. The increase in trust revenues was the result of new business and an increase in equity prices. < Revenues from brokerage decreased $9,000 or 11.8% to $67,000 from $76,000 as a result of a decrease in the number of stock transactions. < Insurance commissions increased $4,000 or 1.1% to $367,000 from $363,000. Increased sales of business property and casualty insurance has increased revenues. < Fees from service charges increased $320,000 or 41.0% to $1,100,000 from $780,000. 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. < Mortgage banking income increased $156,000 or 41.4% to $533,000 from $377,000. 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: < $36.5 million (representing 390 loans) for the 2nd quarter of 2003. < $17.0 million (representing 180 loans) for the 2nd 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 $202,000 or 56.6% to $559,000 from $357,000. This increase was primarily due to fees from ATM usage and placement of additional ATMs late in 2002. Explanations for the six months ended June 30, 2003 as compared to the same period in 2002: < Trust revenues increased $17,000 or 1.8% to $945,000 from $928,000. Trust assets, reported at market value, were $330 million at June 30, 2003 compared to $293 million at June 30, 2002. The increase in trust revenues was the result of new business and an increase in equity prices. < Revenues from brokerage decreased $10,000 or 7.5% to $124,000 from $134,000 as a result of a decrease in the number of stock transactions. < Insurance commissions increased $224,000 or 40.4% to $778,000 from $554,000. 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 $621,000 or 40.9% to $2,138,000 from $1,517,000. 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 $116,000 for the same quarter in 2002. The net gain in 2003 resulted primarily from the sale of $14 million of available-for-sale securities during the first quarter. < Mortgage banking income increased $379,000 or 53.9% to $1,082,000 from $703,000. 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: < $75.4 million (representing 827 loans) for the 2nd quarter of 2003. < $39.4 million (representing 435 loans) for the 2nd 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 $261,000 or 30.8% to $1,108,000 from $847,000. 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 and six months ended June 30, 2003 and 2002 (in thousands):

Explanations for the three months ended June 30, 2003 as compared to the same period in 2002: < Salaries and employee benefits, the largest component of other expense, increased $319,000 or 10.3% to $3,415,000 from $3,096,000. This increase can be explained by merit increases for continuing employees and the addition of branches in Champaign and Maryville in November 2002. There were 317 full-time equivalent employees at June 30, 2003 compared to 310 at June 30, 2002. < Occupancy and equipment expense increased $51,000 or 5.1% to $1,060,000 from $1,009,000. This increase included building maintenance, utilities and rent expense for Champaign and Maryville branches added in November 2002. < Other operating expenses decreased $151,000 or 12.7% to $1,036,000 in 2003 from $1,187,000 in 2002. This decrease was primarily a result of a write-off of an investment in a venture capital fund during the second quarter of 2002. The Company has not had any write-downs on investments during 2003. < All other categories of operating expenses increased a net of $47,000 or 6.5% to $769,000 from $722,000. This increase was primarily the result of a promotional mailing and open house for the Maryville branch. Explanations for the six months ended June 30, 2003 as compared to the same period in 2002: < Salaries and employee benefits increased $627,000 or 10.3% to $6,729,000 from $6,102,000. 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 the addition of branches in Champaign and Maryville in November 2002. There were 317 full-time equivalent employees at June 30, 2003 compared to 310 at June 30, 2002. < Occupancy and equipment expense increased $143,000 or 7.2% to $2,123,000 from $1,980,000. This increase included building maintenance, utilities and rent expense for Checkley, and Champaign and Maryville branches added in November 2002. < Other operating expenses decreased $76,000 or 3.6% to $2,034,000 in 2003 from $2,110,000 in 2002. This increase was primarily a result of a write-off of an investment in a venture capital fund during the second quarter of 2002. The Company has not had any write-downs on investments during 2003. < All other categories of operating expenses increased a net of $7,000 or .5% to $1,460,000 from $1,453,000. Income Taxes Total income tax expense amounted to $1,088,000 (33.9% effective tax rate) for the three months ended June 30, 2003, compared to $1,041,000 (33.7% effective tax rate) for the same period in 2002. For the six months ended June 30, 2003, total income tax expense amounted to $2,320,000 (34.1% effective tax rate) compared to $1,986,000 (33.1% 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 June 30, 2003 and December 31, 2002 (in thousands): June 30, December 31, 2003 2002 -------------- ------------- Real estate - residential $112,555 $116,588 Real estate - agricultural 49,315 47,210 Real estate - commercial 203,308 176,235 -------------- ------------- Total real estate - mortgage $365,178 $340,033 Commercial and agricultural 127,231 127,065 Installment 29,469 31,119 Other 1,380 1,647 -------------- ------------- Total loans $523,258 $499,864 ============== ============= Overall loans increased $23 million, or 4.7%. The largest component of this increase was commercial real estate loans, which increased $27 million, or 15.4%. Total 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 $6,490,000 and $7,070,000 as of June 30, 2003 and December 31, 2002, respectively. At June 30, 2003, the Company had loan concentrations in agricultural industries of $88.3 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 $18.1 million or 3.5% of outstanding loans at June 30, 2003, and $12.5 or 2.5% of outstanding loans at December 31, 2002 and to "motels, hotels and tourist courts" of $17.8 million or 3.4% of outstanding loans at June 30, 2003, and $13.6 million or 2.7% of outstanding loans at December 31, 2002. The Company had no further loan concentrations in excess of 25% of Tier 1 risk-based capital. The following table presents the balance of loans outstanding as of June 30, 2003, by maturities (dollars in thousands):

(1) Based on scheduled principal repayments. (2) Includes demand loans, past due loans and overdrafts. As of June 30, 2003, loans with maturities over one year consisted of approximately $211,950,000 in fixed rate loans and $89,307,000 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 June 30, 2003 and December 31, 2002 (in thousands): June 30, December 31, 2003 2002 ------------- -------------- Nonaccrual loans $5,627 $2,961 Renegotiated loans which are performing in accordance with revised terms 51 188 ------------- -------------- Total nonperforming Loans $5,678 $3,149 ============= ============== At June 30, 2003, approximately $2,963,000 of the nonperforming loans resulted from collateral-dependent loans to three borrowers. The $2,666,000 increase in nonaccrual loans during the six months ended June 30, 2003, resulted from the net of $4,168,000 of loans put on nonaccrual status, $1,407,000 of loans brought current or paid-off and $95,000 of loans transferred to other real estate owned. The increase in nonaccrual loans was primarily due to two agricultural loans that are secured by real estate. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $138,000 for the six months ended June 30, 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 that 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 that 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, 2003 the Company's loan portfolio included $88.3 million of loans to borrowers whose businesses are directly related to agriculture. The balance decreased by $2.4 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 June 30, 2003 and 2002, and of changes in the allowance for the three and six month periods ended June 30, 2003 and 2002, was as follows (dollars in thousands):

During the second quarter of 2003, the Company received a recovery of $382,000 on two commercial real estate loans of a single borrower. The Company also had charge-offs of $170,000 on a commercial building loan and $80,000 on an agricultural operating loan secured by crops and real estate. 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, 2003 and December 31, 2002 (in thousands):

At June 30, 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 June 30, 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 June 30, 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 June 30, 2003. Investment securities carried at approximately $133,253,000 and $141,462,000 at June 30, 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 six months ended June 30, 2003 and for the year ended December 31, 2002 (dollars in thousands): June 30, December 31, 2003 2002 --------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate ----------- --------- ----------- ---------- Demand deposits: Non-interest-bearing $ 81,966 - $ 79,082 - Interest-bearing 216,676 .99% 200,653 1.33% Savings 55,021 .66% 51,634 1.55% Time deposits 255,133 3.15% 242,301 3.63% ----------- --------- ----------- ---------- Total average deposits $608,796 1.73% $573,670 2.14% =========== ========= =========== ========== The following table sets forth the maturity of time deposits of $100,000 or more at June 30, 2003 and December 31, 2002 (in thousands): June 30, December 31, 2003 2002 -------------- --------------- 3 months or less $ 20,248 $ 29,085 Over 3 through 6 months 8,483 18,926 Over 6 through 12 months 14,583 13,715 Over 12 months 32,107 32,225 -------------- --------------- Total $ 75,421 $ 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 June 30, 2003 and December 31, 2002 is presented below (in thousands): June 30, December 31, 2003 2002 --------------- --------------- Securities sold under agreements to repurchase $38,303 $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 9,025 8,525 Loans due after one year 600 800 --------------- --------------- Total $78,228 $88,809 =============== =============== Average interest rate at end of period 2.62% 2.53% Maximum outstanding at any month-end Securities sold under agreements to repurchase $45,099 $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 9,025 9,525 Loans due after one year 600 800 --------------- --------------- Total $90,024 $96,863 =============== =============== Averages for the period (YTD) Securities sold under agreements to repurchase $41,954 $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 26,902 30,300 Federal funds purchased 28 299 Debt: Loans due in one year or less 8,561 5,350 Loans due after one year 630 738 --------------- --------------- Total $83,075 $77,750 =============== =============== Average interest rate during the period 2.46% 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 June 30, 2003, outstanding loan balances include $8,825,000 on a revolving credit agreement with The Northern Trust Company with a floating interest rate of 1.25% over the Federal funds rate (2.35% as of June 30, 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 June 30, 2003 and at December 31, 2002. Management expects to renew this loan with similar terms and conditions. The balance also includes a $800,000 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 (4.00% as of June 30, 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 June 30, 2003 (in thousands):

The static GAP analysis shows that at June 30, 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 June 30, 2003, the Company's stockholders' equity had increased $3,186,000 or 4.8% to $69,993,000 from $66,807,000 as of December 31, 2002. During the first six months of 2003, net income contributed $4,484,000 to equity before the payment of dividends to common stockholders. The change in market value of available-for-sale investment securities increased stockholders' equity by $193,000, net of tax. Additional purchases of treasury stock (70,051 shares at an average cost of $29.62 per share) decreased stockholders' equity by $2,075,000. 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 June 30, 2003 and December 31, 2002, the Company and First Mid Bank have met all capital adequacy requirements. As of June 30, 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 six-month period ending June 30, 2003, the Company repurchased 70,051 shares at a total price of $2,075,000. Since 1998, the Company has repurchased a total of 481,613 shares at a total price of $12,377,000. As of June 30, 2003, the Company was authorized per all repurchase programs to purchase $1,829,000 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 June 30, 2003, the First Mid Bank's ratios of Total Capital to Risk-Weighted Assets of 11.76% and Tier 1 Capital to Total Assets of 7.81% 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, 2003, the excess collateral at the Federal Home Loan Bank will support approximately $25 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 $8,825,000 as of June 30, 2003, and $6,175,000 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 June 30, 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; and < operating activities, including scheduled debt repayments and dividends to stockholders. The following table summarizes significant contractual obligations and other commitments at June 30, 2003 (in thousands): Less than More than Total 1 year 1-3 years 3-5 years 5 years ---------- ----------- ----------- ----------- ----------- Time deposits $245,964 $138,031 $67,999 $39,470 $464 Debt 9,625 9,025 400 200 - Other borrowings 68,603 43,303 17,300 5,000 3,000 Operating leases 2,462 300 519 399 1,244 ---------- ----------- ----------- ----------- ----------- $326,654 $190,659 $86,218 $45,069 $4,708 ========== =========== =========== =========== =========== For the six-month period ended June 30, 2003, net cash of $7.5 million was provided from operating activities while investing activities used net cash of $31.5 million and financing activities used net cash of $18.2 million. Thus, cash and cash equivalents decreased by $42.2 million since year-end 2002. Generally, during 2003, decreases in deposits and customer repurchase agreements due to seasonal outflow and funds used to fund new loans reduced cash balances. 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 June 30, 2003 and December 31, 2002 were as follows (in thousands): June 30, December 31, 2003 2002 -------------- -------------- Unused commitments including lines of credit: Commercial real estate $ 38,670 $31,506 Commercial operating 31,488 31,160 Home equity 11,711 9,509 Other 14,589 13,753 -------------- -------------- Total $ 96,458 $85,928 ============== ============== Standby letters of credit $2,380 $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 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, 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. Changes in Internal Control Over Financial Reporting. There have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 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 The Annual Meeting of Stockholders was held on May 28, 2003. At the meeting, Richard A. Lumpkin, Sara Jane Preston and William S. Rowland were elected to serve as Class II directors with terms expiring in 2006. Continuing Class III directors (terms expiring 2004) are Charles A. Adams, Daniel E. Marvin, Jr. and Ray Anthony Sparks and continuing Class I directors (terms expiring 2005) are Kenneth R. Diepholz, Gary W. Melvin and Steven L. Grissom. There were 3,162,383 issued and outstanding shares of common stock at the time of the Annual Meeting. The voting at the meeting, on the matter listed above, was as follows: Election of Directors For Withheld - --------------------- --- -------- Richard A. Lumpkin 2,911,037 19,029 Sara Jane Preston 2,896,477 33,589 William S. Rowland 2,913,604 16,462 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 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 that immediately precedes the exhibits filed. (b) Reports on Form 8-K: The Company filed Form 8-K on April 24, 2003 regarding the Company's financial statements as of March 31, 2003. The Company filed Form 8-K on July 23, 2003 regarding the Company's financial statements as of June 30, 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: August 13, 2003 Date: August 13, 2003 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) 31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 By /s/ William S. Rowland William S. Rowland, President and Chief Executive Officer Exhibit 31.2 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 I, Michael L. Taylor, certify that: 1. I have reviewed this report on Form 10-Q of First Mid-Illinois Bancshares, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 By /s/ Michael L. Taylor Michael L. Taylor, Chief Financial Officer Exhibit 32.1 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, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, William S. Rowland, as President and Chief Executive Officer of the Company, and Michael L. Taylor, as 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: August 13, 2003 /s/ William S. Rowland William S. Rowland President and Chief Executive Officer /s/ Michael L. Taylor Michael L. Taylor Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----