Business Combinations

6 Months Ended

Jun. 30, 2011

Note 9 -- Business Combination

On September 10, 2010, First Mid Bank completed its acquisition of 10 Illinois bank branches (the “Branches”) from First Bank, a Missouri state chartered bank, located in Bartonville, Bloomington, Galesburg, Knoxville, Peoria and Quincy, Illinois. The acquisition was consistent with the Company’s strategy to expand its overall service area and bring added convenience to its customers by offering banking capabilities in 25 Illinois communities. In accordance with the Branch Purchase and Assumption Agreement, dated as of May 7, 2010, by and between First Mid Bank and First Bank, First Mid Bank acquired approximately $336 million of deposits, approximately $135 million of performing loans and the bank facilities and certain other assets of the Branches. First Mid Bank paid First Bank (a) the principal amount of the loans acquired, (b) the net book value, or approximately $5.3 million, for the bank facilities and certain assets located at the Branches, (c) a deposit premium of 4.77% on the core deposits acquired, which equated to approximately $15.6 million, and (d) approximately $1.8 million for the cash on hand at the Branches, with proration of certain periodic expenses. The acquisition settled by First Bank paying cash of $178.3 million to First Mid Bank for the difference between these amounts and the total deposits assumed.

The purchase was accounted for under the acquisition method in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations,” and accordingly the assets and liabilities were recorded at their fair values on the date of acquisition. The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands).

	Acquired Book Value		Fair Value Adjustments			As Recorded by First Mid Bank
Assets
Cash	$	180,074	$	-		$	180,074
Loans		135,219		(2,102	)		133,117
Premises and equipment		5,266		7,685			12,951
Goodwill		-		8,390			8,390
Core deposit intangible		-		3,050			3,050
Other assets		488		-			488
Total assets acquired	$	321,047	$	17,023		$	338,070
Liabilities
Deposits	$	336,016	$	1,413		$	337,429
Securities sold under agreements to repurchase		126					126
Other liabilities		515					515
Total liabilities assumed	$	336,657	$	1,413		$	338,070

The Company recognized $1,154,000 of costs related to completion of the acquisition during 2010. These acquisition costs are included in other expense. The difference between the fair value and acquired value of the purchased loans of $2,102,000 is being accreted to interest income over the remaining term of the loans. The difference between the fair value and acquired value of the assumed time deposits of $1,413,000 is being amortized to interest expense over the remaining term of the time deposits. The core deposit intangible asset, with a fair value of $3,050,000, will be amortized on an accelerated basis over its estimated life of ten years.

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the purchase accounting adjustments and acquisition expenses, had the acquisition taken place at the beginning of the period (in thousands):

	Three months ended		Six months ended
	June 30, 2010		June 30, 2010
Net interest income	$	11,855	$	23,903
Provision for loan losses		1,293		2,343
Non-interest income		3,355		6,736
Non-interest expense		10,486		20,913
Income before income taxes		3,431		7,383
Income tax expense		965		2,525
Net income	$	2,466	$	4,858
Dividends on preferred shares		554		1,131
Net income available to common stockholders	$	1,912	$	3,727

Earnings per share
Basic	$	.31	$	.61
Diluted	$	.31	$	.61

Basic weighted average shares outstanding		6,101,028		6,099,922
Diluted weighted average shares outstanding		6,130,597		6,128,107

The unaudited pro forma condensed combined financial statements do not reflect any anticipated cost savings and revenue enhancements. Additionally, the income statement for the first three months of 2011 includes merger-related expenses. Accordingly, the pro forma results of operations of the Company as of and after the business combination may not be indicative of the results that actually would have occurred if the combination had been in effect during the periods presented or of the results that may be attained in the future.