UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER: 0-13368 FIRST MID-ILLINOIS BANCSHARES, INC. (Exact name of Company as specified in its charter) DELAWARE 37-1103704 (State of incorporation) (I.R.S. employer identification No.) 1515 CHARLESTON AVENUE, MATTOON, ILLINOIS 61938 (Address and Zip Code of Principal Executive Offices) (217) 234-7454 (Company's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $4.00 PER SHARE, AND RELATED COMMON STOCK PURCHASE RIGHTS (Title of class) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 27, 2002, 3,382,872 common shares, $4.00 par value, were outstanding, and the aggregate market value of common shares (based on the last sale price of the Company's common shares on March 26, 2002) held by non-affiliates was approximately $85,756,000. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT INTO FORM 10-K PART: Portions of the Proxy Statement for 2002 Annual Meeting of Shareholders to be held on May 22, 2002 III FIRST MID-ILLINOIS BANCSHARES, INC. FORM 10-K TABLE OF CONTENTS PAGE PART I Item 1 Business 3 Item 2 Properties 13 Item 3 Legal Proceedings 17 Item 4 Submission of Matters to a Vote of Security Holders 17 PART II Item 5 Market for Company's Common Shares and Related Shareholder Matters 18 Item 6 Selected Financial Data 20 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7A Quantitative and Qualitative Disclosures About Market Risk 44 Item 8 Financial Statements and Supplementary Data 46 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosures 73 PART III Item 10 Directors and Executive Officers of the Company 73 Item 11 Executive Compensation 73 Item 12 Security Ownership of Certain Beneficial Owners and Management 73 Item 13 Certain Relationships and Related Transactions 73 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 74 SIGNATURES 75 Exhibit Index 76 PART I ITEM 1. BUSINESS COMPANY AND SUBSIDIARIES First Mid-Illinois Bancshares, Inc. (the "Company") is a financial holding company. The Company is engaged in the business of banking through its wholly-owned subsidiary, First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank"). The Company provides data processing services to affiliates through another wholly-owned subsidiary, Mid-Illinois Data Services, Inc. ("MIDS"). The Company offers insurance products and services to customers through its wholly-owned subsidiary, The Checkley Agency, Inc. ("Checkley"). First Mid Bank also provides insurance services to customers through its wholly-owned subsidiary First Mid-Illinois Insurance Services, Inc. ("First Mid Insurance"). The Company, a Delaware corporation, was incorporated on September 8, 1981, pursuant to the approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and became the holding company owning all of the outstanding stock of First National Bank, Mattoon ("First National") on June 1, 1982. The Company acquired all of the outstanding stock of a number of community banks on the following dates: o Mattoon Bank, Mattoon ("Mattoon Bank") on April 2, 1984 o State Bank of Sullivan ("Sullivan Bank") on April 1, 1985 o Cumberland County National Bank in Neoga ("Cumberland County") on December 31, 1985 o First National Bank and Trust Company of Douglas County ("Douglas County") on December 31, 1986 o Charleston Community Bank ("Charleston Bank") on December 30, 1987. In April 1989, a purchase and assumption agreement was executed between First National and Mattoon Bank whereby First National purchased substantially all of the assets and assumed all of the liabilities of Mattoon Bank. On May 31, 1992, the Company merged Sullivan Bank, Cumberland County, Douglas County and Charleston Bank into First National. First National changed its name at that time to First Mid-Illinois Bank & Trust, N.A. On July 1, 1992, the Company acquired and re-capitalized Heartland Federal Savings and Loan Association ("Heartland"), a $125 million thrift headquartered in Mattoon with offices in Charleston, Sullivan and Urbana, Illinois. Under the terms of the acquisition, Heartland converted from the mutual form of organization into a federally-chartered, stock savings association and became a 100%-owned subsidiary of the Company. In connection with the Heartland acquisition, $3.1 million of Series A perpetual, cumulative, non-voting, convertible, preferred stock was issued to directors and certain senior officers of the Company in a private placement. Refer to note #1 of Notes to the Consolidated Financial Statements. On October 4, 1994, First Mid Bank acquired all of the outstanding stock of Downstate Bancshares, Inc. ("DBI") which owned 100% of the stock of Downstate National Bank ("DNB"). DNB operated branch locations in Altamont and Effingham, Illinois. Immediately following the acquisition, DBI was dissolved and DNB was merged with and into First Mid Bank with First Mid Bank being the surviving entity. In December 1994, Heartland (formerly known as Heartland Federal Savings and Loan Association) converted from a federally-chartered stock savings association to a state-chartered savings bank and changed its name to Heartland Savings Bank. On March 7, 1997, First Mid Bank acquired the Charleston, Illinois branch location and the customer base of First of America Bank. This cash acquisition added approximately $28 million to total deposits, $.5 million to loans, $1.3 million to premises and equipment and $3.8 million to intangible assets. In November 1997, Heartland merged with and into First Mid Bank with First Mid Bank being the surviving entity. On May 7, 1999, the Company acquired the Monticello, Taylorville and DeLand branch offices and deposit base of Bank One Illinois, N.A. This cash acquisition added approximately $64 million to total deposits, $10 million to loans, $1.7 million to premises and equipment and $6.5 million to intangible assets. This acquisition was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branches were recorded at their fair values as of the acquisition date. On April 17, 2000, the Company opened a DE NOVO branch in Decatur, Illinois. On September 5, 2000, the Company opened a banking center in the Student Union of Eastern Illinois University in Charleston, Illinois. On April 20, 2001, First Mid Bank acquired all of the outstanding stock of American Bank of Illinois in Highland ("American Bank") and merged American Bank with and into First Mid Bank with First Mid Bank being the surviving entity. On January 29, 2002, the Company acquired all of the outstanding stock of Checkley, an insurance agency located in Mattoon. DESCRIPTION OF BUSINESS First Mid Bank conducts a general banking business encompassing most of the services, both consumer and commercial, which banks may lawfully provide, including the following principal services: the acceptance of deposits to demand, savings and time accounts and the servicing of such accounts; commercial, industrial, agricultural, consumer and real estate lending, including installment, credit card, personal lines of credit and overdraft protection; safe deposit box operations; and an extensive variety of additional services tailored to the needs of customers, such as traveler's checks and cashiers' checks, foreign currency, and other special services. First Mid Bank also provides services to its customers through its trust department and investment center. Loans, both commercial and consumer, are provided on either a secured or unsecured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, capital, construction, agriculture, inventory and real estate, with the latter including residential properties. First Mid Bank's installment loan department makes direct loans to consumers and some commercial customers, and purchases retail obligations from retailers, primarily without recourse. First Mid Bank conducts its business in the middle of some of the richest farmland in the world. Accordingly, First Mid Bank provides a wide range of financial services to farmers and agribusiness within their respective markets. The farm management department, headquartered in Mattoon, Illinois, has approximately 33,000 acres under management and is the largest management operation in the area, ranking in the top 100 firms nationwide. First Mid Bank is the largest supplier of farm credit in the Company's market area with $82.6 million in agriculture-related loans at December 31, 2001. The farm credit products offered by First Mid Bank include not only real estate loans, but machinery and equipment loans, production loans, inventory financing and lines of credit. First Mid Bank had total assets of $702,121,000 and stockholder's equity of $63,567,000 at December 31, 2001. EMPLOYEES The Company, MIDS and First Mid Bank, collectively, employed 295 people on a full-time equivalent basis as of December 31, 2001. The Company places a high priority on staff development which involves extensive training, including customer service training. New employees are selected on the basis of both technical skills and customer service capabilities. None of the employees are covered by a collective bargaining agreement with the Company. The Company offers a variety of employee benefits and management considers its employee relations to be excellent. The Company actively competes in all areas in which First Mid Bank presently does business. First Mid Bank competes for commercial and individual deposits, loans, and trust business with many east central Illinois banks, savings and loan associations, and credit unions. The principal methods of competition in the banking and financial services industry are quality of services to customers, ease of access to facilities, and pricing of services, including interest rates paid on deposits, interest rates charged on loans, and fees charged for fiduciary and other banking services. First Mid Bank operates facilities in the Illinois counties of Bond, Champaign, Christian, Coles, Cumberland, Douglas, Effingham, Macon, Madison, Moultrie, and Piatt. Each facility primarily serves the community in which it is located. First Mid Bank serves fifteen different communities with 22 separate locations in the towns of Altamont, Arcola, Charleston, Decatur, DeLand, Effingham, Highland, Mattoon, Monticello, Neoga, Pocahontas, Sullivan, Taylorville, Tuscola, and Urbana, Illinois. Within the area of service there are numerous competing financial institutions and financial services companies. SUPERVISION AND REGULATION GENERAL Financial institutions, financial services companies, and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the OCC, the Federal Reserve Board, the FDIC, the Internal Revenue Service and state taxing authorities. Any change in applicable laws, regulations or regulatory policies may have material effect on the business, operations and prospects of the Company and First Mid Bank. The Company is unable to predict the nature or extent of the effects that fiscal or monetary policies, economic controls or new federal or state legislation may have on its business and earnings in the future. Federal and state laws and regulations generally applicable to financial institutions and financial services companies, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and its subsidiaries. FINANCIAL MODERNIZATION LEGISLATION On November 12, 1999, the President signed into law the Gramm-Leach- Bliley Act (the "GLB Act"). The GLB Act significantly changes financial services regulation by expanding permissible non-banking activities of bank holding companies and removing barriers to affiliations among banks, insurance companies, securities firms and other financial services entities. These activities and affiliations can be structured through a holding company structure or, in the case of many of the activities, through a financial subsidiary of a bank. The GLB Act establishes a system of federal and state regulation based on functional regulation, meaning that primary regulatory oversight for a particular activity generally resides with the federal or state regulator having the greatest expertise in the area. Banking is supervised by banking regulators, insurance by state insurance regulators and securities activities by the SEC and state securities regulators. The GLB Act also establishes a minimum federal standard of financial privacy by, among other provisions, requiring banks to adopt and disclose privacy policies with respect to consumer information and setting forth certain rules with respect to consumer information and setting forth contain rules with respect to the disclosure to third parties of consumer information. The GLB Act also requires the disclosure of agreements reached with community groups that relate to the Community Reinvestment Act, and contains various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry. The GLB Act repeals the anti-affiliation provisions of the Glass-Steagall Act and revises the Bank Holding Company Act of 1956 (the "BHCA") to permit qualifying holding companies, called "financial holding companies," to engage in, or to affiliate with companies engaged in, a full range of financial activities including banking, insurance activities (including insurance portfolio investing), securities activities, merchant banking and additional activities that are "financial in nature," incidental to financial activities or, in certain circumstances, complementary to financial activities. A bank holding company's subsidiary banks must be "well-capitalized" and "well- managed" and have at least a "satisfactory" Community Reinvestment Act rating for the bank holding company to elect status as a financial holding company. A significant component of the GLB Act's focus on functional regulation relates to the application of federal securities laws and SEC oversight of some bank securities activities previously exempt from broker-dealer registration. Among other things, the GLB Act amends the definitions of "broker" and "dealer" under the Securities Exchange Act of 1934 to remove the blanket exemption for banks. Banks now may conduct securities activities without broker-dealer registration only if the activities fall within a set of activity-based exemptions designed to allow banks to conduct only those activities traditionally considered to be primarily banking or trust activities. Securities activities outside these exemptions, as a practical matter, need to be conducted by registered broker-dealer affiliate. Interim final rules of the SEC defer the time for compliance with these provisions of the GLB Act until May 12, 2002. These interim final rules are subject to further revision. The GLB Act also amends the Investment Advisers Act of 1940 to require the registration of banks that act as investment advisers for mutual funds. ANTI-MONEY LAUNDERING LEGISLATION On October 26, 2001, the President signed into law the USA Patriot Act of 2001, which contains the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the "IMLAFA"). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers, and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions' operations. The Company has established policies and procedures to ensure compliance with the IMLAFA and the related regulations. The Company has designated an officer solely responsible for ensuring compliance with existing regulations and monitoring changes to the regulations as they occur. THE COMPANY GENERAL. As a registered bank holding company under the BHCA and as a registered financial holding company under that GLB Act, the Company is subject to regulation by the Federal Reserve Board. In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to First Mid Bank and to commit resources to support First Mid Bank in circumstances where the Company might not do so absent such policy. The Company is subject to inspection, examination, and supervision by the Federal Reserve Board. ACTIVITIES. As a bank holding company that has elected to become a financial holding company, the Company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. A bank holding company that is not also a financial holding company is limited to engaging in banking and such other activities as determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. No Federal Reserve Board approval is required for the Company to acquire a company (other than a bank holding company, bank, or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. However, the Company generally must give the Federal Reserve Board after-the- fact notice of these activities. Prior Federal Reserve Board approval is required before the Company may acquire the beneficial ownership or control of more than 5% of the voting shares of substantially all of the assets of a bank holding company, bank, or savings association. If any subsidiary bank of the Company ceases to be "well-capitalized" or "well-managed" under applicable regulatory standards, the Federal Reserve Board may, among other actions, order the Company to divest its depository institution. Alternatively, the Company may elect to conform its activities to those permissible for a bank holding company that is not also a financial holding company. If any subsidiary bank of the Company receives a rating under the Community Reinvestment Act of less than satisfactory, the Company will be prohibited, until the rating is raised to satisfactory or better, from engaging in new activities or acquiring companies other than bank holding companies, banks, or savings associations. The Company became a financial holding company effective December 14, 2001. It continues to maintain its status as a bank holding company for purposes of other Federal Reserve Board regulations. CAPITAL REQUIREMENTS. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve Board capital adequacy guidelines. The Federal Reserve Board's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk- weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with minimum requirements of at least 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders' equity less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships), and total capital means Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital, limited amounts of unrealized gains on equity securities and a portion of the Company's allowance for loan and lease losses. The risk-based and leverage standards described above are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve Board's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 2001, the Company had regulatory capital, calculated on a consolidated basis, in excess of the Federal Reserve Board's minimum requirements, with a risk-based capital ratio of 11.23% and a leverage ratio of 7.34%. FIRST MID BANK GENERAL. First Mid Bank is a national bank, chartered under the National Bank Act. The FDIC insures the deposit accounts of First Mid Bank. As a national bank, First Mid Bank is a member of the Federal Reserve System and is subject to the examination, supervision, reporting and enforcement requirements of the OCC, as the primary federal regulator of national banks, and the FDIC, as administrator of the deposit insurance fund. DEPOSIT INSURANCE. As an FDIC-insured institution, First Mid Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately-capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. The FDIC makes risk classification of all insured institutions for each semi-annual assessment period. During the year ended December 31, 2001, FDIC assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2002, FDIC assessment rates will continue to range from 0% of deposits to 0.27% of deposits. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of First Mid Bank. In addition to its insurance assessment, each insured bank is subject, in 2002, to quarterly debt service assessments in connection with bonds issued by a government corporation that financed the federal savings and loan bailout. The first quarter 2002 debt service assessment was .0182%. OCC ASSESSMENTS. All national banks are required to pay supervisory fees to the OCC to fund the operations of the OCC. The amount of such supervisory fees is based upon each institution's total assets, including consolidated subsidiaries, as reported to the OCC. During the year ended December 31, 2001, First Mid Bank paid supervisory fees to the OCC totaling $140,000. CAPITAL REQUIREMENTS. The OCC has established the following minimum capital standards for national banks, such as First Mid Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of at least 4% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consists of substantially the same components as Tier 1 capital and total capital under the Federal Reserve Board's capital guidelines for bank holding companies (See "--The Company--Capital Requirements"). The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the OCC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. During the year ended December 31, 2001, First Mid Bank was not required by the OCC to increase its capital to an amount in excess of the minimum regulatory requirements. As of December 31, 2001, First Mid Bank exceeded its minimum regulatory capital requirements with a leverage ratio of 7.36% and a risk-based capital ratio of 11.24%. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well-capitalized," "adequately-capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. DIVIDENDS. The National Bank Act imposes limitations on the amount of dividends that may be paid by a national bank, such as First Mid Bank. Generally, a national bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank's board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank's year-to-date net income plus the bank's adjusted retained net income for the two preceding years. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, First Mid Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2001. As of December 31, 2001, approximately $11.1 million was available to be paid as dividends to the Company by First Mid Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends by First Mid Bank if the Federal Reserve Board determines such payment would constitute an unsafe or unsound practice. AFFILIATE AND INSIDER TRANSACTIONS. First Mid Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by First Mid Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which First Mid Bank maintains a correspondent relationship. SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted guidelines which establish operational and managerial standards to promote the safety and soundness of federally-insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the guidelines are of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the appropriate federal regulator, would constitute grounds for further enforcement action. SUPPLEMENTAL ITEM -- EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are elected annually by the Company's board of directors and are identified below. Name (Age) Position With Company - ------------------------------------------------------------------------------- William S. Rowland (55) Chairman of the Board of Directors, President and Chief Executive Officer Michael L. Taylor (33) Vice President and Chief Financial Officer John W. Hedges (54) President, First Mid Bank Laurel G. Allenbaugh (42) Vice President Christie L. Burich (45) Vice President, Secretary/Treasurer Stanley E. Gilliland (57) Vice President Robert J. Swift, Jr. (50) Vice President William S. Rowland, age 55, has been Chairman of the Board of Directors, President and Chief Executive Officer of the Company since May, 1999. He served as Executive Vice President of the Company from 1997 to 1999 and as Treasurer and Chief Financial Officer from 1989 to 1999. He also serves as Chairman of the Board of First Mid Bank. Michael L. Taylor, age 33, has been the Vice President and Chief Financial Officer of the Company since May, 2000. He was with Amcore in Rockford, Illinois from 1996 to 2000. John W. Hedges, age 54, has been the President of First Mid Bank since September, 1999. He was with National City Bank in Decatur, Illinois from 1976 to 1999. Laurel G. Allenbaugh, age 42, has been Vice President of Operations since February, 2000. She served as Controller of the Company and First Mid Bank from 1990 to February, 2000 and has been President of MIDS since 1998. Christie L. Burich, age 45, has been Vice President of Investments since 1995 and Secretary since 1998. Stanley E. Gilliland, age 57, has been Vice President of Lending of the Company since 1985, and has been Executive Vice President of Lending for First Mid Bank since 1990. Robert J. Swift, Jr., age 50, has been Vice President of the Trust and Farm Department of the Company since August, 2000. He was with Central Trust Bank in Jefferson City, Missouri from 1989 to 2000. ITEM 2. PROPERTIES All of the following properties are owned by the Company or First Mid Bank except those specifically identified as being leased. FIRST MID BANK MATTOON First Mid Bank's main office is located at 1515 Charleston Avenue, Mattoon, Illinois. The office building consists of a one-story structure with occupied basement which was opened in 1965 with approximately 36,000 square feet of office space, four walk-in teller stations, and three sit- down teller stations. Adjacent to this building is a parking lot with parking for approximately one hundred cars. A drive-up facility with nine drive-up lanes, including a drive-up automated teller machine ("ATM"), is located across the street from First Mid Bank's main office. First Mid Bank has a facility at 333 Broadway Avenue East, Mattoon, Illinois. The one-story office building contains approximately 7,600 square feet of office space. The main floor provides space for five teller windows, two private offices, a safe deposit vault and four drive-up lanes. There is adequate parking located adjacent to the building. A drive-up ATM is located adjacent to the building. First Mid Bank leases a facility at 1504-A Lakeland Boulevard, Mattoon, Illinois which provides space for three tellers, two drive-up lanes and a walk-up ATM. First Mid Bank owns a facility located at 1520 Charleston Avenue, Mattoon, Illinois, which is used as the Corporate Headquarters of the Company and is used by MIDS for its data processing and back room operations for the Company and First Mid Bank. The office building consists of a two- story structure with an occupied basement which has approximately 20,000 square feet of office space. SULLIVAN First Mid Bank operates two locations in Sullivan, Illinois. The main office is located at 200 South Hamilton Street, Sullivan, Illinois. Its office building is a one-story structure containing approximately 11,400 square feet of office space with five tellers, six private offices and four drive-up lanes. Adequate customer parking is available on two sides of the main office building. The second office is a leased facility at 435 South Hamilton, Sullivan, Illinois in the IGA. The facility has two teller stations, a vault, an ATM and a night depository. NEOGA First Mid Bank's office in Neoga, Illinois, is located at 102 East 6th Street, Neoga, Illinois. The building consists of a one-story structure containing approximately 4,000 square feet of office space. The main office building provides space for four tellers in the lobby of the building, two drive-up tellers, four private offices, two night depositories, and an ATM. Adequate customer parking is available on three sides of the main office building. During 1996, an adjacent building with approximately 400 square feet was purchased and is being held for future expansion. TUSCOLA First Mid Bank operates an office in Tuscola, Illinois, which is located at 410 South Main Street. The all brick building consists of a one-story structure with approximately 4,000 square feet of office space. This main office building provides for four lobby tellers, two drive-up tellers, four private offices, a conference room, four drive-thru lanes, including one with a drive-up ATM and one with a drive-up night depository. Adequate customer parking is available just outside the main entrance. CHARLESTON First Mid Bank has three offices in Charleston, Illinois. The main office, acquired in March, 1997, is located at 500 West Lincoln Avenue, Charleston, Illinois. This one-story facility contains approximately 8,400 square feet with five teller stations, eight private offices and four drive-up lanes. A second facility is located at 701 Sixth Street, Charleston, Illinois. It is a one-story facility with an attached two-bay drive-up structure and consists of approximately 5,500 square feet of office space. Adequate parking is available to serve its customers. The office space is comprised of three teller stations, three private offices, storage area, and a night depository. Approximately 2,200 square feet of this building is rented out to non-affiliated companies. The third facility consists of approximately 400 square feet of leased space at the Martin Luther King Student Union on the Eastern Illinois University campus. The facility has two walk-up teller stations and two sit-down teller/CSR stations. Five ATMs are located in Charleston. One drive-up ATM is located in the parking lot of the facility at 500 West Lincoln Avenue, one in the parking lot of Save-A-Lot at 1400 East Lincoln Avenue, and one drive-up ATM is located in the parking lot of the 6th Street facility. The fourth is an off-site walk-up ATM located in the student union at Eastern Illinois University and the fifth ATM is a drive-up unit located on the Eastern Illinois University campus in a parking lot at the corner of 9th Street and Roosevelt. URBANA First Mid Bank owns a facility located at 601 South Vine Street, Urbana, Illinois. Its office building consists of a one-story structure and contains approximately 3,600 square feet. The office building provides space for three tellers, two private offices and two drive-up lanes. An ATM machine is located in front of the building. An adequate customer parking lot is located on the south side of the building. EFFINGHAM First Mid Bank operates a facility at 902 North Keller Drive, Effingham, Illinois. The building is a two-story structure with approximately 4,000 square feet of office space. This office space consists of four teller stations, three drive-up teller lanes, five private offices and a night depository. Adequate parking is available to customers in front of the facility. First Mid Bank also owns property at 900 North Keller Drive, Effingham, Illinois which provides additional customer parking along with a drive-up ATM. ALTAMONT First Mid Bank has a banking facility located at 101 West Washington Street, Altamont, Illinois. This building is a one-story structure which has approximately 4,300 square feet of office space. The office space consists of nine teller windows, three drive-up teller lanes (one of which facilitates an ATM), seven private offices, one conference room and a night depository. Adequate parking is available on three sides of the building. ARCOLA First Mid Bank leases a facility at 324 South Chestnut Street, Arcola, Illinois. This building is a one-story structure with approximately 1,140 square feet of office space. This office space consists of two lobby teller stations, one loan station, two drive-up teller lanes, one private office and a night depository. A drive-up ATM lane is available adjacent to the teller lanes. Adequate parking is available to customers in front of the facility. MONTICELLO First Mid Bank has two offices in Monticello. The main facility is located on the north-east corner of the historic town square at 100 West Washington Street. This building is a two-story structure that has 8,000 square feet of office space consisting of five teller stations, seven private offices, and a night depository. The second floor is furnished and is currently being leased to a wholesale pharmacy company and the basement is used for storage. Adequate parking is available to customers in back of the facility. A second facility is located at 219 West Center Street, Monticello, Illinois. It is a one-story facility with two lobby teller stations and an attached two-bay drive-up structure with a drive-up ATM and a night depository. Adequate parking is available to serve its customers. DELAND First Mid Bank has an office at 220 North Highway Ave, DeLand, Illinois. It is a one-story structure with one private office, three teller stations and a night depository. Adequate parking is available in front of the building. TAYLORVILLE First Mid Bank has a banking facility located at 200 N. Main Street, Taylorville, Illinois. This one-story building has approximately 3,700 square feet with five teller stations, three private offices, one drive-up lane, and a finished basement. A drive-up ATM is located in the parking lot and adequate customer parking is available adjacent to the building. DECATUR First Mid Bank leases a facility at 111 E. Main Street, Decatur, Illinois. The office space comprised of 4,340 square feet contains three lobby teller windows, two drive-up lanes, a night depository, three private offices, safe deposit and loan vaults, and a conference room. Customer parking is available adjacent to the building. HIGHLAND First Mid Bank owns a facility located at 12616 State Route 143, Highland, Illinois. The building is a two-story structure with approximately 6,720 square feet of office space. This office space consists of a customer service area and teller windows, three drive-up teller lanes and four private offices. Adequate parking is available to serve customers. POCAHONTAS First Mid Bank owns a facility located at 103 Park Street, Pocahontas, Illinois. The building is a one-story brick structure with approximately 3,360 square feet of office space. This office space consists of a customer processing room, three private offices and three bank vaults. Adequate parking is available to serve customers. ITEM 3. 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 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. In addition to the normal proceedings referred to above, Heartland Savings Bank ("Heartland"), a subsidiary of the Company that merged with First Mid Bank during 1997, filed a complaint on December 5, 1995, against the U.S. Government which is now pending in the U.S. Court of Federal Claims in Washington D.C. This complaint relates to Heartland's interest as successor to Mattoon Federal Savings and Loan Association which incurred a significant amount of supervisory goodwill when it acquired Urbana Federal Savings and Loan in 1982. The complaint alleges that the U.S. Government breached its contractual obligations when, in 1989, it issued new rules which eliminated supervisory goodwill from inclusion in regulatory capital. On August 6, 1998, First Mid Bank filed a motion with the U.S. Court of Federal Claims to grant summary judgement on liability for breach of contract in this matter. On August 13, 1998, the U.S. Government filed a motion to stay such proceedings. On March 26, 2002, the Company's Board of Directors voted to withdraw the complaint based upon advise of legal counsel. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMPANY'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS The Company's common stock was held by approximately 707 shareholders of record as of December 31, 2001, and is traded in the over-the-counter market. The following table shows, for the indicated periods, the range of reported prices per share of the Company's common stock in the over-the-counter market. These quotations represent inter-dealer prices without retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions. QUARTER HIGH LOW - --------------------------- ---------------------- ---------------------- 2001 4th $ 24 2/3 $ 22 2/3 3rd 24 21 1/6 2nd 23 1/3 21 1/2 1st 21 1/2 18 3/4 2000 4th $ 20 $ 18 1/2 3rd 19 2/3 18 1/3 2nd 22 18 2/3 1st 22 3/4 21 1/3 The following table sets forth the cash dividends per share on the Company's common stock for the last two years. DIVIDEND DATE DECLARED DATE PAID PER SHARE - --------------------------- -------------------- ------------------- 5-17-2000 6-16-2000 $.18 12-19-2000 1-05-2000 $.21 5-23-2001 6-15-2001 $.19 12-18-2001 1-04-2002 $.24 - --------------------------- -------------------- ------------------- On November 16, 2001, the Registrant effected a three-for-two stock split in the form of a 50 percent stock dividend. All share and per share information has been restated to reflect the split. The Company's shareholders are entitled to receive such dividends as are declared by the board of directors, which considers payment of dividends semi-annually. The ability of the Company to pay dividends, as well as fund its operations, is dependent upon receipt of dividends from First Mid Bank. Regulatory authorities limit the amount of dividends which can be paid by First Mid Bank without prior approval from such authorities. For further discussion of First Mid Bank's dividend restrictions and capital requirements, see "Note 17" of the Notes to the Consolidated Financial Statements included under Item 8 of this document. Cash dividends have been declared by the Board of Directors of the Company semi-annually during the two years ended December 31, 2001. On November 15, 1999, the Company issued 248,177 shares of its common stock to holders of its Series A Convertible Preferred Stock upon the Company's election to convert all of such preferred stock to common stock. The transaction was exempt from registration pursuant to Section 3(a) of the Securities Act of 1933. ITEM 6. SELECTED FINANCIAL DATA The following sets forth a five-year comparison of selected financial data. (Dollars in thousands, except per share data) 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- --------- SUMMARY OF OPERATIONS Interest income $ 45,506 $ 44,191 $ 39,168 $ 37,451 $ 37,805 Interest expense 21,590 22,573 18,415 18,626 19,131 -------- -------- -------- -------- -------- Net interest income 23,916 21,618 20,753 18,825 18,674 Provision for loan losses 600 550 600 550 700 Other income 8,672 6,689 6,703 6,340 5,421 Other expense 22,432 20,062 19,387 17,119 16,039 -------- -------- -------- -------- -------- Income before income taxes 9,556 7,695 7,469 7,496 7,356 Income tax expense 3,040 2,035 2,237 2,434 2,630 -------- -------- -------- -------- -------- Net income $ 6,516 $ 5,660 $ 5,232 $ 5,062 $ 4,726 -------- -------- -------- -------- -------- PER COMMON SHARE DATA (1) Basic earnings per share $ 1.93 $ 1.67 $ 1.60 $ 1.59 $ 1.53 Diluted earnings per share 1.92 1.67 1.53 1.49 1.45 Dividends per common share .43 .39 .37 .34 .31 Book value per common share 18.96 17.18 15.09 15.74 14.47 FINANCIAL RATIOS Net interest margin (TE) 3.99% 3.97% 4.09% 3.93% 3.96% Return on average assets .97% .92% .91% .95% .90% Return on average equity 12.14% 10.55% 10.14% 10.39% 11.08% Return on average common equity 12.14% 10.55% 10.08% 10.47% 11.23% Dividend payout ratio 22.29% 23.53% 22.95% 21.35% 19.99% Average equity to average assets 8.00% 8.70% 8.96% 9.16% 8.11% Capital to risk-weighted assets 11.23% 11.74% 11.98% 13.89% 12.20% YEAR END BALANCES Total assets $705,979 $642,999 $601,103 $554,663 $532,978 Net loans 469,541 426,026 385,380 346,350 355,587 Total deposits 559,420 503,985 485,011 449,636 457,598 Total equity 63,925 57,727 51,518 50,480 45,576 AVERAGE BALANCES Total assets $670,890 $616,855 $575,903 $531,809 $525,751 Net loans 450,466 406,505 356,031 345,254 352,495 Total deposits 540,209 491,584 474,636 445,048 443,399 Total equity 61,714 53,674 51,577 48,704 42,638 (1) All share and per share data have been restated to reflect the 3-for-2 stock split effective November 16, 2001. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries for the years ended December 31, 2001, 2000 and 1999. 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. MERGERS AND ACQUISITIONS On April 20, 2001, First Mid Bank acquired all the outstanding stock of American Bank of Illinois in Highland for $3.7 million in cash. This acquisition added approximately $30.8 million to total deposits, $24.9 million to loans, $2 million to securities, $1.7 million to premises and equipment and $1.4 million to intangible assets. The acquisition was accounted for using the purchase method of accounting whereby the acquired assets and liabilities were recorded at fair value as of the acquisition date and the excess cost over fair value of net assets was recorded as goodwill. The consolidated financial statements include the results of operations of American Bank of Illinois since the acquisition date. On January 29, 2002, First Mid-Illinois Bancshares, Inc. acquired all of the issued and outstanding stock of The Checkley Agency, Inc., an insurance agency headquartered in Mattoon, Illinois. The Checkley Agency, Inc. was purchased for cash with a portion paid at closing and the remainder to be paid over a five-year earn-out agreement ending January, 2007. The Checkley Agency, Inc. will operate as a separate subsidiary of First Mid- Illinois Bancshares, Inc. and will provide customers with commercial property, casualty, life, auto and home insurance. In order to facilitate this acquisition, First Mid-Illinois Bancshares, Inc. effectively elected to become a financial holding company under the Gramm-Leach-Bliley Act on December 14, 2001. OVERVIEW In 2001, the Company had net income of $6,516,000, up 15.12% from $5,660,000 in 2000. In 2000, net income increased 8.2% from $5,232,000 in 1999. Diluted earnings per share was $1.92 in 2001 compared with $1.67 in 2000 and $1.53 in 1999. A summary of the factors which contributed to the changes in net income follows (in thousands): 2001 VS 2000 2000 VS 1999 ------------ ------------ Net interest income $2,298 $ 865 Provision for loan losses (50) 50 Other income, including securities transactions 1,983 (14) Other expenses (2,370) (675) Income taxes (1,005) 202 ------------ ------------ Increase in net income $ 856 $ 428 ------------ ------------ On May 7, 1999, the Company acquired the Monticello, Taylorville and DeLand branch offices and deposit base of Bank One Illinois, N.A. This cash acquisition added approximately $64 million to total deposits, $10 million to loans, $1.7 million to premises and equipment and $6.5 million to intangible assets. This acquisition was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branches were recorded at their fair values as of the acquisition date. The operating results have been combined with those of the Company since May 7, 1999. On April 20, 2001, First Mid Bank acquired all the outstanding stock of American Bank of Illinois in Highland, for $3.7 million in cash. This acquisition added approximately $30.8 million to total deposits, $24.9 million to loans, $2 million to securities, $1.7 million to premises and equipment and $1.4 million to intangible assets. The acquisition was accounted for using the purchase method of accounting whereby the acquired assets and liabilities were recorded at fair value as of the acquisition date and the excess cost over fair value of net assets was recorded as goodwill. The consolidated financial statements include the results of operations of American Bank of Illinois since the acquisition date. 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 ("TE") 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): YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ----------------------------------------------------------------------------------- ASSETS Interest-bearing deposits $ 3,621 $ 81 2.23% $ 102 $ 6 6.35% $ 1,407 $ 70 4.99% Federal funds sold 10,410 335 3.22% 1,994 121 6.09% 9,799 485 4.95% Investment securities Taxable 119,245 6,820 5.72% 121,390 7,721 6.36% 125,311 7,425 5.93% Tax-exempt(1) 30,643 2,110 6.89% 30,402 2,196 7.22% 29,762 2,125 7.14% Loans (2)(3) 454,108 36,877 8.12% 409,649 34,893 8.52% 358,948 29,785 8.30% ----------------------------------------------------------------------------------- Total earning assets 618,027 46,223 7.48% 563,537 44,937 7.97% 525,227 39,890 7.59% ----------------------------------------------------------------------------------- Cash and due from banks 17,125 16,628 17,438 Premises and equipment 16,385 15,807 14,873 Other assets 22,995 24,026 21,282 Allowance for loan losses (3,642) (3,143) (2,917) --------- --------- --------- Total assets $670,890 $616,855 $575,903 --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-Bearing Deposits Demand deposits $182,404 4,374 2.40% $163,531 5,112 3.13% $147,753 3,809 2.58% Savings deposits 41,437 923 2.23% 39,215 952 2.43% 40,875 944 2.31% Time deposits 247,348 13,476 5.40% 226,259 12,348 5.42% 225,451 11,476 5.09% Securities sold under agreements to repurchase 29,547 915 3.10% 24,576 1,357 5.52% 22,063 948 4.29% FHLB advances 28,866 1,664 5.76% 36,979 2,409 6.51% 18,602 942 5.07% Federal funds purchased 236 12 5.09% 1,047 66 6.34% 345 18 5.28% Long-term debt 4,325 226 5.23% 4,325 329 7.61% 4,416 278 6.29% ---------------------------------------------------------------------------------- Total interest-bearing liabilities 534,163 21,590 4.04% 495,932 22,573 4.55% 459,505 18,415 4.01% ---------------------------------------------------------------------------------- Demand deposits 69,020 62,579 60,557 Other liabilities 5,993 4,670 4,264 Stockholders' equity 61,714 53,674 51,577 -------- --------- --------- Total liabilities & equity$670,890 $616,855 $575,903 -------- --------- --------- Net interest income (TE) $24,633 $ 22,364 $ 21,475 --------- ---------- --------- Net interest spread 3.44% 3.42% 3.58% Impact of non-interest bearing funds .55% .55% .51% --------- --------- ---------- Net yield on interest-earning assets (TE) 3.99% 3.97% 4.09% --------- --------- ---------- (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 have been included in the average balances. Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE) for the past two years (in thousands): 2001 COMPARED TO 2000 2000 COMPARED TO 1999 INCREASE - (DECREASE) INCREASE - (DECREASE) -------------------------------------------------------------------------------- TOTAL RATE/ TOTAL RATE/ CHANGE VOLUME RATE VOLUME(4) CHANGE VOLUME RATE VOLUME(4) -------------------------------------------------------------------------------- EARNING ASSETS: Interest-bearing deposits $ 75 $ 223 $ (4) $ (144) $(64) $(65) $ 19 $ (18) Federal funds sold 214 513 (57) (242) (364) (387) 112 (89) Investment securities: Taxable (901) (136) (778) 13 296 (232) 545 (17) Tax-exempt (1) (86) 17 (102) (1) 71 45 25 1 Loans (2)(3) 1,984 3,788 (1,635) (169) 5,108 4,206 790 112 -------------------------------------------------------------------------------- Total interest income 1,286 4,405 (2,576) (543) 5,047 3,567 1,491 (11) -------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Interest-bearing deposits Demand deposits (738) 590 (1,191) (137) 1,303 407 810 86 Savings deposits (29) 54 (79) (4) 8 (39) 49 (2) Time deposits 1,128 1,151 (21) (2) 872 41 828 3 Securities sold under agreements to repurchase (442) 275 (596) (121) 409 108 270 31 FHLB advances (745) (528) (278) 61 1,467 932 269 266 Federal funds purchased (54) (51) (13) 10 48 37 4 7 Long-term debt (103) 0 (103) 0 51 (6) 58 (1) -------------------------------------------------------------------------------- Total interest expense (983) 1,491 (3,281) (193) 4,158 1,480 2,288 390 -------------------------------------------------------------------------------- Net interest income $2,269 $2,914 $(295) $ (350) $ 889 $2,087 $(797) $ (401) -------------------------------------------------------------------------------- (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 $2,269,000, or 10.1% in 2001, compared to an increase of $889,000, or 4.1% in 2000. The increase in net interest income in 2001 was due primarily to increased loan volumes, including acquisitions, and a decrease in deposit rates. In 2000, the increase in net interest income was due primarily to the increase in loan volume. In 2001, average earning assets increased by $54,490,000, or 9.7%, and average interest-bearing liabilities increased $38,231,000 or 7.7% compared with 2000. Changes in average balances, as a percent of average earnings assets, are shown below: o average loans (as a percent of average earnings assets) increased 0.8% to 73.5% in 2001 from 72.7% in 2000. o average securities (as a percent of average earnings assets) decreased 2.7% to 24.3% in 2001 from 26.4% in 2000. o Federal Funds rate declined from 6.5% at December 31, 2000 to 1.75% at December 31, 2001. This decline in interest rates was a primary contributor to the decline in asset yields of 49 basis points and interest-bearing liabilities of 49 basis points. o net interest margin has increased to 3.99% in 2001 from 3.97% in 2000 and decreased from 4.09% in 1999. PROVISION FOR LOAN LOSSES The provision for loan losses in 2001 was $600,000 compared to $550,000 in 2000 and $600,000 in 1999. For information on loan loss experience and nonperforming loans, see the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections later in this document. OTHER INCOME An important source of the Company's revenue is derived from other income. The following table sets forth the major components of other income for the last three years (in thousands): $ CHANGE FROM PRIOR YEAR ------------------- 2001 2000 1999 2001 2000 ------- --------- -------- -------- -------- Trust $1,924 $ 2,010 $1,912 $ (86) $ 98 Brokerage 356 437 456 (81) (19) Securities gains(losses) 208 (3) 8 211 (11) Service charges 3,122 2,592 2,317 530 275 Mortgage banking 1,156 383 624 773 (241) Other 1,906 1,270 1,386 636 (116) ------ ------- ------ ------- ----- Total other income $8,672 $ 6,689 $6,703 $ 1,983 $ (14) ------ ------- ------ ------- ----- Total non-interest income increased to $8,672,000 in 2001 as compared to $6,689,000 in 2000 and $6,703,000 in 1999. The primary reasons for the more significant year to year changes in other income components are as follows: o Trust revenues decreased $86,000 or 4.3% to $1,924,000 in 2001 from $2,010,000 in 2000 and $1,912,000 in 1999 mostly due to the volatility and declines in the stock market. o Revenues from brokerage and annuity sales decreased $81,000 or 18.5% in 2001 as compared to 2000 as a result of decreased sales with the decline in the stock market. o Net securities gains in 2001 were $208,000 compared to net securities losses of $3,000 in 2000, and net gains of $8,000 in 1999. Securities were sold to provided liquidity for loan growth. o Fees from service charges increased $530,000 or 20.4% to $3,122,000 in 2001 from $2,592,000 in 2000 and $2,317,000 in 1999. This increase was primarily due to the acquisition of the Highland and Pocahontas branches and an increase in the charge for overdraft fees and club fees. o Mortgage banking income increased $773,000 or 201.8% to $1,156,000 in 2001 from $383,000 in 2000. 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. Loan sold balances are as follows: o $71 million (representing 801 loans) in 2001 o $15 million (representing 203 loans) in 2000 o $36 million (representing 480 loans) in 1999 o Other income increased $636,000 or 50.1% to $1,906,000 in 2001 from $1,270,000 in 2000 and $1,386,000 in 1999. This increase was largely attributed to an increase in ATM fee income due to the addition of ATMs in 2000. Also, the acquisition of American Bank of Illinois in Highland provided additional income. OTHER EXPENSE The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations. The following table sets forth the major components of other expense for the last three years (in thousands): $ CHANGE FROM PRIOR YEAR ------------------ 2001 2000 1999 2001 2000 ------- --------- -------- -------- -------- Salaries and benefits $11,116 $10,104 $ 9,616 $ 1,012 $ 488 Occupancy and equipment 3,909 3,563 3,437 346 126 FDIC premiums 98 100 104 (2) (4) Amortization of intangibles 1,228 1,190 1,024 38 166 Stationery and supplies 671 534 642 137 (108) Legal and professional fees 1,033 941 1,232 92 (291) Marketing and promotion 789 769 643 20 126 Other 3,588 2,861 2,689 727 172 ------- ------- ------- ------- ----- Total other expense $22,432 $20,062 $19,387 $ 2,370 $ 675 ------- ------- ------- ------- ----- Total non-interest expense increased to $22,432,000 in 2001 from $20,062,000 in 2000 and $19,387,000 in 1999. The primary reasons for the more significant year to year changes in other expense components are as follows: o Salaries and employee benefits, the largest component of other expense, increased $1,012,000 or 10.0% to $11,116,000 in 2001 from $10,104,000 in 2000 and $9,616,000 in 1999. This increase can be explained by: o merit and incentive increases for continuing employees o the acquisition of American Bank of Illinois in Highland o Occupancy and equipment expense increased $346,000 or 9.7% to $3,909,000 in 2001 from $3,563,000 in 2000 and $3,437,000 in 1999. This increase was primarily the result of included depreciation expense recorded on technology equipment placed in service. o The net amount of insurance premiums assessed by the Federal Deposit Insurance Corporation ("FDIC") was $98,000 in 2001, remaining fairly constant with $100,000 in 2000 and $104,000 in 1999. o Amortization of intangible assets increased $38,000 or 3.2% to $1,228,000 in 2001 from $1,190,000 in 2000 and $1,024,000 in 1999. This increase is due to the goodwill and core deposit intangibles associated with the acquisition of American Bank of Illinois in Highland in April, 2001. o Other remaining expenses increased $976,000 or 19.1% to $6,081,000 in 2001 from $5,105,000 in 2000 and $5,206,000 in 1999. This increase was largely attributed to additional ATM network charges in 2001 from new ATMs installed in 2000. INCOME TAXES Income tax expense amounted to $3,040,000 in 2001 as compared to $2,035,000 in 2000 and $2,237,000 in 1999. Effective tax rates were 31.8%, 26.4% and 30.0%, respectively, for 2001, 2000 and 1999. The increase in the effective tax rate resulted primarily from increased federal and state income taxes due to the large charitable contribution in 2000. ANALYSIS OF BALANCE SHEETS LOANS The loan portfolio (net of unearned discount) is the largest category of the Company's earning assets. The following table summarizes the composition of the loan portfolio for the last five years (in thousands): 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Real estate - mortgage $331,873 $299,252 $273,293 $244,501 $252,312 Commercial & agricultural 107,620 100,201 89,176 78,579 73,854 Installment 32,522 28,674 24,501 25,194 29,266 Other 1,228 1,161 1,349 791 2,791 -------- -------- -------- -------- -------- Total loans $473,243 $429,288 $388,319 $349,065 $358,223 -------- -------- -------- -------- -------- At December 31, 2001, the Company had loan concentrations in agricultural industries of $82.6 million, or 17.5%, of outstanding loans and $67.9 million, or 15.8%, at December 31, 2000. The Company had no further industry loan concentrations in excess of 10% of outstanding loans. Real estate mortgage loans have averaged approximately 70% of the Company's total loan portfolio for the past several years. This is the result of a strong local housing market and the Company's long-term commitment to residential real estate lending. The 10.9% increase in the real estate loan category in 2001 was primarily due to an increase in the volume of loans secured by commercial real estate. The balance of real estate loans held for sale amounted to $5,571,000 and $587,000 as of December 31, 2001 and 2000, respectively. The following table presents the balance of loans outstanding as of December 31, 2001, by maturities (dollars in thousands): MATURITY (1) ------------------------------------------ OVER 1 ONE YEAR THROUGH OVER OR LESS(2) 5 YEARS 5 YEARS TOTAL ---------- -------- -------- -------- Real estate - mortgage $ 99,475 $195,468 $36,930 $331,873 Commercial & agricultural 66,545 38,430 2,645 107,620 Installment 5,926 24,419 2,177 32,522 Other 85 718 425 1,228 ---------- -------- ------- -------- Total loans $172,031 $259,035 $42,177 $473,243 ---------- -------- ------- -------- (1) Based upon remaining maturity. (2) Includes demand loans, past due loans and overdrafts. As of December 31, 2001, loans with maturities over one year consisted of $269,103,000 in fixed rate loans and $32,109,000 in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding rollovers and borrower requests, which are handled on a case-by-case basis. NONPERFORMING LOANS Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and loans not included in (a) and (b) above which are defined as "renegotiated loans". The following table presents information concerning the aggregate amount of nonperforming loans (in thousands): DECEMBER 31, ------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ Nonaccrual loans $3,419 $2,982 $1,430 $1,783 $1,194 Loans past due ninety days or more and still accruing -- 245 366 609 145 Renegotiated loans which are performing in accordance with revised terms 188 232 81 90 346 ------ ------ ------ ------ ------ Total Nonperforming Loans $3,607 $3,459 $1,877 $2,482 $1,685 ------ ------ ------ ------ ------ At December 31, 2001,approximately $837,600 of the nonperforming loans resulted from collateral-dependent loans to two borrowers. Management has identified a $278,000 possible loss exposure associated with the total nonperforming loans. Interest income that would have been reported if nonaccrual and renegotiated loans had been performing totaled $247,000, $154,000 and $131,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Interest income that was included in income totaled $16,000, $20,000 and $7,000 for the same periods. The Company's policy generally is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due and when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's estimate of the reserve necessary to adequately cover probable losses that could ultimately be realized from current loan exposures. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the 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. Collateral values are considered by management in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans and the current 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 December 31, 2001, the Company's loan portfolio included $82.6 million of loans to borrowers whose businesses are directly related to agriculture. The balance increased $14.7 million from $67.9 million at December 31, 2000. While the Company adheres to sound underwriting practices, including collateralization of loans, an extended period of low commodity prices could nevertheless result in an increase in the level of problem agriculture loans. Loan loss experience for the years ending December 31, are summarized as follows (dollars in thousands): 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Average loans outstanding, net of unearned income $454,108 $409,648 $358,948 $348,055 $355,167 Allowance-beginning of year $ 3,262 $ 2,939 $ 2,715 $ 2,636 $ 2,684 Balance added through acquisitions 275 -- 150 -- -- Charge-offs: Commercial, financial and agricultural 244 57 511 382 588 Real estate-mortgage 86 47 17 21 69 Installment 171 183 98 152 145 -------- -------- -------- -------- -------- Total charge-offs 501 287 626 555 802 Recoveries: Commercial, financial and agricultural 22 26 69 28 28 Real estate-mortgage -- 1 3 30 1 Installment 44 33 28 26 25 -------- -------- -------- -------- -------- Total recoveries 66 60 100 84 54 Net charge-offs 435 227 526 471 748 -------- -------- -------- -------- -------- Provision for loan losses 600 550 600 550 700 -------- -------- -------- -------- -------- Allowance-end of year $ 3,702 $ 3,262 $ 2,939 $ 2,715 $ 2,636 -------- -------- -------- -------- -------- Ratio of net charge-offs to average loans .10% .06% .15% .14% .21% -------- -------- -------- -------- -------- Ratio of allowance for loan losses to loans outstanding (at end of year) .79% .76% .76% .78% .74% -------- -------- -------- -------- -------- Ratio of allowance for loan losses to nonperforming loans 102.6% 94.3% 156.6% 109.4% 156.4% -------- -------- -------- -------- -------- The Company minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and changes are approved by the board of directors. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a monthly basis, the board of directors reviews the status of problem loans. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. During 2001, the Company had net charge-offs of $435,000, compared to $227,000 in 2000 and $526,000 in 1999. At December 31, 2001, the allowance for loan losses amounted to $3,702,000, or .79% of total loans, and 102.6% of nonperforming loans. At December 31, 2000, the allowance was $3,262,000, or .76% of total loans, and 94.3% of nonperforming loans. The allowance for loan losses, in management's judgment, is allocated as follows to cover probable loan losses (in thousands): DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------- ------------------ ------------------ ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF FOR LOANS FOR LOANS FOR LOANS LOAN TO TOTAL LOAN TO TOTAL LOAN TO TOTAL LOSSES LOANS LOSSES LOANS LOSSES LOANS ----------------- ------------------ ------------------ Real estate-mortgage $ 311 70.1% $ 267 69.7% $ 242 70.4% Commercial, financial and agricultural 2,938 22.7% 2,453 23.3% 1,997 23.0% Installment 207 6.9% 182 6.7% 181 6.3% Other - .3% - .3% - .3% ---------------- ------------------ ------------------ Total allocated 3,456 2,902 2,420 Unallocated 246 N/A 360 N/A 519 N/A -------- -------- --------- Allowance at end of year $3,702 100.0% $3,262 100.0% $2,939 100.0% ---------------- ------------------ ------------------ DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ---------------- ALLOWANCE % OF ALLOWANCE % OF FOR LOANS FOR LOANS LOAN TO TOTAL LOAN TO TOTAL LOSSES LOANS LOSSES LOANS ----------------- ----------------- Real estate-mortgage $ 264 70.1% $ 245 70.4% Commercial, financial and agricultural 1,961 22.5% 1,699 20.6% Installment 166 7.2% 192 8.2% Other - .2% - .8% ---------------- ----------------- Total allocated 2,391 2,136 Unallocated 324 N/A 500 N/A -------- -------- Allowance at end of year $2,715 100.0% $2,636 100.0% ---------------- ----------------- The allowance is allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based on historical losses. SECURITIES The Company's overall investment goal is to maximize earnings while maintaining liquidity in securities having minimal credit risk. The types and maturities of securities purchased are primarily based on the Company's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the year-end amortized cost of the Company's securities for the last three years (in thousands): DECEMBER 31, --------------------------------------------------- 2001 2000 1999 --------------- --------------- --------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- U.S. Treasury securities and obligations of U.S. government corporations and agencies 60,852 38% $ 89,202 58% $ 92,180 58% Obligations of states and political subdivisions 29,211 18 30,434 20 30,281 19 Mortgage-backed securities 54,306 34 27,750 18 32,578 21 Other securities 16,591 10 5,873 4 2,579 2 -------- --- -------- --- -------- --- Total securities $160,960 100% $153,259 100% $157,618 100% -------- --- -------- --- -------- --- At December 31, 2001, the investment portfolio showed an increase in mortgage-backed securities and other securities and a decrease in U.S. Treasury securities and obligations of U.S. government corporations and agencies. This change in the portfolio mix improved the characteristics of the portfolio relating to interest rate risk exposure and portfolio yield. The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at amortized cost, at December 31, 2001 (dollars in thousands) and the weighted average yield for each range of maturities. Mortgage-backed securities are aged according to their weighted average life. All other securities are shown at their contractual maturity. ONE AFTER 1 AFTER 5 AFTER YEAR THROUGH THROUGH TEN OR LESS 5 YEARS 10 YEARS YEARS TOTAL ------- -------- -------- ------- --------- AVAILABLE-FOR-SALE: U.S. Treasury securities and obligations of U.S. government corporations and agencies $2,500 $ 56,074 $ 1,500 $ 778 $ 60,852 Obligations of state and political subdivisions -- 5,440 12,048 9,652 27,140 Mortgage-backed securities 895 41,713 11,698 -- 54,306 Other securities -- 2,052 -- 14,539 16,591 ------ -------- ------- ------- -------- Total investments $3,395 $105,279 $25,246 $24,969 $158,889 ------ -------- ------- ------- -------- Weighted average yield 5.51% 4.75% 4.74% 5.98% 4.96% Full tax-equivalent yield 5.51% 4.87% 5.83% 7.13% 5.38% ------ -------- ------- ------- -------- ONE AFTER 1 AFTER 5 AFTER YEAR THROUGH THROUGH TEN OR LESS 5 YEARS 10 YEARS YEARS TOTAL ------- -------- -------- ------- ---------- HELD-TO-MATURITY: Obligations of state and political subdivisions $ 85 $ 715 $ 655 $ 616 $ 2,071 ------ -------- ------- ------- --------- Weighted average yield 5.88% 5.28% 5.50% 5.43% 5.42% Full tax-equivalent yield 8.92% 8.01% 8.34% 8.23% 8.22% ------ -------- ------- ------- --------- The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Full 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 December 31, 2001. Investment securities carried at approximately $133,208,000 and $131,654,000 at December 31, 2001 and 2000, 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 at December 31, 2001, 2000 and 1999 (dollars in thousands): 2001 2000 1999 --------------- --------------- --------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE -------- ----- -------- ----- -------- ----- Demand deposits: Non-interest bearing $ 69,020 -- $ 62,579 -- $ 60,557 -- Interest bearing 182,404 2.40% 163,531 3.13% 147,753 2.58% Savings 41,437 2.23% 39,215 2.43% 40,875 2.31% Time deposits 247,348 5.45% 226,259 5.42% 225,451 5.09% -------- ---- -------- ---- -------- ---- Total average deposits $540,209 3.48% $491,584 3.73% $474,636 3.42% -------- ---- -------- ---- -------- ---- The following table sets forth the maturity of time deposits of $100,000 or more (in thousands): DECEMBER 31, --------------------------------------------- 2001 2000 1999 --------------------------------------------- 3 months or less $ 25,503 $ 15,413 $ 16,915 Over 3 through 6 months 20,228 20,283 11,708 Over 6 through 12 months 10,913 18,668 11,444 Over 12 months 4,794 8,558 3,854 --------------------------------------------- Total $ 61,438 $ 62,922 $ 43,921 --------------------------------------------- OTHER BORROWINGS Other borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") advances, and federal funds purchased, and loans (short-term or long-term debt) that the Company has outstanding. Information relating to other borrowings for the last three years is presented below (in thousands): 2001 2000 1999 ------- -------- ------- At December 31: Securities sold under agreements to repurchase $38,879 $ 31,096 $32,308 Federal Home Loan Bank advances: Overnight -- 20,000 3,000 Fixed term - due after one year 33,300 20,300 18,500 Federal funds purchased -- -- 1,175 Debt: Loans due in one year or less 4,325 -- -- Loans due after one year -- 4,325 4,325 ------- -------- ------- Total $76,504 $ 75,721 $59,308 ------- -------- ------- Average interest rate at year end 3.15% 6.15% 5.00% Maximum Outstanding at Any Month-end Securities sold under agreements to repurchase $40,646 $ 34,546 $32,308 Federal Home Loan Bank advances: Overnight 12,800 44,000 18,000 Fixed term - due in one year or less 5,000 -- -- Fixed term - due after one year 28,300 20,300 20,500 Federal funds purchased 2,850 1,000 1,175 Debt: Loans due in one year or less 4,325 -- -- Loans due after one year -- 4,325 4,700 ------- -------- ------- Total $93,921 $104,171 $76,683 ------- -------- ------- Averages for the Year Securities sold under agreements to repurchase $29,547 $ 24,576 $22,063 Federal Home Loan Bank advances: Overnight 2,161 25,216 1,486 Fixed term - due in one year or less 3,356 -- -- Fixed term - due after one year 23,349 11,763 17,116 Federal funds purchased 236 1,047 345 Debt: Loans due in one year or less 4,325 -- -- Loans due after one year -- 4,325 4,416 ------- -------- ------- Total $62,974 $ 66,927 $45,426 ------- -------- ------- Average interest rate during the year 4.47% 6.22% 4.81% Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. First Mid Bank collateralizes these obligations with certain government securities which 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. FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. The fixed term advances consists of $33.3 million which First Mid Bank is using to fund loans: o $5 million advance at 4.35% with a 9-month maturity, due 2/1/02 o $3 million advance at 6.00% with a 2-year maturity, due 10/10/02 o $5 million advance at 6.16% with a 5-year maturity, due 3/20/05 o $2.3 million advance at 6.10% with a 5-year maturity, due 4/7/05 o $5 million advance at 6.12% with a 5-year maturity, due 9/6/05 o $5 million advance at 5.34% with a 5-year maturity, due 12/14/05 o $3 million advance at 5.98% with a 10-year maturity, due 3/1/11 o $5 million advance at 4.33% with a 10-year maturity, due 11/23/11. Debt, both short-term and long-term, represents the outstanding loan balance for the Company. This loan was renegotiated on November 19, 2001, and replaced the Company's previous loan balance set to mature December 31, 2003. Terms of the November 19, 2001 loan are a floating interest rate of 1.25% over the Federal Funds rate with interest due quarterly. The interest rate as of December 31, 2001 was 3.00%. The loan is a revolving credit agreement with a maximum available balance of $10 million. The outstanding loan balance matures November 19, 2002. The loan is secured by all of the common stock of First Mid Bank. The borrowing agreement 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 exisiting convenants at December 31, 2001 and 2000. INTEREST RATE SENSITIVITY The Company seeks to maximize its net interest margin within an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to favorable or unfavorable movements in interest rates. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the maturity or repricing characteristics of liabilities. The 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 an effort to maintain a cumulative one-year gap to earning assets ratio of less than 30% of total earning assets. In the banking industry, a traditional measurement of interest rate sensitivity is known as "GAP" analysis, which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. The following table sets forth the Company's interest rate repricing gaps for selected maturity periods at December 31, 2001 (in thousands): NUMBER OF MONTHS UNTIL NEXT REPRICING OPPORTUNITY INTEREST EARNING ASSETS: 0-1 1-3 3-6 6-12 12+ --------- --------- --------- --------- -------- Deposits with other financial institutions $ 5,400 $ -- $ -- $ -- $ -- Federal funds sold 4,225 -- -- -- -- Taxable investment securities 8,286 5,930 7,057 4,079 107,568 Nontaxable investment securities 246 741 615 30 27,615 Loans 101,130 35,332 40,215 51,542 245,025 --------- --------- --------- --------- -------- Total $ 119,287 $ 42,003 $ 47,887 $ 55,651 $380,208 --------- --------- --------- --------- -------- INTEREST BEARING LIABILITIES: Savings and N.O.W. accounts 112,675 610 911 2,796 70,965 Money market accounts 28,575 550 825 1,546 27,013 Other time deposits 30,083 52,659 56,873 49,915 43,123 Other borrowings 38,879 5000 -- 3,000 25,300 Long-term debt 4,325 -- -- -- -- --------- --------- --------- --------- -------- Total $ 214,537 $ 58,819 $ 58,609 $ 57,275 $166,419 --------- --------- --------- --------- -------- Periodic GAP $ (95,250) $ (16,816) $ (10,722) $ (1,624) $213,789 --------- --------- --------- --------- -------- Cumulative GAP $ (95,250) $(112,066) $(122,788) $(124,412) $ 89,377 --------- --------- --------- --------- -------- GAP as a % of interest earning assets: Periodic (14.8%) (2.6%) (1.7%) (.3%) 33.1% Cumulative (14.8%) (17.4%) (19.0%) (19.3%) 13.9% --------- --------- --------- --------- -------- At December 31, 2001, the Company was liability-sensitive on a cumulative basis through the twelve-month time horizon. Accordingly, future increases in interest rates could have an unfavorable effect on the net interest margin. The Company's ability to lag the market in repricing deposits in a rising interest rate environment eases the implied liability sensitivity of the Company. Interest rate sensitivity using a static GAP analysis basis is only one of several measurements of the impact of interest rate changes on net interest income used by the Company. Its actual usefulness in assessing the effect of changes in interest rates varies with the constant changes which occur in the composition of the Company's earning assets and interest- bearing liabilities. For this reason, the Company uses financial models to project interest income under various rate scenarios and assumptions relative to the prepayments, reinvestment and roll overs of assets and liabilities, of which First Mid Bank represents substantially all of the Company's rate sensitive assets and liabilities. CAPITAL RESOURCES At December 31, 2001, stockholders' equity increased $6,198,000 or 10.7% to $63,925,000 from $57,727,000 as of December 31, 2000. During 2001, net income contributed $6,516,000 to equity before the payment of dividends to common stockholders of $1,460,000. The change in the market value of available-for-sale investment securities increased stockholders' equity by $1,028,000, net of tax. STOCK PLANS On November 16, 2001, the Registrant effected a three-for-two stock split in the form of a 50 percent stock dividend. All share and per share information has been restated to reflect the split. DEFERRED COMPENSATION PLAN Effective September 30, 1998, the Company adopted the provisions of the Emerging Issues Task Force Issue No. 97-14, "ACCOUNTING FOR DEFERRED COMPENSATION ARRANGEMENTS WHERE AMOUNTS EARNED ARE HELD IN A RABBI TRUST AND INVESTED" ("EITF 97-14") for purposes of the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan ("DCP"). At December 31, 2001, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $1,392,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $1,392,000 as an equity instrument (deferred compensation). The DCP was effective as of June, 1984, in which the purpose is to enable directors, advisory directors, and key officers the opportunity to defer a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. During 1996, the Company began issuing common stock for participants of the DCP. The Company issued, pursuant to DCP: o 8,108 common shares during 2001 o 1,605 common shares during 2000 o 8,730 common shares during 1999. FIRST RETIREMENT AND SAVINGS PLAN The First Retirement and Savings Plan ("401k plan") was effective beginning in 1985. Employees are eligible to participate in the 401k plan after six months of service to the Company. During 1996, the Company began issuing common stock as an investment option for participants of the 401k plan. The Company issued, pursuant to the 401k plan: o 9,983 common shares during 2001 o 645 common shares during 2000 o 4,913 common shares during 1999. DIVIDEND REINVESTMENT PLAN The Dividend Reinvestment Plan ("DRIP") was effective as of October, 1994. The purpose of the DRIP is to provide participating stockholders with a simple and convenient method of investing cash dividends paid by the Company on its common and preferred shares into newly-issued common shares of the Company. All holders of record of the Company's common or preferred stock are eligible to voluntarily participate in the DRIP. The DRIP is administered by Computershare Investor Services LLC and offers a way to increase one's investment in the Company. Of the $1,460,000 in common stock dividends paid during 2001, $775,000 or 53.1%, was reinvested into shares of common stock of the Company through the DRIP. Events that resulted in common shares being reinvested in the DRIP: o during 2001, 39,787 common shares were issued from common stock dividends. o during 2000, 750 common shares were issued from stock options that were granted in October, 1997 and exercised in May, 2000. o during 2000, 32,166 common shares were issued from common stock dividends. o during 1999, 750 common shares were issued from stock options that were granted in December, 1998 and exercised in May, 1999. o during 1999, 272,226 common shares were issued from converting 449 preferred shares. o during 1999, 31,535 common shares were issued from common and preferred stock dividends. STOCK INCENTIVE PLAN In December, 1997, the Company established a Stock Incentive Plan ("SI Plan") intended to provide a means whereby directors and certain officers can acquire shares of the Company's common stock, and a maximum of 150,000 shares were originally authorized under the SI Plan. In September, 2001, the board authorized an additional 150,000 shares to be issued and sold under the SI Plan. Options to acquire shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. Options to acquire shares have a 10-year term. Options granted to employees vest over a four year period and those options granted to directors vest at the time they are issued. The following stock options have been awarded by the Company: o December, 2001 granted 39,500 options at an option price of $24.00. o December, 2000 granted 29,250 options at an option price of $18.83. o January, 2000 granted 4,500 options at an option price of $23.00. o December, 1999 granted 14,250 options at an option price of $23.00; canceled 1,500 options in December, 2000. The Company applied APB Opinion No. 25 in accounting for the SI Plan and, accordingly, compensation cost based on fair value at grant date has not been recognized for its stock options in the consolidated financial statements for the years ended December 31, 2001, 2000, and 1999. STOCK REPURCHASE PROGRAM On August 5, 1998, the Company announced a stock repurchase program of up to 3% of its common stock. In March 2000, the board approved the repurchase of an additional 5% of the Company's common stock. In September 2001, the board authorized the repurchase of $3 million additional shares of the authorized common stock, bringing the aggregate total to 8% of the Company's common stock plus $3 million additional shares. During 2001, 46,111 shares (1.4%) at a total price of $1,038,000 were repurchased by the Company, 90,254 shares (2.7%) at a total price of $1,881,000 were repurchased by the Company in 2000 and 14,544 shares (.4%) at a total price of $337,000 were purchased in 1999. As of December 31, 2001, the Company was authorized per all repurchase programs to purchase an additional 3,098,531 shares. Treasury Stock is further affected by activity in the Deferred Compensation Plan. CAPITAL RATIOS Minimum regulatory requirements for highly-rated banks that do not expect significant growth is 8% for the Total Capital to Risk-Weighted Assets ratio and 3% for the Tier 1 Capital to Average Assets ratio. Other institutions, not considered highly-rated, are required to maintain a ratio of Tier 1 Capital to Risk-Weighted Assets of 4% to 5% depending on their particular circumstances and risk profiles. The Company and First Mid Bank have capital ratios above the regulatory capital requirements. A tabulation of the Company's and First Mid Bank's capital ratios as of December 31, 2001 follows: TIER ONE TOTAL TIER ONE CAPITAL TO CAPITAL TO CAPITAL TO RISK-WEIGHTED RISK-WEIGHTED AVERAGE ASSETS ASSETS ASSETS ------------- ------------- ----------- First Mid-Illinois Bancshares Inc. (Consolidated) 10.47% 11.23% 7.34% First Mid-Illinois Bank & Trust 10.47% 11.24% 7.36% N.A. ------------- ------------- ----------- Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. These ratios are in excess of regulatory minimums and will allow the Company to operate without capital adequacy concerns. 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 which may be converted into cash at minimal costs or through other sources. The Company's other sources for cash include overnight Federal Fund lines, Federal Home Loan Bank advances, deposits of the State of Illinois, the ability to borrow at the Federal Reserve Bank, and the Company's operating line of credit with The Northern Trust Company. Details for the sources include: o 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 December 31, 2001, the First Mid Bank's ratios of total capital to risk-weighted assets of 11.24% and Tier 1 capital to total assets of 7.36% met regulatory requirements. o 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 December, 31, 2001, the excess collateral at the Federal Home Loan Bank will support approximately $33 million of additional advances. o 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. o First Mid Bank is also a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged. o In addition, the Company has a revolving credit agreement in the amount of $10 million with The Northern Trust Company. The Company has an outstanding balance of $4,325,000 as of December 31, 2001 and $5,675,000 in available funds. The credit agreement matures on November 19, 2002. The agreement contains requirements for the Company and First Mid Bank to maintain various operating and capital ratios and also contains requirements for 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 December 31, 2001. Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from: o lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions o deposit activities, including seasonal demand of private and public funds o investing activities, including prepayments of mortgage-backed securities and call assumptions on U.S. Government Treasuries and Agencies o operating activities, including scheduled debt repayments and dividends to shareholders The following table summarizes significant contractual obligations and other commitments at December 31, 2001 (in thousands): TIME OPERATING DEPOSITS BORROWINGS* LEASES TOTAL -------- ---------- --------- -------- 2002 $191,795 $68,504 $ 98 $260,397 2003 28,753 -- 91 28,844 2004 6,618 -- 91 6,709 2005 6,450 -- 39 6,489 2006 2,290 5,000 14 7,304 Thereafter 106 3,000 3 3,109 -------- --------- --------- -------- Total $236,012 $76,504 $336 $312,852 -------- --------- --------- -------- Commitments to extend credit $ 87,455 * Borrowings included at earlier of call date or maturity For the year ended December 31, 2001, net cash was provided from both financing activities and operating activities ($24.4 million and $4.5 million, respectively), while investing activities used net cash of $20.6 million. Thus, cash and cash equivalents increased by $8.3 million since year-end 2000. Generally, during 2001, the increases in deposits, customer repurchase agreements, and 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 2000. Also included was the addition of American Bank of Illinois in Highland which provided $30.8 million in deposits, $24.9 million in loans, and $2 million in securities. Thus, other financing sources, including short-term FHLB advances, were reduced. For the year ended December 31, 2000, net cash was provided from both financing activities and operating activities ($33 million and $8.7 million, respectively), while investing activities used net cash of $38.7 million. Thus, cash and cash equivalents increased by $3 million since year- end 1999. Generally, during 2000, loan growth was strong and was funded with both deposit growth and short-term FHLB advances. Cash was also needed for common stock repurchases and payment of cash dividends. During 2000, proceeds from the sales and maturities of investment securities were predominantly reinvested by the Company to mitigate interest rate risk and enhance future investment yields. EFFECTS OF INFLATION Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are effected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company's assets and liabilities which are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects. ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the balance sheet at fair value. The accounting for the changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. The gain or loss due to changes in fair value is recognized in earnings or as other comprehensive income in the statement of stockholders' equity, depending on the type of instrument and whether or not it is considered a hedge. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the effective date of Statement No. 133." This statement defers the adoption of SFAS 133 to fiscal quarters of fiscal years beginning after June 15, 2000. The FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB Statement No. 133" in June 2000, which addresses various implementation issues relating to SFAS 133. Adoption of the above Statements on January 1, 2001 did not have a material impact on the Company's financial position, results of operation or liquidity. Statement of Financial Accounting Standards ("SFAS") No. 140 "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES", was issued by the Financial Accounting Standards Board (FASB) in September of 2000. SFAS No. 140 supersedes and replaces FASB SFAS No. 125, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES". Accordingly, SFAS No. 140 is now the authoritative accounting literature for transfers and servicing of financial assets and extinguishments of liabilities. SFAS No. 140 also includes several additional disclosure requirements in the area of securitized financial assets and collateral arrangements. The provisions of SFAS No. 140 related to transfers of financial assets are to be applied to all transfers of financial assets occurring after March 31, 2001. The collateral recognition and disclosure provisions in SFAS No. 140 are effective for fiscal years ending after December 15, 2000. Adoption of SFAS No. 140 did not have a material impact on the Company's results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk arises primarily from interest rate risk inherent in its lending, investing and deposit taking activities, which are restricted to First Mid Bank. The Company does not currently use derivatives to manage market or interest rate risks. For a discussion of how management of the Company addresses and evaluates interest rate risk see also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity." Based on the financial analysis performed as of December 31, 2001, which takes into account how the specific interest rate scenario would be expected to impact each interest-earning asset and each interest-bearing liability, the Company estimates that changes in the prime interest rate would impact First Mid Bank's performance as follows: Increase (Decrease) In Net Interest Net Interest Return On DECEMBER 31, 2001 Income Income Average Equity Prime rate is 4.75% (000) (%) 2001=11.52% ------------ ------------ -------------- Prime rate increase of: 200 basis points to 6.75% $ (1,624) (5.80)% (1.59)% 100 basis points to 5.75% (314) (1.12)% (.30)% Prime rate decrease of: 200 basis points to 2.75% (1,960) (7.00)% (1.93)% 100 basis points to 3.75% (725) (2.59)% (.71)% ------------ ------------ -------------- The following table shows the same analysis performed as of December 31, 2000. Increase (Decrease) In Net Interest Net Interest Return On DECEMBER 31, 2000 Income Income Average Equity Prime rate is 9.50% (000) (%) 2000=11.16% ------------ ------------ -------------- Prime rate increase of: 200 basis points to 11.50% $ (1,171) (.10)% (1.26)% 100 basis points to 1050% (609) (4.04)% (.65)% Prime rate decrease of: 200 basis points to 7.50% (24) (2.50)% (.02)% 100 basis points to 8.50% (984) (4.81)% (1.06)% ------------ ------------ -------------- The First Mid Bank's board of directors has adopted an interest rate risk policy which establishes maximum decreases in the percentage change in net interest margin of 5% in a 100 basis point rate shift and 10% in a 200 basis point rate shift. No assurance can be given that the actual net interest income would increase or decrease by such amounts in response to a 100 or 200 basis point increase or decrease in the prime rate. Interest rate sensitivity analysis is also used to measure the Company's interest risk by computing estimated changes in the Economic Value of Equity (EVE)of First Mid Bank under various interest rate shocks. EVE is determined by calculating the net present value of each asset and liability category by rate shock. The net differential between assets and liabilities. is the Economic Value of Equity. EVE is an expression of the long-term interest rate risk in the balance sheet as a whole. The following tables present, in thousands, First Mid Bank's projected change in EVE for the various rate shock levels at December 31, 2001 and December 31, 2000. All market risk sensitive instruments presented in the tables are held-to- maturity or available-for-sale. First Mid Bank has no trading securities. DECEMBER 31, 2001 Change in Changes In Economic Value of Equity Interest Rates Amount Percent (basis points) of Change of Change - ---------------------- ----------------- --------------- +200 bp $(15,315) (16.3)% +100 bp (5,695) (6.1)% -200 bp 12,651 13.5% -100 bp 9,423 10.0% - ---------------------- ----------------- --------------- DECEMBER 31, 2000 Change in Changes In Economic Value of Equity Interest Rates Amount Percent (basis points) of Change of Change - ---------------------- ----------------- --------------- +200 bp $(7,797) (10.2)% +100 bp (1,825) (2.4)% -200 bp (4,852) (6.3)% -100 bp (488) (.6)% - ---------------------- ----------------- --------------- As indicated above, at December 31, 2001, in the event of a sudden and sustained increase in prevailing market interest rates, First Mid Bank's EVE would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, First Mid Bank's EVE would be expected to increase. At December 31, 2001, First Mid Bank's estimated changes in EVE were within the industry guidelines which normally allow for a change in capital of +/-10% from the base case scenario under a 100 basis point shock and +/- 20% from the base case scenario under a 200 basis point shock. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions First Mid Bank may undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of EVE. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in First Mid Bank's portfolio change in future periods as market rates change. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (In thousands, except share data) 2001 2000 ----------- -------- ASSETS Cash and due from banks (note 4): Non-interest bearing $ 23,471 $ 22,035 Interest bearing 5,400 80 Federal funds sold 4,225 2,725 -------- --------- Cash and cash equivalents 33,096 24,840 Investment securities (note 5): Available-for-sale, at fair value 160,096 150,034 Held-to-maturity, at amortized cost (estimated fair value of $2,136 and $2,800 at December 31, 2001 and 2000, respectively 2,071 2,757 Loans (note 6) 473,243 429,288 Less allowance for loan losses (note 7) 3,702 3,262 -------- --------- Net loans 469,541 426,026 Premises and equipment, net (note 8) 16,656 15,375 Accrued interest receivable 6,790 7,395 Intangible assets, net (notes 3 and 9) 12,392 12,150 Other assets (note 16) 5,337 4,422 -------- --------- TOTAL ASSETS $705,979 $642,999 -------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (note 10): Non-interest bearing $ 80,265 $ 66,646 Interest bearing 479,155 437,339 -------- --------- Total deposits 559,420 503,985 Accrued interest payable 2,370 2,628 Securities sold under agreements to repurchase (notes 11) 38,879 31,096 Other borrowings (note 11) 37,625 44,625 Other liabilities (note 16) 3,760 2,938 -------- --------- TOTAL LIABILITIES 642,054 585,272 -------- --------- Stockholders' Equity (notes 12 and 15) Common stock, $4 par value; authorized 6,000,000 shares; issued 3,546,060 shares in 2001 and 3,488,204 shares in 2000 14,184 9,302 Additional paid-in capital 13,288 12,293 Retained earnings 39,500 39,169 Deferred compensation 1,392 1,218 Accumulated other comprehensive income (loss) 740 (288) Less treasury stock at cost, 174,216 shares in 2001 and 128,106 shares in 2000 (5,179) (3,967) -------- --------- TOTAL STOCKHOLDERS' EQUITY 63,925 57,727 -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $705,979 $642,999 -------- --------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 2001, 2000 and 1999 (In thousands, except per share data) 2001 2000 1999 -------- -------- ------- INTEREST INCOME: Interest and fees on loans $36,877 $ 34,893 $29,785 Interest on investment securities: Taxable 6,820 7,722 7,425 Exempt from federal income tax 1,393 1,449 1,403 Interest on federal funds sold 335 121 485 Interest on deposits with other financial institutions 81 6 70 ------- -------- ------- Total interest income 45,506 44,191 39,168 INTEREST EXPENSE: Interest on deposits (note 10) 18,773 18,412 16,229 Interest on securities sold under agreements to repurchase 915 1,357 948 Interest on other borrowings 1,902 2,804 1,238 ------- -------- ------- Total interest expense 21,590 22,573 18,415 ------- -------- ------- Net interest income 23,916 21,618 20,753 Provision for loan losses (note 7) 600 550 600 ------- -------- ------- Net interest income after provision for loan losses 23,316 21,068 20,153 OTHER INCOME: Trust revenues 1,924 2,010 1,912 Brokerage revenues 356 437 456 Service charges 3,122 2,592 2,317 Gain(loss) on sale of securities, net (note 5) 208 (3) 8 Mortgage banking income 1,156 383 624 Other 1,906 1,270 1,386 ------- -------- ------- Total other income 8,672 6,689 6,703 OTHER EXPENSE: Salaries and employee benefits (note 14) 11,116 10,104 9,616 Net occupancy expense 1,544 1,378 1,323 Equipment rentals, depreciation and maintenance 2,365 2,185 2,114 Federal deposit insurance premiums 98 100 104 Amortization of intangible assets (note 9) 1,228 1,190 1,024 Stationery and supplies 671 534 642 Legal and professional 1,033 941 1,232 Marketing and promotion 789 769 643 Other 3,588 2,861 2,689 ------- -------- ------- Total other expense 22,432 20,062 19,387 ------- -------- ------- Income before income taxes 9,556 7,695 7,469 Income taxes (note 16) 3,040 2,035 2,237 ------- -------- ------- Net income $ 6,516 $ 5,660 $ 5,232 Per common share data: Basic earnings per share $ 1.93 $ 1.67 $ 1.60 Diluted earnings per share 1.92 1.67 1.53 ------- -------- ------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 2001, 2000 and 1999 (In thousands, except share and per share data) ACCUMULATED ADDITIONAL OTHER PREFERRED COMMON PAID-IN RETAINED DEFERRED COMPREHENSIVE TREASURY STOCK STOCK CAPITAL EARNINGS COMPENSATION INCOME(LOSS) STOCK TOTAL --------- ------ ------- ---------- ------------ ------------- ----------- -------- DECEMBER 31, 1998 $3,070 $8,093 $ 8,562 $31,025 $ 950 $ 261 $(1,481) $50,480 Comprehensive income: Net income - - - 5,232 - - - 5,232 Net unrealized change in available-for- sale investment securities - - - - - (3,526) - (3,526) ------- Total Comprehensive Income 1,706 Cash dividends on preferred stock ($462.50 per share) - - - (232) - - - (232) Cash dividends on common stock ($.37 per share) - - - (1,190) - - - (1,190) Issuance of 31,535 common shares pursuant to the Dividend Reinvestment Plan - 84 663 - - - - 747 Issuance of 8,730 common shares pursuant to the Deferred Compensation Plan - 23 185 - - - - 208 Issuance of 4,913 common shares pursuant to the First Retirement & Savings Plan - 13 105 - - - - 118 Conversion of 614 preferred shares into 372,266 common shares (3,070) 993 2,077 - - - - - Purchase of 14,544 treasury shares - - - - - - (337) (337) Deferred compensation - - - - 173 - (173) - Issuance of 750 common shares pursuant to the exercise of stock options - 2 16 - - - - 18 --------- ------ ------- ----------------------- ------------- ----------- -------- DECEMBER 31, 1999 $ - $9,208 $11,608 $34,835 $1,123 $(3,265) $(1,991) $51,518 Comprehensive income: Net income - - - 5,660 - - - 5,660 Net unrealized change in available-for- sale investment securities - - - - - 2,977 - 2,977 -------- Total Comprehensive Income 8,637 Cash dividends on common stock ($.39 per share) - - - (1,326) - - - (1,326) Issuance of 32,166 common shares pursuant to the Dividend Reinvestment Plan - 86 639 - - - - 725 Issuance of 1,605 common shares pursuant to the Deferred Compensation Plan - 4 26 - - - - 30 Issuance of 645 common shares pursuant to the First Retirement & Savings Plan - 2 10 - - - - 12 Purchase of 90,254 treasury shares - - - - - - (1,881) 1,881) Deferred compensation - - - - 95 - (95) - Issuance of 750 common shares pursuant to the exercise of stock options - 2 10 - - - - 12 --------- ------ ------- ---------- ------------ ------------- ----------- -------- DECEMBER 31, 2000 $ - $9,302 $12,293 $39,169 $1,218 $ (288) $(3,967) $57,727 --------- ------ ------- ---------- ------------ ------------- ----------- -------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 2001, 2000 and 1999 (In thousands, except share and per share data) ACCUMULATED ADDITIONAL OTHER PREFERRED COMMON PAID-IN RETAINED DEFERRED COMPREHENSIVE TREASURY STOCK STOCK CAPITAL EARNINGS COMPENSATION INCOME(LOSS) STOCK TOTAL --------- ------- ------- ---------- ------------ ------------- ----------- -------- DECEMBER 31, 2000 $ - $ 9,302 $12,293 $39,169 $1,218 $ (288) $(3,967) $57,727 Comprehensive income: Net income - - - 6,516 - - - 6,516 Net unrealized change in available-for- sale investment securities - - - - - 1,028 - 1,028 -------- Total Comprehensive Income 7,544 Cash dividends on common stock ($.43 per share) - - - (1,460) - - - (1,460) Issuance of 39,787 common shares pursuant to the Dividend Reinvestment Plan - 85 690 - - - - 775 Issuance of 8,108 common shares pursuant to the Deferred Compensation Plan - 32 134 - - - - 166 Issuance of 9,983 common shares pursuant to the First Retirement & Savings Plan - 40 171 - - - - 211 Purchase of 46,111 treasury shares - - - - - - (1,038) (1,038) Deferred compensation - - - - 174 - (174) - 3-for-2 stock split in the form of 50% stock dividend - 4,725 - (4,725) - - - - --------- ------- ------- ---------- ------------ ------------- ----------- -------- DECEMBER 31, 2001 $ - $14,184 $13,288 $39,500 $1,392 $ 740 $(5,179) $63,925 ========= ======= ======= ========== ============ ============= =========== ======== See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2001, 2000 and 1999 (In thousands) 2001 2000 1999 ---------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,516 $ 5,660 $ 5,232 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 600 550 600 Depreciation, amortization and accretion, net 3,204 2,887 2,474 (Gain) loss on sale of securities, net (208) 3 (8) (Gain) loss on sale of other real property owned, net 132 48 (70) Gain on sale of mortgage loans held for sale, net (998) (286) (552) Deferred income taxes (313) (260) (293) Decrease (increase) in accrued interest receivable 605 (1,462) (191) Increase (decrease) in accrued interest payable (258) 332 205 Origination of mortgage loans held for sale (76,212) (14,220) (28,998) Proceeds from sale of mortgage loans held for sale 72,226 15,268 36,944 (Increase) decrease in other assets (841) 1,828 (3,050) Increase (decrease) in other liabilities 48 (1,688) 2,687 --------- -------- -------- Net cash provided by operating activities 4,501 8,660 14,980 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of mortgage servicing rights (47) (189) (47) Purchases of premises and equipment (1,625) (1,106) (2,731) Net increase in loans (14,512) (41,958) (37,055) Proceeds from sales of: Securities available-for-sale 9,888 607 721 Proceeds from maturities of: Securities available-for-sale 88,213 10,229 34,275 Securities held-to-maturity 456 375 447 Purchases of: Securities available-for-sale (103,216) (4,817) (36,164) Securities held-to-maturity (394) (1,794) (332) Purchase of financial organization, net of cash received 606 -- 46,441 --------- -------- -------- Net cash provided by (used in) investing activities (20,631) (38,653) 5,555 --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 24,854 18,974 (28,938) Increase (decrease) in federal funds purchased -- (1,175) 1,175 Increase (decrease) in repurchase agreements 7,783 (1,212) 6,290 Increase in short-term FHLB Advances (15,000) 17,000 3,000 Increase in long-term FHLB Advances 8,000 1,800 -- Repayment of long-term debt (4,325) -- (1,375) Proceeds from issuance of short-term debt 4,325 -- -- Proceeds from issuance of common stock 377 54 344 Purchase of treasury stock (1,038) (1,881) (337) Dividends paid on preferred stock -- -- (110) Dividends paid on common stock (590) (569) (514) --------- -------- -------- Net cash provided by (used in) financing activities 24,386 32,991 (20,465) --------- -------- -------- Increase in cash and cash equivalents 8,256 2,998 70 Cash and cash equivalents at beginning of year 24,840 21,842 21,772 --------- -------- -------- Cash and cash equivalents at end of year $ 33,096 $ 24,840 $ 21,842 --------- -------- -------- ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 21,848 $ 22,241 $ 18,620 Income taxes 3,171 2,417 2,539 Loans transferred to real estate owned 617 102 442 Dividends reinvested in common shares 775 725 747 --------- -------- -------- See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING AND CONSOLIDATION The accompanying consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. ("Company") and its wholly- owned subsidiaries: Mid-Illinois Data Services, Inc. ("MIDS") and First Mid-Illinois Bank & Trust, N.A. ("First Mid Bank") and its wholly-owned subsidiary First Mid-Illinois Insurance Services, Inc. ("First Mid Insurance"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform with the 2001 presentation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America. The following is a description of the more significant of these policies. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. CASH EQUIVALENTS For purposes of reporting cash flows, cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. INVESTMENT SECURITIES The Company classifies its debt securities into one or more of three categories: held-to-maturity, available-for-sale, or trading. Held-to- maturity securities are those which management has the positive intent and ability to hold to maturity. Available-for-sale securities are those securities which management may sell prior to maturity as a result of changes in interest rates, prepayment factors, or as part of the Company's overall asset and liability strategy. Trading securities are those securities bought and held principally for the purpose of selling them in the near term. The Company had no securities designated as trading during 2001, 2000 or 1999. Held-to-maturity securities are recorded at cost adjusted for amortization of premiums and accretion of discounts to the earlier of the call date or maturity date using the interest method. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related income tax effect, are excluded from income and reported as a separate component of stockholders' equity. If a decrease in the fair value of a security is expected to be other than temporary, then the security is written down to its fair value through a charge to income. Realized gains and losses on the sale of investment securities are recorded using the specific identification method. LOANS Loans are stated at the principal amount outstanding less unearned discount, net of the allowance for loan losses. Interest on substantially all loans is credited to income based on the principal amount outstanding. The Company's policy is to generally discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due and when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level deemed appropriate by management to provide for probable losses inherent in the loan portfolio. The allowance is based on a continuing review of the loan portfolio, the underlying value of the collateral securing the loans, current economic conditions and past loan loss experience. Loans which are deemed to be uncollectible are charged off to the allowance. The provision for loan losses and recoveries are credited to the allowance. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement, including principal and interest. The amount of the impairment is measured based on the fair value of the collateral, if the loan is collateral dependent, or alternatively, at the present value of expected future cash flows discounted at the loan's effective interest rate. Certain homogeneous loans such as residential real estate mortgage and installment loans are excluded from the impaired loan provisions. Interest income on impaired loans is recorded when cash is received and only if principal is considered to be fully collectible. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is determined principally by the straight-line method over the estimated useful lives of the assets. INTANGIBLE ASSETS Intangible assets generally arise from business combinations which the Company accounted for as purchases. Such assets consist of the excess of the purchase price over the fair value of net assets acquired, with specific amounts assigned to core deposit relationships of acquired businesses. Intangible assets are amortized by the straight-line and accelerated methods over various periods of up to twenty years. Management reviews intangible assets for possible impairment when there is a significant event that detrimentally effects operations. MORTGAGE BANKING ACTIVITIES First Mid Bank originates residential mortgage loans both for its portfolio and for sale into the secondary market. Included in mortgage banking income are gains or losses on the sale of loans and servicing fee income. Loans that are originated and held for sale are carried at the lower of aggregate amortized cost or fair value. Gains or losses from loan sales are computed using the specific identification method and are included in mortgage banking income in the Consolidated Statements of Income. The Company recognizes as separate assets the rights to service mortgage loans for others, however those rights are acquired. Originated Mortgage Servicing Rights ("OMSRs") are amortized in proportion to and over the period of estimated net servicing income. For the year ended December 31, 2001 2000 1999 - --------------------------------------- -------- --------- --------- Capitalized mortgage servicing rights $47,000 $189,000 $47,000 Amortization expense $86,000 $ 79,000 $62,000 The balance of mortgage servicing rights was $217,000 and $256,000 at December 31, 2001 and 2000, respectively, and the fair value of the servicing rights approximates the net investment. INCOME TAXES The Company and its subsidiaries file consolidated Federal and State income tax returns with each organization computing its taxes on a separate company basis. Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under tax laws. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences existing between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an increase or decrease in income tax expense in the period such change is enacted. TRUST DEPARTMENT ASSETS Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets since such items are not assets of the Company or its subsidiaries. STOCK SPLIT On November 16, 2001, the Registrant effected a three-for-two stock split in the form of a 50 percent stock dividend. Par value remained at $4 per share. The stock split increased the Company's outstanding common shares from 2,250,714 to 3,376,071 shares. All share and per share amounts have been restated giving retroactive recognition to the stock split. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combinations," ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations. SFAS 141 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and subsequently, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," after its adoption. The Company adopted the provisions of SFAS 141 as of July 1, 2001, and SFAS 142 as of January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001, continued to be amortized and tested for impairment prior to the full adoption of SFAS 142. Upon adoption of SFAS 142, the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS 141 for recognition separate from goodwill. The Company will also be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Impairment is measured as the excess of the carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the SFAS 142 transitional goodwill impairment evaluation, the Statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company will then have up to six months from January 1, 2002, to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and the Company must perform the second step of the transitional impairment test. The second step is required to be completed as soon as possible, but no later than the end of the year of adoption. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of income. As of January 1, 2002, the date of adoption of SFAS 142, the Company has unamortized goodwill in the amount of $11.1 million, of which $4 million will be subject to the transition provisions of SFAS 142 and $7.1 million will continue to be amortized as an identifiable intangible asset subject to amortization. Also, at January 1, 2002, the Company had core deposit intangibles of $1.3 million which will continue to be amortized. Annual amortization expense related to the core deposit intangibles was $323,000 for 2001. Amortization expense related to goodwill was $905,000 for the year ended December 31, 2001. The Company is evaluating its goodwill for impairment in accordance with SFAS 142. COMPREHENSIVE INCOME The Company's comprehensive income for the years ended December 31, 2001, 2000 and 1999 is as follows (in thousands): 2001 2000 1999 ------- ------- ------- Net income $ 6,516 $ 5,660 $ 5,232 Other comprehensive income: Unrealized gains(losses) during the year 1,886 4,857 (5,334) Reclassification adjustment for net (gains)losses realized in net income (208) 3 (8) Tax effect (650) (1,883) 1,816 ------- ------- ------- Comprehensive income $ 7,544 $ 8,637 $ 1,706 ------- ------- ------- NOTE 2 - EARNINGS PER SHARE The Company follows Financial Accounting Standards Board's Statement No. 128, "EARNINGS PER SHARE" ("SFAS 128") in which income for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to preferred stock and is based on the weighted average number of common shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock and the assumed conversion of stock options, if not anti-dilutive. The components of basic and diluted earnings per common share for the years ended December 31, 2001, 2000, and 1999 are as follows: 2001 2000 1999 ---------- ---------- ----------- BASIC EARNINGS PER SHARE: Net income $6,516,000 $5,660,000 $5,232,000 Less preferred stock dividends -- -- (304,000) ---------- ---------- ----------- Net income available to common stockholders $6,516,000 $5,660,000 $4,928,000 ---------- ---------- ----------- Weighted average common shares outstanding 3,378,019 3,386,111 3,083,858 ---------- ---------- ----------- Basic earnings per common share $ 1.93 $ 1.67 $ 1.60 ---------- ---------- ----------- DILUTED EARNINGS PER SHARE: Net income available to common stockholders $6,516,000 $5,660,000 $4,928,000 Assumed conversion of preferred stock -- -- 304,000 ---------- ---------- ----------- Net income available to common stock- holders after assumed conversion $6,516,000 $5,660,000 $5,232,000 ---------- ---------- ----------- Weighted average common shares outstanding 3,378,019 3,386,111 3,083,858 Assumed conversion of stock options 11,195 7,918 11,240 Assumed conversion of preferred stock -- -- 325,352 ---------- ---------- ----------- Diluted weighted average common shares outstanding 3,389,214 3,394,029 3,420,450 ---------- ---------- ----------- Diluted earnings per common share $ 1.92 $ 1.67 $ 1.53 ---------- ---------- ----------- NOTE 3 - MERGERS AND ACQUISITIONS On May 7, 1999, the Company acquired the Monticello, Taylorville and DeLand branch offices and deposit base of Bank One Illinois, N.A. This cash acquisition added approximately $64 million in total deposits, $10 million in loans, $1.7 million in premises and equipment and $6.5 million in intangible assets. This acquisition was accounted for using the purchase method of accounting whereby the acquired assets and deposits of the branches were recorded at their fair values as of the acquisition date. The operating results have been combined with those of the Company since May 7, 1999. On April 20, 2001, First Mid Bank acquired all the outstanding stock of American Bank of Illinois in Highland for $3.7 million in cash. This acquisition added approximately $30.8 million in total deposits, $24.9 million in loans, $2 million in securities, $1.7 million in premises and equipment and $1.4 million in intangible assets. The acquisition was accounted for using the purchase method of accounting whereby the acquired assets and liabilities were recorded at fair value as of the acquisition date and the excess cost over fair value of net assets was recorded as goodwill. The consolidated financial statements include the results of operations of American Bank of Illinois in Highland since the acquisition date. NOTE 4 - CASH AND DUE FROM BANKS Aggregate cash and due from bank balances of $214,000 and $471,000 at December 31, 2001 and 2000, were maintained in satisfaction of statutory reserve requirements of the Federal Reserve Bank. NOTE 5 - INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at December 31, 2001 and 2000 were as follows (in thousands): GROSS ESTIMATED AMORTIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------- ------ ------ -------- 2001 Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 60,852 $1,165 $(181) $ 61,836 Obligations of states and political subdivisions 27,140 247 (212) 27,175 Mortgage-backed securities 54,306 427 (242) 54,491 Federal Home Loan Bank stock 3,102 -- -- 3,102 Other securities 13,489 23 (20) 13,492 -------- ------ ----- -------- Total available-for-sale $158,889 $1,862 $(655) $160,096 -------- ------ ----- -------- Held-to-maturity: Obligations of states and political subdivisions $ 2,071 $ 70 $ (5) $ 2,136 -------- ------ ----- -------- 2000 Available-for-sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 89,202 $185 $ (707) $ 88,680 Obligations of states and political subdivisions 27,677 248 (283) 27,642 Mortgage-backed securities 27,750 102 (144) 27,708 Federal Home Loan Bank stock 2,708 -- -- 2,708 Other securities 3,165 131 -- 3,296 -------- ---- ------- -------- Total available-for-sale $150,502 $666 $(1,134) $150,034 -------- ---- ------- -------- Held-to-maturity: Obligations of states and political subdivisions $ 2,757 $ 43 $ -- $ 2,800 -------- ---- ------- -------- Proceeds from sales of investment securities and realized gains and losses were as follows during the years ended December 31, 2001, 2000 and 1999 (in thousands): 2001 2000 1999 ------------ ------------ ------------ Proceeds from sales $ 9,888 $ 607 $ 721 Gross gains 208 1 8 Gross losses - 4 - ------------ ------------ ------------ Maturities of investment securities were as follows at December 31, 2001 (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. AMORTIZED ESTIMATED COST FAIR VALUE ------------------- ------------------- Available-for-sale: Due in one year or less $ 2,500 $ 2,544 Due after one-five years 63,566 64,489 Due after five-ten years 13,548 13,567 Due after ten years 24,969 25,005 ------------------- ------------------- 104,583 105,605 Mortgage-backed securities 54,306 54,491 ------------------- ------------------- Total available-for-sale $158,889 $160,096 ------------------- ------------------- Held-to-maturity: Due in one year or less $ 85 $ 86 Due after one-five years 715 743 Due after five-ten years 655 688 Due after ten-years 616 619 ------------------- ------------------- Total held-to-maturity $ 2,071 $ 2,136 ------------------- ------------------- Total investment securities $160,960 $162,232 ------------------- ------------------- Investment securities of approximately $133,208,000 and $131,654,000 at December 31, 2001 and 2000 respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law. NOTE 6 - LOANS A summary of loans at December 31, 2001 and 2000 follows (in thousands): 2001 2000 ---------------- ----------------- Commercial, financial and agricultural $107,794 $100,216 Real estate-mortgage 331,873 299,252 Installment 32,652 28,865 Other 1,228 1,161 ---------------- ----------------- Total gross loans 473,547 429,494 Less unearned discount 304 206 ---------------- ----------------- Net loans $473,243 $429,288 ---------------- ----------------- The real estate mortgage loan balance in the above table includes loans held for sale of $5,571,000 and $587,000 at December 31, 2001 and 2000, respectively. Certain officers, directors and principal stockholders of the Company and its subsidiaries, their immediate families or their affiliated companies have loans with one or more of the subsidiaries. These loans are made in the ordinary course of business on substantially the same terms, including interest and collateral, as those prevailing for comparable transactions with others and do not involve more than the normal risk of collectibility. Loans to related parties totaled approximately $13,568,000 at December 31, 2001 and $14,260,000 at December 31, 2000. Activity during 2001 was as follows (in thousands): Balance at December 31, 2000 $14,260 New loans 3,781 Loan repayments (4,473) ------------------ Balance at December 31, 2001 $13,568 ------------------ The aggregate principal balances of nonaccrual, past due and renegotiated loans were as follows at December 31, 2001 and 2000(in thousands): 2001 2000 --------- --------- Nonaccrual loans $3,419 $2,982 Loans past due ninety days or more and still accruing - 245 Renegotiated loans which are performing in accordance with revised terms 188 232 --------- --------- Interest income which would have been recorded under the original terms of such nonaccrual or renegotiated loans totaled $247,000, $154,000 and $131,000 in 2001, 2000 and 1999, respectively. The amount of interest income which was recorded amounted to $16,000 in 2001, $20,000 in 2000 and $7,000 in 1999. Impaired loans are defined as those loans where it is probable that amounts due according to contractual terms, including principal and interest, will not be collected. Both nonaccrual and renegotiated loans meet this definition. The Company evaluates all individual loans on nonaccrual or renegotiated with a balance over $100,000 for impairment. Impaired loans are measured by the Company at the present value of expected future cash flows or, alternatively, if the loan is collateral dependant, at the fair value of the collateral. Known losses of principal on these loans have been charged off. Interest income on nonaccrual loans is recognized only at the time cash is received. Interest income on renegotiated loans is recorded according to the most recently agreed upon contractual terms. The following table presents information on impaired loans (in thousands). At December 31, 2001 2000 - --------------------------------------------- -------- -------- Impaired loans for which an allowance has been provided $ 727 $ 202 Impaired loans for which no allowance has been provided 2,692 2,780 -------- -------- Total loans determined to be impaired $3,419 $2,982 -------- -------- Allowance on impaired loans $ 218 $ 68 -------- -------- For the year ended December 31, 2001 2000 1999 - --------------------------------------------- -------- -------- -------- Average recorded investment in impaired loans $2,306 $2,037 $1,692 Cash basis interest income recognized from impaired loans 16 20 7 -------- -------- -------- First Mid Bank enters into financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in accordance with line of credit agreements and/or mortgage commitments and standby letters of credit. Standby letters of credit are conditional commitments issued by a bank to guarantee the performance of a customer to a third-party. First Mid Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by First Mid Bank upon an extension of credit, is based on management's evaluation of the credit worthiness of the borrower. Collateral varies but generally includes assets such as property, equipment and receivables. At December 31, 2001 and 2000, respectively, the Company had $87,455,000 and $70,050,000 of outstanding commitments to extend credit and $1,218,000 and $1,098,000 of standby letters of credit. Management does not believe that any significant losses will be incurred in connection with such instruments. Most of the Company's business activities are with customers located within east central Illinois. At December 31, 2001 and 2000, the Company's loan portfolio included approximately $82,615,000 and $67,912,000, respectively, of loans to borrowers directly related to the agricultural industry. Mortgage loans serviced for others by First Mid Bank are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at December 31, 2001, 2000 and 1999 was approximately $38,960,000, $55,729,000 and $51,905,000, respectively. NOTE 7 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows during the three year period ended December 31, 2001 (in thousands): 2001 2000 1999 ---------- ---------- ---------- Balance, beginning of year $3,262 $2,939 $2,715 Provision for loan losses 600 550 600 Added through acquisitions 275 - 150 Recoveries 66 60 100 Charge-offs (501) (287) (626) ---------- ---------- ---------- Balance, end of year $3,702 $3,262 $2,939 ---------- ---------- ---------- NOTE 8 - PREMISES AND EQUIPMENT, NET Premises and equipment at December 31, 2001 and 2000 consisted of (in thousands): 2001 2000 -------------- ------------- Land $ 3,364 $ 2,981 Buildings and improvements 14,166 12,797 Furniture and equipment 10,121 8,668 Leasehold improvements 382 382 Construction in progress 59 26 -------------- ------------- Subtotal 28,092 24,854 Accumulated depreciation and amortization 11,436 9,479 -------------- ------------- Total $16,656 $15,375 -------------- ------------- Depreciation and amortization expense was $2,040,000, $1,884,000 and $1,562,000 for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE 9 - INTANGIBLE ASSETS Intangible assets, net of accumulated amortization, at December 31, 2001 and 2000 consisted of (in thousands): 2001 2000 -------------- ------------- Excess of cost over fair market value of acquired businesses $11,093 $10,529 Core deposit premiums 1,299 1,621 -------------- ------------- Total $12,392 $12,150 -------------- ------------- Amortization expense was $1,228,000, $1,190,000 and $1,024,000 for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE 10 - DEPOSITS As of December 31, 2001 and 2000, deposits consisted of (in thousands): 2001 2000 -------------- ------------- Demand deposits: Non-interest bearing $ 80,265 $ 66,646 Interest bearing 139,715 113,388 Savings 44,884 36,080 Money market 58,544 47,408 Time deposits 236,012 240,463 -------------- ------------- Total deposits $559,420 $503,985 -------------- ------------- Total interest expense on deposits for the years ended December 31, 2001, 2000 and 1999 was as follows (in thousands): 2001 2000 1999 -------------- -------------- -------------- Interest-bearing demand $ 2,603 $ 2,989 $ 2,230 Savings 923 952 944 Money market 1,771 2,123 1,579 Time deposits 13,476 12,348 11,476 -------------- -------------- -------------- Total $18,773 $18,412 $16,229 -------------- -------------- -------------- As of December 31, 2001, 2000 and 1999, the aggregate amount of time deposits in denominations of more than $100,000 and the total interest expense on such deposits was as follows (in thousands): 2001 2000 1999 -------------- -------------- -------------- Outstanding $61,438 $62,922 $43,921 Interest expense for the year 3,607 2,738 2,079 -------------- -------------- -------------- The following table shows the amount of maturities for all time deposits as of December 31, 2001 (in thousands): less than 1 year $191,795 1 year to 2 years 28,753 2 years to 3 years 6,618 3 years to 4 years 6,450 over 4 years 2,396 -------------- total $236,012 -------------- NOTE 11 - OTHER BORROWINGS As of December 31, 2001 and 2000 other borrowings consisted of (in thousands): 2001 2000 --------- --------- Securities sold under agreements to repurchase $38,879 $31,096 Federal Home Loan Bank advances: Overnight advances (6.62% in 2000) - 20,000 Fixed term-advances 33,300 20,300 Debt: Loans due in one year or less 4,325 - Loans due after one year - 4,325 --------- --------- Total $76,504 $75,721 --------- --------- The Federal Home Loan Bank fixed-term advances at December 31, 2001 consist of the following: o $5 million advance at 4.35%, due February 1, 2002 o $3 million advance at 6.00%, due October 10, 2002 o $5 million advance at 6.16%, due March 20, 2005, one year call option (callable beginning March 20, 2001) o $2.3 million advance at 6.10%, due April 7, 2005, callable quarterly after January, 2001 o $5 million advance at 6.12%, due September 6, 2005 o $5 million advance at 5.34%, due December 14, 2005 o $3 million advance at 5.98%, due March 1, 2011 o $5 million advance at 4.33%, due November 23, 2011 2001 2000 1999 ---------- ---------- ---------- Securities sold under agreements to repurchase: Maximum outstanding at any month-end $40,646 $34,546 $32,308 Average amount outstanding for the year 29,547 24,576 22,063 ---------- ---------- ---------- First Mid Bank has collateral pledge agreements whereby it has agreed to keep on hand at all times, free of all other pledges, liens, and encumbrances, whole first mortgages on improved residential property with unpaid principal balances aggregating no less than 167% of the outstanding advances from the Federal Home Loan Bank. The securities underlying the repurchase agreements are under the Company's control. The Company had a debt balance of $4,325,000 as of December 31, 2001 and 2000. Terms of the loan agreement are a floating interest rate of 1.25% over the Federal Funds rate with interest due quarterly. The interest rate as of December 31, 2001 was 3.10% (7.8% at December 31, 2000). The loan is a revolving credit agreement with a maximum available balance of $10 million. The outstanding loan balance matures November 19, 2002. The loan outstanding at December 31, 2000, originally scheduled to mature in 2003, was repaid in 2001. The loan is secured by all of the common stock of First Mid Bank. The borrowing agreement 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 December 31, 2001 and 2000. NOTE 12 - REGULATORY CAPITAL 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 Federal Reserve Board. First Mid Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2001 and 2000, that all capital adequacy requirements have been met. As of December 31, 2001 and 2000, the most recent notification from the primary regulators 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. At December 31, 2001, there are no conditions or events since the most recent notification that management believes have changed the Bank's category. TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS --------------- ----------------- ---------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ------ --------- ------- ------- ------- DECEMBER 31, 2001 Total Capital (to risk-weighted assets) Company $ 54,498 11.23% $ 38,810 > 8.00% N/A N/A - First Mid Bank 54,139 11.24 38,521 > 8.00 $48,152 > 10.00% - - Tier 1 Capital (to risk-weighted assets) Company 50,796 10.47 19,405 > 4.00 N/A N/A - First Mid Bank 50,437 10.47 19,261 > 4.00 28,891 > 6.00 - - Tier 1 Capital (to average assets) Company 50,796 7.34 27,669 > 4.00 N/A N/A - First Mid Bank 50,437 7.36 27,427 > 4.00 34,284 > 5.00 - - -------- ------ --------- ------- ------- ------- DECEMBER 31, 2000 Total Capital (to risk-weighted assets) Company $ 49,111 11.74% $ 33,453 > 8.00% N/A N/A - First Mid Bank 50,226 12.04 33,374 > 8.00 $41,718 > 10.00% - - Tier 1 Capital (to risk-weighted assets) Company 45,849 10.96 16,727 > 4.00 N/A N/A - First Mid Bank 46,964 11.26 16,687 > 4.00 25,031 > 6.00 - - Tier 1 Capital (to average assets) Company 45,849 7.32 25,070 > 4.00 N/A N/A - First Mid Bank 46,964 7.54 24,931 > 4.00 31,163 > 5.00 - - -------- ------ --------- ------- ------- ------- NOTE 13 - DISCLOSURE OF FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS," ("SFAS 107"), requires the disclosure of the estimated fair value of financial instrument assets and liabilities. For the Company, as for most financial institutions, most of the assets and liabilities are considered financial instruments as defined in SFAS 107. However, many of the Company's financial instruments lack an available trading market as characterized by a willing buyer and seller engaging in an exchange transaction. Additionally, the Company's general practice and intent is to hold its financial instruments until maturity and not to engage in trading or sales activity. Accordingly, significant assumptions and estimations as well as present value calculations were used by the Company for purposes of the SFAS 107 disclosure. Future changes in these assumptions or methodologies may have a material effect on estimated fair values. Estimated fair values have been determined by the Company using the best available information and an estimation methodology suitable for each category of financial instrument. The estimation methodology used, the estimated fair values and the carrying amount at December 31, 2001 and 2000 were as follows (in thousands): Financial instruments for which an active secondary market exists have been valued using quoted available market prices. 2001 2000 ---------------------- --------------------- FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT ---------- ---------- ---------- ---------- Cash and cash equivalents $ 33,096 $ 33,096 $ 24,840 $ 24,840 Investments available-for-sale 160,096 160,096 150,034 150,034 Investments held-to-maturity 2,136 2,071 2,800 2,757 ---------- ---------- ---------- ---------- Financial instrument liabilities with stated maturities and other borrowings have been valued at present value, using a discount rate approximating current market rates for similar assets and liabilities. 2001 2000 ---------------------- --------------------- FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT ---------- ---------- ---------- ---------- Deposits with stated maturities $238,126 $236,012 $240,349 $240,463 Securities sold under agreements to repurchase 38,866 38,879 30,954 31,096 Federal Home Loan Bank advances 37,319 33,300 39,767 40,300 ---------- ---------- ---------- ---------- Financial instrument liabilities without stated maturities and floating rate debt have estimated fair values equal to both the amount payable on demand and the carrying amount. 2001 2000 --------------------- --------------------- FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT ---------- ---------- ---------- ---------- Deposits with no stated maturity $323,408 $323,408 $263,522 $263,522 Floating rate debt 4,325 4,325 4,325 4,325 ---------- ---------- ---------- ---------- For loans with floating interest rates, it is assumed that the estimated fair values generally approximate the carrying amount balances. Fixed rate loans have been valued using a discounted present value of projected cash flow. The discount rate used in these calculations is the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. 2001 2000 ---------------------- --------------------- FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT ---------- ---------- ---------- ---------- Net loan portfolio $480,522 $469,541 $423,952 $426,026 ---------- ---------- ---------- ---------- The notional amount of off-balance sheet items such as unfunded loan commitments and stand-by letters of credit generally approximate their estimated fair values. NOTE 14 - RETIREMENT PLAN The Company has a defined contribution retirement plan which covers substantially all employees and which provides for base contributions of 4% of compensation and a matching contribution by the Company of up to 50% of the first 4% of voluntary employee contributions. Employee contributions are limited to 15% of compensation. The total expense for the plan amounted to $450,000, $413,000 and $405,000 in 2001, 2000 and 1999, respectively. The Company has two agreements in place to pay $50,000 annually for 20 years from the retirement date to one retired senior officer of the Company and one to a current senior officer. NOTE 15 - STOCK OPTION PLAN The Company established a Stock Incentive Plan ("SI Plan") intended to provide a means whereby directors and certain officers can acquire shares of the Company's common stock. A maximum of 300,000 shares have been authorized under the SI Plan. Options to acquire shares will be awarded at an exercise price equal to the fair market value of the shares on the date of grant. Options to acquire shares have a 10-year term. Options granted to employees vest over a four-year period and those options granted to directors vest at the time they are issued. A summary of the status of stock options under the SI plan at December 31, 2001, 2000 and 1999 and changes during the years then ended are presented in the following table: FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999 AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE -------- --------- -------- --------- ------- --------- Beginning of year 94,500 $19.83 69,000 $20.10 62,250 $19.60 Granted 39,500 24.00 33,750 19.39 14,250 23.00 Exercised - - (750) 15.68 (750) 23.34 Cancelled - - (7,500) 20.72 (6,750) 21.35 -------- --------- -------- --------- ------- --------- End of year 134,000 $21.06 94,500 $19.83 69,000 $20.10 -------- --------- -------- --------- ------- --------- Options exercisable 58,250 $19.61 21,750 $20.56 15,750 $21.21 -------- --------- -------- --------- ------- --------- Fair value of options granted during year $ 8.43 $ 8.32 $ 8.98 --------- --------- --------- At December 31, 2001 options for 166,000 shares were available for grant under the SI Plan. The Company applies APB Opinion No. 25 in accounting for the SI 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 Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" in the following table (in thousands, except per share date): For the years ended December 31, 2001 2000 1999 -------- -------- --------- Net income: As reported $6,516 $5,660 $5,232 Pro forma 6,386 5,564 5,148 Basic Earnings Per Share: As reported $ 1.93 $ 1.67 $ 1.60 Pro forma 1.80 1.55 1.57 Diluted Earnings Per Share: As reported $ 1.92 $ 1.67 $ 1.53 Pro forma 1.83 1.58 1.44 The fair value of options granted is estimated on the grant date using the Black-Scholes option-pricing model. The following assumptions were used in estimating the fair value for options granted in 2001, 2000 and 1999. 2001 2000 1999 -------- ------- --------- Dividend yield 2.0% 1.9% 1.6% Risk free interest rate 4.97% 5.12% 6.93% Weighted average expected life 8.9 yrs 8.6 yrs 9.3 yrs Expected volatility 11% 14% 13% The weighted average per share fair values of options granted in 2001, 2000 and 1999 was $8.43, $8.32 and $8.98, respectively. NOTE 16 - INCOME TAXES The components of Federal and State income tax expense (benefit) for the years ended December 31, 2001, 2000 and 1999 were as follows (in thousands): 2001 2000 1999 ------------ ------------ ------------- Current Federal $2,977 $2,197 $2,386 State 376 98 144 ------------ ------------ ------------- Total Current 3,353 2,295 2,530 Deferred Federal (277) (227) (267) State (38) (33) (26) ------------ ------------ ------------- Total Deferred (313) (260) (293) ------------ ------------ ------------- Total $3,040 $2,035 $2,237 ------------ ------------ ------------- Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. Federal tax rate of 34% to income before income taxes). The principal reasons for this difference are as follows (in thousands): 2001 2000 1999 ----------- ----------- ------------ Expected income taxes $3,249 $2,616 $2,539 Effects of: Tax-exempt income (659) (595) (562) Nondeductible interest expense 82 87 70 Goodwill amortization 120 120 120 State taxes, net of federal taxes 222 43 78 Donation of property - (197) - Other items, net (26) (39) (8) ----------- ----------- ------------ Total $3,040 $2,035 $2,237 ----------- ----------- ------------ The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below (in thousands): 2001 2000 ------------- ------------- Deferred tax assets: Allowance for loan losses $ 1,417 $ 1,230 Available-for-sale investment securities 468 180 Deferred compensation 441 398 Other, net 303 327 ------------- ------------- Total gross deferred tax assets $ 2,629 $ 2,135 ------------- ------------- Deferred tax liabilities: Depreciation $ 232 $ 362 Purchase accounting 156 185 Other, net 245 193 ------------- ------------- Total gross deferred tax liabilities $ 633 $ 740 ------------- ------------- Net deferred tax assets $ 1,996 $ 1,395 ------------- ------------- Deferred tax assets and deferred tax liabilities are recorded in other assets and other liabilities, respectively, on the consolidated balance sheets. No valuation allowance related to deferred tax assets has been recorded at December 31, 2001 and 2000 as management believes it is more likely than not that the deferred tax assets will be fully realized. NOTE 17 - DIVIDEND RESTRICTIONS Banking regulations impose restrictions on the ability of First Mid Bank to pay dividends to the Company. At December 31, 2001, regulatory approval would have been required for aggregate dividends from First Mid Bank to the Company in excess of approximately $11.1 million. The amount of such dividends that could be paid is further restricted by the limitations of sound and prudent banking principles. NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are various outstanding commitments and contingent liabilities such as guarantees, commitments to extend credit, claims and legal actions which are not reflected in the accompanying consolidated financial statements. In the opinion of management, no significant losses are anticipated as a result of these matters. NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS Presented below are condensed balance sheets, statements of income and cash flows for the Parent Company (in thousands): FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) BALANCE SHEETS: DECEMBER 31, 2001 2000 - ----------------------------------------- ------------ ----------- Assets Cash $ 1,690 $ 745 Premises and equipment, net 2 4 Investment in subsidiaries 64,488 59,345 Other assets 2,985 2,729 ------------ ----------- Total Assets $69,165 $62,823 ------------ ----------- Liabilities and Stockholders' equity Liabilities Dividends payable $ 809 $ 717 Long-term debt 4,325 4,325 Other liabilities 106 54 ------------ ----------- Total Liabilities 5,240 5,096 ------------ ----------- Stockholders' equity 63,925 57,727 ------------ ----------- Total Liabilities and Stockholders' equity $69,165 $62,823 ------------ ----------- FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) STATEMENTS OF INCOME: YEARS ENDED DECEMBER 31, 2001 2000 1999 - ----------------------------------------------- ---------- --------- --------- Income: Dividends from subsidiaries $3,281 $2,813 $1,875 Other income 93 96 155 ---------- --------- --------- 3,374 2,909 2,030 Operating expenses 1,006 1,053 1,323 ---------- --------- --------- Income before income taxes and equity in undistributed earnings of subsidiaries 2,368 1,856 707 Income tax benefit 319 371 471 ---------- --------- --------- Income before equity in undistributed earnings of subsidiaries 2,687 2,227 1,178 Equity in undistributed earnings of subsidiaries 3,829 3,433 4,054 ---------- --------- --------- Net income $6,516 $5,660 $5,232 ---------- --------- --------- FIRST MID-ILLINOIS BANCSHARES, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS: YEARS ENDED DECEMBER 31, 2001 2000 1999 - ----------------------------------------------- ---------- --------- --------- Cash flows from operating activities: Net income $6,516 $5,660 $5,232 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, accretion, net 2 4 4 Equity in undistributed earnings of subsidiaries (3,829) (3,433) (4,054) (Increase) decrease in other assets (543) 121 (533) Increase (decrease) in other liabilities 50 (34) 45 -------- --------- --------- Net cash provided by operating activities 2,196 2,318 694 -------- --------- --------- Cash flows from financing activities: Repayment of long-term debt - - (375) Proceeds from issuance of common stock 377 54 344 Purchase of treasury stock (1,038) (1,881) (337) Dividends paid on preferred stock - - (110) Dividends paid on common stock (590) (569) (514) -------- --------- --------- Net cash used in financing activities (1,251) (2,396) (992) -------- --------- --------- Increase (decrease) in cash 945 (78) (298) Cash at beginning of year 745 823 1,121 -------- --------- --------- Cash at end of year $ 1,690 $ 745 $ 823 -------- --------- --------- STATEMENT OF RESPONSIBILITY FOR FINANCIAL DATA Management is responsible for the integrity of all the financial data included in this Annual Report. The financial statements and related notes are prepared in accordance with accounting principles generally accepted in the United States of America. Financial information elsewhere in this Report is consistent with that in the financial statements. Management maintains a system of internal accounting control, including an internal audit program, which provides reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are properly authorized and accounting records are reliable for the preparation of financial statements. The foundation of the system of internal accounting control rests upon careful selection and training of personnel, segregation of responsibilities and application of formal policies and procedures that are consistent with the highest standards of business conduct. The system of internal accounting control is being continuously modified and improved in response to changes in business conditions and operations. The board of directors has an audit committee comprised of six outside directors. The Committee meets periodically with the independent auditors, the internal auditors and management to ensure that the system of internal accounting control is being properly administered and that financial data is being properly reported. The committee reviews the scope and timing of both the internal and external audits, including recommendations made with respect to the system of internal accounting control by the independent auditors. The consolidated financial statements, as identified in the accompanying Independent Auditors' Report, have been audited by KPMG LLP, independent certified public accountants. The audits were conducted in accordance with auditing standards generally accepted in the United States of America, which included tests of the accounting records and other auditing procedures considered necessary to formulate an opinion as to the fairness, in all material respects, of the consolidated financial statements. William S. Rowland Michael L. Taylor Chairman and Chief Chief Financial Officer Executive Officer INDEPENDENT AUDITORS' REPORT The Board of Directors First Mid-Illinois Bancshares, Inc. Mattoon, Illinois: We have audited the accompanying consolidated balance sheets of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. [GRAPHIC OMITTED] Chicago, Illinois January 25, 2002 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information called for by Item 10 with respect to directors and director nominees is incorporated by reference to the Company's 2002 Proxy Statement under the caption "Proposal 1 - Election of Directors." The information called for by Item 10 with respect to executive officers is incorporated by reference to Part I hereof under the caption "Supplemental Item - Executive Officers of the Company." ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is incorporated by reference to the Company's 2002 Proxy Statement under the caption "Executive Compensation," "Common Stock Price Performance Graph" and "Directors' Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 12 is incorporated by reference to the Company's 2002 Proxy Statement under the caption "Voting Securities and Principal Holders Thereof." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Item 13 is incorporated by reference to the Company's 2002 Proxy Statement under the caption "Transactions with Management." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2) -- Financial Statements and Financial Statement Schedules The following consolidated financial statements and financial statement schedules of the Company are filed as part of this document under Item 8. Financial Statements and Supplementary Data: o Consolidated Balance Sheets -- December 31, 2001 and 2000 o Consolidated Statements of Income -- For the Years Ended December 31, 2001, 2000 and 1999 o Consolidated Statements of Changes in Stockholders' Equity -- For the Years Ended December 31, 2001, 2000 and 1999 o Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2001, 2000 and 1999. (a)(3) -- Exhibits The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index which follows the Signature Page and immediately precedes the exhibits filed. (b) Reports on Form 8-K 8-K's were filed by the Company on October 30, 2001 and November 16, 2001 announcing the Company's three-for-two stock split and share repurchase plan. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MID-ILLINOIS BANCSHARES, INC. (Company) Dated: MARCH 26, 2002 By: /S/ WILLIAM S. ROWLAND --------------------- ---------------------------- William S. Rowland President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 27th day of March, 2002, by the following persons on behalf of the Company and in the capacities listed. SIGNATURE AND TITLE /S/ WILLIAM S. ROWLAND - ------------------------------------ William S. Rowland, Chairman of the Board, President and Chief Executive Officer and Director /S/ MICHAEL L. TAYLOR - ----------------------------------- Michael L. Taylor, Vice President and Chief Financial Officer /S/ CHARLES A. ADAMS - ----------------------------------- Charles A. Adams, Director /S/ KENNETH R. DIEPHOLZ - ----------------------------------- Kenneth R. Diepholz, Director /S/ STEVEN L. GRISSOM - ----------------------------------- Steven L. Grissom, Director /S/ RICHARD A. LUMPKIN - ------------------------------------ Richard A. Lumpkin, Director /S/ DANIEL E. MARVIN, JR. - ------------------------------------ Daniel E. Marvin, Jr., Director /S/ GARY W. MELVIN - ------------------------------------ Gary W. Melvin, Director /S/ SARA JANE PRESTON - ------------------------------------ Sara Jane Preston, Director /S/ RAY A. SPARKS - ------------------------------------ Ray A. Sparks, Director EXHIBIT INDEX TO FORM 10-K REGISTRATION STATEMENT EXHIBIT NUMBER DESCRIPTION AND FILING OR INCORPORATION REFERENCE - -------------------------------------------------------------------------------- 3.1 RESTATED CERTIFICATE OF INCORPORATION AND AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION OF FIRST MID-ILLINOIS BANCSHARES, INC. Incorporated by reference to Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-13368) 3.2 RESTATED BYLAWS OF FIRST MID-ILLINOIS BANCSHARES, INC. Incorporated by reference to Exhibit 3(b) to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987 (File No 0-13368) 4.1 RIGHTS AGREEMENT, DATED AS OF SEPTEMBER 21, 1999, BETWEEN FIRST MID- ILLINOIS BANCSHARES, INC. AND HARRIS TRUST AND SAVINGS BANK, AS RIGHTS AGENT Incorporated by reference to Exhibit 4.1 to First Mid-Illinois Bancshares, Inc.'s Registration Statement on Form 8-A filed with the SEC on September 22, 1999 10.1 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND WILLIAM S. ROWLAND (Filed herewith) 10.2 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND JOHN W. HEDGES (Filed herewith) 10.3 DEFERRED COMPENSATION PLAN Incorporated by reference to Exhibit 10.4 to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998 (File No 0-13368) 10.4 1997 STOCK INCENTIVE PLAN Incorporated by reference to Exhibit 10.5 to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998 (File No 0-13368) 10.5 SCHEDULE OF PARTIES TO EMPLOYMENT AGREEMENTS The following Company officers have entered into Employment Agreements with the Company: Robert J. Swift, Jr., Michael L. Taylor, Laurel G. Allenbaugh, Stanley E. Gilliland, Christie L. Burich. The contracts are substantially identical in all material respects except as to the parties, the execution dates and the monthly base payout. A sample form of the agreement is filed herewith. 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (Filed herewith) 21.1 SUBSIDIARIES OF THE COMPANY (Filed herewith) 23.1 CONSENT OF KPMG LLP (Filed herewith) EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into this 25th day of January, 2002, by and between First Mid-Illinois Bancshares, Inc. ("the Company"), a corporation with its principal place of business located in Mattoon, Illinois, and William S. Rowland ("Executive"). In consideration of the promises and mutual covenants and agreements contained herein, the parties hereto acknowledge and agree as follows: ARTICLE ONE TERM AND NATURE OF AGREEMENT 1.01 TERM OF AGREEMENT. The term of this Agreement shall commence as of February 1, 2002 and shall continue until December 31, 2004. Thereafter, unless Executive's employment with the Company has been previously terminated, Executive shall continue his employment with the Company on an at will basis and, except as provided in Articles Five, Six and Seven, this Agreement shall terminate unless extended by mutual written agreement. 1.02 EMPLOYMENT AS PRESIDENT AND CEO. The Company agrees to employ Executive as its President and Chief Executive Officer commencing February 1, 2002 and Executive accepts such employment by the Company on the terms and conditions herein set forth. The duties of Executive shall be determined by the Company's Board of Directors and Executive shall adhere to the policies and procedures of the Company and shall follow the supervision and direction of the Board in the performance of such duties. During the term of his employment, Executive agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Executive shall not, while he is employed by the Company, engage in any activity which would (a) interfere with, or have an adverse effect on, the reputation, goodwill or any business relationship of the Company or any of its subsidiaries; (b) result in economic harm to the Company or any of its subsidiaries; or (c) result in a breach of Section Six of the Agreement. 1.03 SERVICE AS CHAIRMAN. The Company shall use its best efforts to continue Executive's position as Chairman of the Board of Directors of the Company during the term of his employment, to which position he was elected effective as of June 1, 1999. ARTICLE TWO COMPENSATION AND BENEFITS While Executive is employed with the Company during the term of this Agreement, the Company shall provide Executive with the following compensation and benefits: 2.01 BASE SALARY. The Company shall pay Executive an annual base salary of $187,000.00 per fiscal year, payable in accordance with the Company's customary payroll practices for executive employees. The Board may review and adjust Executive's base salary from year to year; provided, however, that during the term of Executive's employment, the Company shall not decrease Executive's base salary. 2.02 INCENTIVE COMPENSATION PLAN. Executive shall continue to participate in the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in accordance with the terms and conditions of such Plan. Pursuant to the Plan, Executive shall have an opportunity to receive incentive compensation of up to a maximum of 40% of Executive's annual base salary. The incentive compensation payable for a particular fiscal year will be based upon the attainment of the performance goals in effect under the Plan for such year and will be paid in accordance with the terms of the Plan and at the sole discretion of the Board. 2.03 DEFERRED COMPENSATION PLAN. Executive may continue to participate in the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan in accordance with the terms and conditions of such Plan. 2.04 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Executive shall continue to participate in the First Mid-Illinois Bancshares, Inc. Supplemental Executive Retirement Plan with retirement benefit payable under the Plan upon Executive's retirement at age 63 of $50,000 per year and unreduced benefits commencing at age 63. All other provisions of the Plan shall remain unchanged. 2.05 STOCK OPTION PLAN. Executive may continue to participate in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. 2.06 VACATION. Executive shall be entitled to four (4) weeks of paid vacation each year during the term of this Agreement. 2.07 FRINGE BENEFITS.The Company shall provide the following additional fringe benefits to Executive: (a) Use of a Company-owned or leased vehicle for professional and personal use. (b) An amount equal to the annual dues for a Class "H" membership at the Mattoon Golf and Country Club. (c) Use of a cellular phone for work-related calls and calls associated with Internet connection for Executive's home. 2.08 OTHER BENEFITS. Executive shall be eligible (to the extent he qualifies) to participate in any other retirement, health, accident and disability insurance, or similar employee benefit plans as may be maintained from time to time by the Company for its other executives or employees subject to and on a consistent basis with the terms, conditions and overall administration of such plans. 2.09 BUSINESS EXPENSES. Executive shall be entitled to reimbursement by the Company for all reasonable expenses actually and necessarily incurred by him on its behalf in the course of his employment hereunder and in accordance with expense reimbursement plans and policies of the Company from time to time in effect for executive employees. 2.10. WITHHOLDING. All salary, incentive compensation and other benefits provided to Executive pursuant to this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable employee benefit plans, policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise or by agreement with, or consent of, Executive. ARTICLE THREE DEATH OF EXECUTIVE This Agreement shall terminate prior to the end of the term described in Section 1.01 upon Executive's termination of employment with the Company due to his death. Upon Executive's termination due to death, the Company shall pay Executive's estate the amount of Executive's base salary and his accrued but unused vacation time earned through the date of such death and any incentive compensation earned for the preceding fiscal year that is not yet paid as of the date of such death. ARTICLE FOUR TERMINATION OF EMPLOYMENT Executive's employment with the Company may be terminated by Executive or by the Company at any time for any reason. Upon Executive's termination of employment prior to the end of the term of the Agreement, the Company shall pay Executive as follows: 4.01 TERMINATION BY THE COMPANY FOR OTHER THAN CAUSE. If the Company terminates Executive's employment for any reason other than Cause, the Company shall pay Executive the following: (a) An amount equal to Executive's monthly base salary in effect at the time of such termination of employment for a period of twelve (12) months thereafter. Such amount shall be paid to Executive periodically in accordance with the Company's customary payroll practices for executive employees. (b) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (c) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Cause" shall mean Executive's (i) conviction in a court of law of (or entering a plea of guilty or no contest to) any crime or offense involving fraud, dishonesty or breach of trust or involving a felony; (ii) performance of any act which, if known to the customers, clients, stockholders or regulators of the Company, would materially and adversely impact the business of the Company; (iii) act or omission that causes a regulatory body with jurisdiction over the Company to demand, request, or recommend that Executive be suspended or removed from any position in which Executive serves with the Company; (iv) substantial nonperformance of any of his obligations under this Agreement; (v) misappropriation of or intentional material damage to the property or business of the Company or any affiliate; or (vi) breach of Article Five or Six of this Agreement. 4.02 TERMINATION FOLLOWING A CHANGE IN CONTROL. Notwithstanding Section 4.01, if, following a Change in Control, Executive's employment is terminated by the Company (or any successor thereto) for any reason other than Cause, or if Executive terminates his employment because of a decrease in his then current base salary or a substantial diminution in his position and responsibilities, the Company (or any successor thereto) shall pay Executive the following: (a) Two times Executive's annual base salary in effect at the time of such termination. Such amount shall be paid, at Executive's election, in either a lump sum payment as soon as practicable following the date of such termination or periodically in accordance with the Company's or successor's customary payroll practices for executive employees. (b) An amount equal to the incentive compensation earned by or paid to Executive for the fiscal year immediately preceding the year in which Executive's termination of employment occurs. Such amount shall be paid to Executive in a lump sum as soon as practicable after the date of his termination. (c) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (d) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Change in Control" shall have the meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. 4.03 OTHER TERMINATION OF EMPLOYMENT. If the Company terminates Executive's employment for Cause, or if Executive terminates his employment for any reason other than as described in Section 4.02 above, the Company shall pay Executive the base salary and accrued but unused paid vacation time earned through the date of such termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. ARTICLE FIVE CONFIDENTIAL INFORMATION 5.01 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. During his employment with the Company, and after his termination of such employment with the Company, Executive shall not, in any form or manner, directly or indirectly, use, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, any Confidential Information, except as required in the performance of Executive's duties hereunder, as required by law or as necessary in conjunction with legal proceedings. 5.02 DEFINITION OF CONFIDENTIAL INFORMATION. For the purposes of this Agreement, the term "Confidential Information" shall mean any and all information either developed by Executive during his employment with the Company and used by the Company or its affiliates or developed by or for the Company or its affiliates of which Executive gained knowledge by reason of his employment with the Company that is not readily available in or known to the general public or the industry in which the Company or any affiliate is or becomes engaged. Such Confidential Information shall include, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers, lists of employees and any information regarding the Company's or any affiliate's products, marketing or database. The Company and Executive acknowledge and agree that such Confidential Information is extremely valuable to the Company and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Executive or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Executive shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 5.03 DELIVERY UPON TERMINATION. Upon termination of Executive's employment with the Company for any reason, Executive shall promptly deliver to the Company all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Company's or any affiliate's customers, database, business plan, marketing strategies, processes or other materials which contain Confidential Information, together with all other property of the Company or any affiliate in Executive's possession, custody or control. ARTICLE SIX NON-COMPETE AND NON-SOLICITATION COVENANTS 6.01 COVENANT NOT TO COMPETE. During the term of this Agreement and for a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of the Agreement, Executive shall not, on behalf of himself or on behalf of another person, corporation, partnership, trust or other entity, within the counties of Coles, Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian, Madison, Macon, Bond or Piatt, Illinois, or any other county in which the Company or any affiliate conducts business: (a) Directly or indirectly own, manage, operate, control, participate in the ownership, management, operation or control of, be connected with or have any financial interest in, or serve as an officer, employee, advisor, consultant, agent or otherwise to any person, firm, partnership, corporation, trust or other entity which owns or operates a business similar to that of the Company or its affiliates. (b) Solicit for sale, represent, and/or sell Competing Products to any person or entity who or which was the Company's customer or client during the last two years of Executive's employment. "Competing Products," for purposes of this Agreement, means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by the Company or any affiliate or which were in development by the Company or any affiliate within the last two years of Executive's employment. 6.02 COVENANT NOT TO SOLICIT. For a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of this Agreement, Executive shall not: (a) Attempt in any manner to solicit from any client or customer business of the type performed by the Company or any affiliate or persuade any client or customer of the Company or any affiliate to cease to do such business or to reduce the amount of such business which any such client or customer has customarily done or contemplates doing with the Company or any affiliate, whether or not the relationship between the Company or affiliate and such client or customer was originally established in whole or in part through Executive's efforts. (b) Render any services of the type rendered by the Company or any affiliate for any client or customer of the Company. (c) Solicit or encourage, or assist any other person to solicit or encourage, any employees, agents or representatives of the Company or an affiliate to terminate or alter their relationship with the Company or any affiliate. (d) Do or cause to be done, directly or indirectly, any acts which may impair the relationship between the Company or any affiliate with their respective clients, customers or employees. ARTICLE SEVEN REMEDIES Executive acknowledges that compliance with the provisions of Articles Five and Six herein is necessary to protect the business, goodwill and proprietary information of the Company and that a breach of these covenants will irreparably and continually damage the Company for which money damages may not be inadequate. Consequently, Executive agrees that, in the event that he breaches or threatens to breach any of these provisions, the Company shall be entitled to both (a) a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm; and (b) money damages insofar as they can be determined. In addition, the Company will cease payment of all compensation and benefits under Articles Three and Four hereof. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon the Executive or are otherwise invalid, for whatsoever cause, then the court so holding shall reduce, and is so authorized to reduce, the territory to which it pertains and/or the period of time in which it operates, or the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of this Agreement enforceable. ARTICLE EIGHT MISCELLANEOUS 8.01 SUCCESSORS AND ASSIGNABILITY. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder which may be transferred only by will or the laws of descent and distribution. 8.02 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Executive's employment by the Company shall be of no further force or effect from and after the date hereof. 8.03 SEVERABILITY. If any phrase, clause or provision of this Agreement is deemed invalid or unenforceable, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous or unduly restrictive, it shall not be stricken in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. 8.04 CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. The parties hereby consent to the jurisdiction of the state and federal courts in the State of Illinois in the event that any disputes arise under this Agreement. 8.05 NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given; (b) on the day after delivery to an overnight courier service; (c) on the day of transmission if sent via facsimile to the facsimile number given below; or (d) on the third day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid and properly addressed, to the party as follows: If to Executive: William S. Rowland 1 Prairie Sun Lane Mattoon, IL 61938 If to the Company: First Mid-Illinois Bancshares, Inc. 1515 Charleston Avenue Mattoon, Illinois 61938 Facsimile: 217-234-0485 Attention: Chairman of Compensation Committee Any party may change its address for the purpose of this Section by giving the other party written notice of its new address in the manner set forth above. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FIRST MID-ILLINOIS BANCSHARES, INC. By: Title: EXECUTIVE: /S/ WILLIAM S. ROWLAND ------------------------------ William S. Rowland EXHIBIT 10.2 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into this 1st day of October, 1999, by and between First Mid-Illinois Bancshares, Inc. ("the Company"), a corporation with its principal place of business located in Mattoon, Illinois, and John W. Hedges ("Executive"). In consideration of the promises and mutual covenants and agreements contained herein, the parties hereto acknowledge and agree as follows: ARTICLE ONE TERM AND NATURE OF AGREEMENT 1.01 TERM OF AGREEMENT. The term of this Agreement shall commence as of October 1,1999 and shall continue for three years, until September 30, 2002. Thereafter, unless Executive's employment with the Company has been previously terminated, Executive shall continue his employment with the Company on an at will basis and, except as provided in Articles Five, Six and Seven, this Agreement shall terminate unless extended by mutual written agreement. 1.02 EMPLOYMENT. The Company agrees to employ Executive as President of First Mid-Illinois Bank & Trust, N.A. commencing October 1, 1999 and Executive accepts such employment by the Company on the terms and conditions herein set forth. The duties of Executive shall be determined by the Company's Board of Directors and Executive shall adhere to the policies and procedures of the Company and shall follow the supervision and direction of the Board in the performance of such duties. During the term of his employment, Executive agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Executive shall not, while he is employed by the Company, engage in any activity which would (a) interfere with, or have an adverse effect on, the reputation, goodwill or any business relationship of the Company or any of its subsidiaries; (b) result in economic harm to the Company or any of its subsidiaries; or (c) result in a breech of Section Six of the Agreement. ARTICLE TWO COMPENSATION AND BENEFITS While Executive is employed with the Company during the term of this Agreement, the Company shall provide Executive with the following compensation and benefits: 2.01 BASE SALARY. The Company shall pay Executive an annual base salary of $110,000 per fiscal year, payable in accordance with the Company's customary payroll practices for executive employees. The Board may review and adjust Executive's base salary from year to year; provided, however, that during the term of Executive's employment, the Company shall not decrease Executive's base salary. 2.02 INCENTIVE COMPENSATION PLAN. Executive shall continue to participate in the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in accordance with the terms and conditions of such Plan. Pursuant to the Plan, Executive shall have an opportunity to receive incentive compensation of up to a maximum of 25% of Executive's annual base salary. The incentive compensation payable for a particular fiscal year will be based upon the attainment of the performance goals in effect under the Plan for such year and will be paid in accordance with the terms of the Plan and at the sole discretion of the Board. 2.03 DEFERRED COMPENSATION PLAN. Executive shall be eligible to participate in the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan in accordance with the terms and conditions of such Plan. 2.04 VACATION. Executive shall be entitled to three (3) weeks of paid vacation each year during the term of this Agreement. 2.05 FRINGE BENEFITS. The Company shall provide the following additional fringe benefits to Executive: (a) Use of a Company-owned or leased vehicle for professional and personal use. (b) An amount equal to the annual dues for a Class "H" membership at the Mattoon Golf and Country Club. (c) Use of a cellular phone for work-related calls and calls associated with Internet connection for Executive's home. 2.06 OTHER BENEFITS. Executive shall be eligible (to the extent he qualifies) to participate in any other retirement, health, accident and disability insurance, or similar employee benefit plans as may be maintained from time to time by the Company for its other executives or employees subject to and on a consistent basis with the terms, conditions and overall administration of such plans. 2.07 BUSINESS EXPENSES. Executive shall be entitled to reimbursement by the Company for all reasonable expenses actually and necessarily incurred by him on its behalf in the course of his employment hereunder and in accordance with expense reimbursement plans and policies of the Company from time to time in effect for executive employees. 2.08 WITHHOLDING. All salary, incentive compensation and other benefits provided to Executive pursuant to this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable employee benefit plans, policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise or by agreement with, or consent of, Executive. ARTICLE THREE DEATH OF EXECUTIVE This Agreement shall terminate prior to the end of the term described in Section 1.01 upon Executive's termination of employment with the Company due to his death. Upon Executive's termination due to death, the Company shall pay Executive's estate the amount of Executive's base salary and his accrued but unused vacation time earned through the date of such death and any incentive compensation earned for the preceding fiscal year that is not yet paid as of the date of such death. ARTICLE FOUR TERMINATION OF EMPLOYMENT Executive's employment with the Company may be terminated by Executive or by the Company at any time for any reason. Upon Executive's termination of employment prior to the end of the term of the Agreement, the Company shall pay Executive as follows: 4.01 TERMINATION BY THE COMPANY FOR OTHER THAN CAUSE. If the Company terminates Executive's employment for any reason other than Cause, the Company shall pay Executive the following: (a) An amount equal to Executive's monthly base salary in effect at the time of such termination of employment for a period of twelve (12) months thereafter. Such amount shall be paid to Executive periodically in accordance with the Company's customary payroll practices for executive employees. (b) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (c) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. (d) For purposes of this Agreement, "Cause" shall mean Executive's (i) conviction in a court of law of (or entering a plea of guilty or no contest to) any crime or offense involving fraud, dishonesty or breach of trust or involving a felony; (ii) performance of any act which, if known to the customers, clients, stockholders or regulators of the Company, would materially and adversely impact the business of the Company; (iii) act or omission that causes a regulatory body with jurisdiction over the Company to demand, request, or recommend that Executive be suspended or removed from any position in which Executive serves with the Company; (iv) substantial nonperformance of any of his obligations under this Agreement; (v) misappropriation of or intentional material damage to the property or business of the Company or any affiliate; or (vi) breach of Article Five or Six of this Agreement. 4.02 TERMINATION FOLLOWING A CHANGE IN CONTROL. Notwithstanding Section 4.01, if, following a Change in Control, Executive's employment is terminated by the Company (or any successor thereto) for any reason other than Cause, or if Executive terminates his employment because of a decrease in his then current base salary or a substantial diminution in his position and responsibilities, the Company (or any successor thereto) shall pay Executive the following: (a) Two times Executive's annual base salary in effect at the time of such termination. Such amount shall be paid, at Executive's election, in either a lump sum payment as soon as practicable following the date of such termination or periodically in accordance with the Company's or successor's customary payroll practices for executive employees. (b) An amount equal to the incentive compensation earned by or paid to Executive for the fiscal year immediately preceding the year in which Executive's termination of employment occurs. Such amount shall be paid to Executive in a lump sum as soon as practicable after the date of his termination. (c) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (d) Continued coverage for Executive and/or Executive's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Executive's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the twelve month period beginning on the date of such termination, the Executive shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, the Executive shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Change in Control" shall have the meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. 4.03 OTHER TERMINATION OF EMPLOYMENT. If the Company terminates Executive's employment for Cause, or if Executive terminates his employment for any reason other than as described in Section 4.02 above, the Company shall pay Executive the base salary and accrued but unused paid vacation time earned through the date of such termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. ARTICLE FIVE CONFIDENTIAL INFORMATION 5.01 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. During his employment with Company, and after his termination of such employment with the Company, Executive shall not, in any form or manner, directly or indirectly, use, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, any Confidential Information, except as required in the performance of Executive's duties hereunder, as required by law or as necessary in conjunction with legal proceedings. 5.02 DEFINITION OF CONFIDENTIAL INFORMATION. For the purposes of this Agreement, the term "Confidential Information" shall mean any and all information either developed by Executive during his employment with the Company and used by the Company or its affiliates or developed by or for the Company or its affiliates of which Executive gained knowledge by reason of his employment with the Company that is not readily available in or known to the general public or the industry in which the Company or any affiliate is or becomes engaged. Such Confidential Information shall include, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers. Lists of employees and any information regarding the Company's or any affiliate's products, marketing or database. The Company and Executive acknowledge and agree that such Confidential Information is extremely valuable to the Company and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Executive or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Executive shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 5.03 DELIVERY UPON TERMINATION. Upon termination of Executive's employment with the Company for any reason, Executive shall promptly deliver to the Company all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Company's or any affiliate's customers, database, business plan, marketing strategies, processes or other materials which contain Confidential Information, together with all other property of the Company or any affiliate in Executive's possession, custody or control. ARTICLE SIX NON-COMPETE AND NON-SOLICITATION COVENANTS 6.01 COVENANT NOT TO COMPETE. During the term of this Agreement and for a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of the Agreement, Executive shall not, on behalf of himself or on behalf of another person, corporation, partnership, trust or other entity, within the counties of Coles, Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian or Piatt, Illinois: (a) Directly or indirectly own, manage, operate, control, participate in the ownership, management, operation or control of, be connected with or have any financial interest in, or serve as an officer, employee, advisor, consultant, agent or otherwise to any person, firm, partnership, corporation, trust or other entity which owns or operates a business similar to that of the Company or its affiliates. (b) Solicit for sale, represent, and/or sell Competing Products to any person or entity who or which was the Company's customer or client during the last two years of Executive's employment. "Competing Products," for purposes of this Agreement, means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by the Company or any affiliate or which were in development by the Company or any affiliate within the last two years of Executive's employment. 6.02 COVENANT NOT TO SOLICIT. For a period of two years following the later of (i) the termination of Executive's employment for any reason or (ii) the last day of the term of this Agreement, Executive shall not: (a) Attempt in any manner to solicit from any client or customer business of the type performed by the Company or any affiliate or persuade any client or customer of the Company or any affiliate to cease to do such business or to reduce the amount of such business which any such client or customer has customarily done or contemplates doing with the Company or any affiliate, whether or not the relationship between the Company or affiliate and such client or customer was originally established in whole or in part through Executive's efforts. (b) Render any services of the type rendered by the Company or any affiliate for any client or customer of the Company. (c) Solicit or encourage, or assist any other person to solicit or encourage, any employees, agents or representatives of the Company or an affiliate to terminate or alter their relationship with the Company or any affiliate. (d) Do not cause to be done, directly or indirectly, any acts which may impair the relationship between the Company or any affiliate with their respective clients, customers or employees. ARTICLE SEVEN REMEDIES Executive acknowledges that compliance with the provisions of Articles Five and Six herein is necessary to protect the business, goodwill and proprietary information of the Company and that a breach of these covenants will irreparably and continually damage the Company for which money damages may not be inadequate. Consequently, Executive agrees that, in the event that he breaches or threatens to breach any of these provisions, the Company shall be entitled to both (a) a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm; and (b) money damages insofar as they can be determined. In addition, the Company will cease payment of all compensation and benefits under Articles Three and Four hereof. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon the Executive or are otherwise invalid, for whatsoever cause, then the court so holding shall reduce, and is so authorized to reduce, the territory to which it pertains and/or the period of time in which it operates, or the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of this Agreement enforceable. ARTICLE EIGHT MISCELLANEOUS 8.01 SUCCESSORS AND ASSIGNABILITY. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder which may be transferred only by will or the laws of descent and distribution. 8.02 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Executive's employment by the Company shall be of no further force or effect from and after the date hereof. 8.03 SEVERABILITY. If any phrase, clause or provision of this Agreement is deemed invalid or unenforceable, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous or unduly restrictive, it shall not be stricken in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. 8.04 CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. The parties hereby consent to the jurisdiction of the state and federal courts in the State of Illinois in the event that any disputes arise under this Agreement. 8.05 NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given; (b) on the day after delivery to an overnight courier service; (c) on the day of transmission if sent via facsimile to the facsimile number given below; or (d) on the third day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid and properly addressed, to the party as follows: If to Executive: __________________________ Facsimile: __________________ If to the Company: First Mid-Illinois Bancshares, Inc. 1515 Charleston Avenue Mattoon IL 61938 Facsimile: 217-258-0485 Attention: Chairman Any party may change its address for the purpose of this Section by giving the other party written notice of its new address in the manner set forth above. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FIRST MID-ILLINOIS BANCSHARES, INC. By: /S/ WILLIAM S. ROWLAND --------------------------------------- William S. Rowland Title: CHAIRMAN OF THE BOARD ------------------------------------ EXECUTIVE: /S/ JOHN W. HEDGES --------------------------------- John W. Hedges EXHIBIT 10.5 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into this 1st day of ____________, 2002, by and between First Mid-Illinois Bancshares, Inc. ("the Company"), a corporation with its principal place of business located in Mattoon, Illinois, and _____________ ("Manager"). In consideration of the promises and mutual covenants and agreements contained herein, the parties hereto acknowledge and agree as follows: ARTICLE ONE TERM AND NATURE OF AGREEMENT 1.01 TERM OF AGREEMENT. The term of this Agreement shall commence as of _________, 2002 and shall continue until ___________, 2004. Thereafter, unless Manager's employment with the Company has been previously terminated, Manager shall continue his employment with the Company on an at will basis and, except as provided in Articles Five, Six and Seven, this Agreement shall terminate unless extended by mutual written agreement. 1.02 EMPLOYMENT. The Company agrees to employ Manager and Manager accepts such employment by the Company on the terms and conditions herein set forth. The duties of Manager shall be determined by the Company's Chief Executive Officer and shall adhere to the policies and procedures of the Company and shall follow the supervision and direction of the Chief Executive Officer or his designee in the performance of such duties. During the term of his employment, Manager agrees to devote his full working time, attention and energies to the diligent and satisfactory performance of his duties hereunder. Manager shall not, while he is employed by the Company, engage in any activity which would (a) interfere with, or have an adverse effect on, the reputation, goodwill or any business relationship of the Company or any of its subsidiaries; (b) result in economic harm to the Company or any of its subsidiaries; or (c) result in a breach of Section Six of the Agreement. ARTICLE TWO COMPENSATION AND BENEFITS While Manager is employed with the Company during the term of this Agreement, the Company shall provide Manager with the following compensation and benefits: 2.01 BASE SALARY. The Company shall pay Manager an annual base salary of $________ per fiscal year, payable in accordance with the Company's customary payroll practices for management employees. The Chief Executive Officer or his designee may review and adjust Manager's base salary from year to year; provided, however, that during the term of Manager's employment, the Company shall not decrease Manager's base salary. 2.02 INCENTIVE COMPENSATION PLAN. Manager shall continue to participate in the First Mid-Illinois Bancshares, Inc. Incentive Compensation Plan in accordance with the terms and conditions of such Plan. Pursuant to the Plan, Manager shall have an opportunity to receive incentive compensation of up to a maximum of ____% of Manager's annual base salary. The incentive compensation payable for a particular fiscal year will be based upon the attainment of the performance goals in effect under the Plan for such year and will be paid in accordance with the terms of the Plan and at the sole discretion of the Board. 2.03 VACATION. Manager shall be entitled to _____ weeks of paid vacation each year during the term of this Agreement. 2.04 OTHER BENEFITS. Manager shall be eligible (to the extent he qualifies) to participate in any other retirement, health, accident and disability insurance, or similar employee benefit plans as may be maintained from time to time by the Company for its other management employees subject to and on a consistent basis with the terms, conditions and overall administration of such plans. 2.05 BUSINESS EXPENSES. Manager shall be entitled to reimbursement by the Company for all reasonable expenses actually and necessarily incurred by him on its behalf in the course of his employment hereunder and in accordance with expense reimbursement plans and policies of the Company from time to time in effect for management employees. 2.6. WITHHOLDING. All salary, incentive compensation and other benefits provided to Manager pursuant to this Agreement shall be subject to withholding for federal, state or local taxes, amounts withheld under applicable employee benefit plans, policies or programs, and any other amounts that may be required to be withheld by law, judicial order or otherwise or by agreement with, or consent of, Manager. ARTICLE THREE DEATH OF MANAGER This Agreement shall terminate prior to the end of the term described in Section 1.01 upon Manager's termination of employment with the Company due to his death. Upon Manager's termination due to death, the Company shall pay Manager's estate the amount of Manager's base salary and his accrued but unused vacation time earned through the date of such death and any incentive compensation earned for the preceding fiscal year that is not yet paid as of the date of such death. ARTICLE FOUR TERMINATION OF EMPLOYMENT Manager's employment with the Company may be terminated by Manager or by the Company at any time for any reason. Upon Manager's termination of employment prior to the end of the term of the Agreement, the Company shall pay Manager as follows: 4.01 TERMINATION BY THE COMPANY FOR OTHER THAN CAUSE. If the Company terminates Manager's employment for any reason other than Cause, the Company shall pay Manager the following: (a) An amount equal to Manager's monthly base salary in effect at the time of such termination of employment for a period of _____ months thereafter. Such amount shall be paid to Manager periodically in accordance with the Company's customary payroll practices for management employees. (b) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (c) Continued coverage for Manager and/or Manager's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Manager's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the period beginning on the date of such termination and ending at the end of the period described in Section 4.01(a), Manager shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, Manager shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Cause" shall mean Manager's (i) conviction in a court of law of (or entering a plea of guilty or no contest to) any crime or offense involving fraud, dishonesty or breach of trust or involving a felony; (ii) performance of any act which, if known to the customers, clients, stockholders or regulators of the Company, would materially and adversely impact the business of the Company; (iii) act or omission that causes a regulatory body with jurisdiction over the Company to demand, request, or recommend that Manager be suspended or removed from any position in which Manager serves with the Company; (iv) substantial nonperformance of any of his obligations under this Agreement; (v) misappropriation of or intentional material damage to the property or business of the Company or any affiliate; or (vi) breach of Article Five or Six of this Agreement. 4.02 TERMINATION FOLLOWING A CHANGE IN CONTROL. Notwithstanding Section 4.01, if, following a Change in Control, and prior to the end of the term of this Agreement, Manager's employment is terminated by the Company (or any successor thereto) for any reason other than Cause, or if Manager terminates his employment because of a decrease in his then current base salary or a substantial diminution in his position and responsibilities, the Company (or any successor thereto) shall pay Manager the following: (a) An amount equal to Manager's monthly base salary in effect at the time of such termination for a period of twelve (12) months thereafter. Such amount shall be paid in accordance with the Company's or successor's customary payroll practices for Manager employees. (b) The base salary and accrued but unused paid vacation time earned through the date of termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. (c) Continued coverage for Manager and/or Manager's family under the Company's health plan pursuant to Title I, Part 6 of the Employee Retirement Income Security Act of 1974 ("COBRA") and for such purpose the date of Manager's termination of employment shall be considered the date of the "qualifying event" as such term is defined by COBRA. During the period beginning on the date of such termination and ending at the end of the period described in Section 4.02(a), Manager shall be charged for such coverage in the amount that he would have paid for such coverage had he remained employed by the Company, and for the duration of the COBRA period, Manager shall be charged for such coverage in accordance with the provisions of COBRA. For purposes of this Agreement, "Change in Control" shall have the meaning as set forth in the First Mid-Illinois Bancshares, Inc. 1997 Stock Incentive Plan. 4.03 OTHER TERMINATION OF EMPLOYMENT. If, prior to the end of the term of this Agreement, the Company terminates Manager's employment for Cause, or if Manager terminates his employment for any reason other than as described in Section 4.02 above, the Company shall pay Manager the base salary and accrued but unused paid vacation time earned through the date of such termination and any incentive compensation earned for the preceding fiscal year that is not yet paid. ARTICLE FIVE CONFIDENTIAL INFORMATION 5.01 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. During his employment with the Company, and after his termination of such employment with the Company, Manager shall not, in any form or manner, directly or indirectly, use, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, any Confidential Information, except as required in the performance of Manager's duties hereunder, as required by law or as necessary in conjunction with legal proceedings. 5.02 DEFINITION OF CONFIDENTIAL INFORMATION. For the purposes of this Agreement, the term "Confidential Information" shall mean any and all information either developed by Manager during his employment with the Company and used by the Company or its affiliates or developed by or for the Company or its affiliates of which Manager gained knowledge by reason of his employment with the Company that is not readily available in or known to the general public or the industry in which the Company or any affiliate is or becomes engaged. Such Confidential Information shall include, but shall not be limited to, any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, procedures, manuals, financial data, business plans, lists of actual or potential customers, lists of employees and any information regarding the Company's or any affiliate's products, marketing or database. The Company and Manager acknowledge and agree that such Confidential Information is extremely valuable to the Company and may constitute trade secret information under applicable law. In the event that any part of the Confidential Information becomes generally known to the public through legitimate origins (other than by the breach of this Agreement by Manager or by other misappropriation of the Confidential Information), that part of the Confidential Information shall no longer be deemed Confidential Information for the purposes of this Agreement, but Manager shall continue to be bound by the terms of this Agreement as to all other Confidential Information. 5.03 DELIVERY UPON TERMINATION. Upon termination of Manager's employment with the Company for any reason, Manager shall promptly deliver to the Company all correspondence, files, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, and any other documents or data concerning the Company's or any affiliate's customers, database, business plan, marketing strategies, processes or other materials which contain Confidential Information, together with all other property of the Company or any affiliate in Manager's possession, custody or control. ARTICLE SIX NON-COMPETE AND NON-SOLICITATION COVENANTS 6.01 COVENANT NOT TO COMPETE. During the term of this Agreement and for a period of one year following the later of (i) the termination of Manager's employment for any reason or (ii) the last day of the term of the Agreement, Manager shall not, on behalf of himself or on behalf of another person, corporation, partnership, trust or other entity, within the counties of Coles, Moultrie, Douglas, Cumberland, Effingham, Champaign, Christian, Madison, Macon, Bond or Piatt, Illinois, or any other county in which the Company or any affiliate conducts business: (a) Directly or indirectly own, manage, operate, control, participate in the ownership, management, operation or control of, be connected with or have any financial interest in, or serve as an officer, employee, advisor, consultant, agent or otherwise to any person, firm, partnership, corporation, trust or other entity which owns or operates a business similar to that of the Company or its affiliates. (b) Solicit for sale, represent, and/or sell Competing Products to any person or entity who or which was the Company's customer or client during the last year of Manager's employment. "Competing Products," for purposes of this Agreement, means products or services which are similar to, compete with, or can be used for the same purposes as products or services sold or offered for sale by the Company or any affiliate or which were in development by the Company or any affiliate within the last year of Manager's employment. 6.02 COVENANT NOT TO SOLICIT. For a period of one year following the later of (i) the termination of Manager's employment for any reason or (ii) the last day of the term of this Agreement, Manager shall not: (a) Attempt in any manner to solicit from any client or customer business of the type performed by the Company or any affiliate or persuade any client or customer of the Company or any affiliate to cease to do such business or to reduce the amount of such business which any such client or customer has customarily done or contemplates doing with the Company or any affiliate, whether or not the relationship between the Company or affiliate and such client or customer was originally established in whole or in part through Manager's efforts. (b) Render any services of the type rendered by the Company or any affiliate for any client or customer of the Company. (c) Solicit or encourage, or assist any other person to solicit or encourage, any employees, agents or representatives of the Company or an affiliate to terminate or alter their relationship with the Company or any affiliate. (d) Do or cause to be done, directly or indirectly, any acts which may impair the relationship between the Company or any affiliate with their respective clients, customers or employees. ARTICLE SEVEN REMEDIES Manager acknowledges that compliance with the provisions of Articles Five and Six herein is necessary to protect the business, goodwill and proprietary information of the Company and that a breach of these covenants will irreparably and continually damage the Company for which money damages may be inadequate. Consequently, Manager agrees that, in the event that he breaches or threatens to breach any of these provisions, the Company shall be entitled to both (a) a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm; and (b) money damages insofar as they can be determined. In addition, the Company will cease payment of all compensation and benefits under Articles Three and Four hereof. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon Manager or are otherwise invalid, for whatsoever cause, then the court so holding shall reduce, and is so authorized to reduce, the territory to which it pertains and/or the period of time in which it operates, or the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of this Agreement enforceable. ARTICLE EIGHT MISCELLANEOUS 8.01 SUCCESSORS AND ASSIGNABILITY. (a) No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) No rights or obligations of Manager under this Agreement may be assigned or transferred by Manager other than his rights to payments or benefits hereunder which may be transferred only by will or the laws of descent and distribution. 8.02 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and may not be modified except in writing by the parties hereto. Furthermore, the parties hereto specifically agree that all prior agreements, whether written or oral, relating to Manager's employment by the Company shall be of no further force or effect from and after the date hereof. 8.03 SEVERABILITY. If any phrase, clause or provision of this Agreement is deemed invalid or unenforceable, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous or unduly restrictive, it shall not be stricken in its entirety and held totally void and unenforceable, but shall be deemed rewritten and shall remain effective to the maximum extent permissible within reasonable bounds. 8.04 CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. The parties hereby consent to the jurisdiction of the state and federal courts in the State of Illinois in the event that any disputes arise under this Agreement. 8.05 NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given; (b) on the day after delivery to an overnight courier service; (c) on the day of transmission if sent via facsimile to the facsimile number given below; or (d) on the third day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid and properly addressed, to the party as follows: If to Manager: _________________ If to the Company: First Mid-Illinois Bancshares, Inc. 1515 Charleston Avenue Mattoon, Illinois 61938 Facsimile: 217-234-0485 Attention: Chairman and Chief Executive Officer Any party may change its address for the purpose of this Section by giving the other party written notice of its new address in the manner set forth above. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FIRST MID-ILLINOIS BANCSHARES, INC. By: /S/ WILLIAM S. ROWLAND ----------------------------------- William S. Rowland Title: CHAIRMAN OF THE BOARD -------------------------------- MANAGER:_______________________________ EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE The Company follows Financial Accounting Standards Board's Statement No. 128, "EARNINGS PER SHARE" ("SFAS 128") in which income for Basic Earnings per Share ("EPS") is adjusted for dividends attributable to preferred stock and is based on the weighted average number of common shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock and the assumed conversion of the stock options. The components of basic and diluted earnings per common share for the years ended December 31, 2001, 2000, and 1999 are as follows: 2001 2000 1999 ---------- ----------- ------------ BASIC EARNINGS PER SHARE: Net income $6,516,000 $5,660,000 $5,232,000 Less preferred stock dividends - - (304,000) ---------- ----------- ------------ Net income available to common stockholders $6,516,000 $5,660,000 $4,928,000 ---------- ----------- ------------ Weighted average common shares outstanding 3,378,019 3,386,111 3,083,858 ---------- ----------- ------------ Basic earnings per common share $1.93 $1.67 $1.60 ---------- ----------- ------------ DILUTED EARNINGS PER SHARE: Net income available to common stockholders $6,516,000 $5,660,000 $4,928,000 Assumed conversion of preferred stock - - 304,000 ---------- ----------- ------------ Net income available to common stock- holders after assumed conversion $6,516,000 $5,660,000 $5,232,000 ---------- ----------- ------------ Weighted average common shares outstanding 3,378,019 3,386,111 3,083,858 Assumed conversion of stock options 11,195 7,918 11,240 Assumed conversion of preferred stock - - 325,352 ---------- ----------- ------------ Diluted weighted average common shares outstanding 3,389,214 3,394,029 3,420,450 ---------- ----------- ------------ Diluted earnings per common share $1.92 $1.67 $1.53 ---------- ----------- ------------ EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY First Mid-Illinois Bank & Trust, N.A. (a national banking association) Mid-Illinois Data Services, Inc. (a Delaware corporation) First Mid-Illinois Insurance Services, Inc. (an Illinois corporation; 100% owned by First Mid Bank) Effective January 29, 2002, The Checkley Agency, Inc. (an Illinois corporation) EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors First Mid-Illinois Bancshares, Inc.: RE: Registration Statements Registration No. 033-84404 on Form S-3 Registration No. 033-64061 on Form S-8 Registration No. 033-64139 on Form S-8 Registration No. 333-69673 on Form S-8 We consent to incorporation by reference in the subject Registration Statements on Forms S-3 and S-8 of First Mid-Illinois Bancshares, Inc. of our report dated January 25, 2002, relating to the consolidated balance sheets of First Mid-Illinois Bancshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of First Mid-Illinois Bancshares, Inc. [GRAPHIC OMITTED] Chicago, Illinois March 27, 2002