SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q JUNE 30, 1995 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the quarterly period ended June 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from_________________to_________________ Commission file number: 0-13368 First Mid-Illinois Bancshares, Inc. (Exact name of Registrant as specified in its charter) Delaware 37-1103704 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1515 Charleston Avenue, Mattoon, Illinois 61938 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 217-234-7454 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 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 889,108 shares of Common Stock at July 19, 1995. 1 FORM 10-Q For the Quarter Ended June 30, 1995 INDEX Beginning Page No. Part I - Financial Information Item 1. Financial Statements 3 Consolidated Balance Sheets 4 Consolidated Statements of Income 5 Consolidated Statement of Cash Flows 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II - Other Information Item 1. Legal Proceedings 28 Item 2. Changes in Securities 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 29 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by generally accepted accounting principles for complete financial statements and related footnote disclosures. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered for a fair presentation have been included. For further information, refer to the financial statements and notes included in the Registrant's 1994 Annual Report to Stockholders. 3 FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands) June 30, December 31, 1995 1994 Assets Cash and due from banks: Noninterest bearing $ 15,563 $ 17,631 Interest bearing 660 82 Excess funds sold 4,425 - Cash and cash equivalents 20,648 17,713 Investment certificates of deposits 99 99 Investment securities available-for-sale at fair value 64,321 68,973 Investment securities held-to-maturity (approximate fair value of $63,486,000 at June 30, 1995 and $59,836,000 at December 31, 1994) 64,021 62,304 Loans 295,805 282,153 Less allowance for loan losses 2,696 2,608 Net loans 293,109 279,545 Premises and equipment, net 9,337 9,336 Intangible assets 6,323 6,627 Other assets 6,848 6,561 Total assets $ 464,706 $ 451,158 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest bearing $ 44,978 $ 45,159 Interest bearing 344,292 344,409 Total deposits 389,270 389,568 Long-term debt 7,700 7,700 Short-term borrowings 29,480 19,590 Other liabilities 4,506 3,700 Total liabilities 430,956 420,558 Stockholders' equity Preferred stock no par value; authorized 1,000,000 shares; issued 620 shares of Series A preferred with stated value of $5,000 per share 3,100 3,100 Common stock, $4 par value; authorized 2,000,000 shares; issued 891,108 shares in 1995 and 878,769 in 1994 3,580 3,515 Additional paid-in-capital 3,841 3,531 Retained earnings 23,118 21,577 Net unrealized gain (loss) on available-for-sale investment securities, net of tax 135 (1,099) 33,774 30,624 Less treasury stock at cost, 2,000 shares 24 24 Total stockholders' equity 33,750 30,600 Total liabilities and stockholders' equity $ 464,706 $ 451,158 ====================== See accompanying notes to consolidated financial statements. 4 FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME Three months ended June 30, 1995 and 1994 (unaudited) (in thousands, except per share data) 1995 1994 Interest income: Interest and fees on loans $ 6,181 $ 4,499 Interest on investment securities 1,971 1,613 Interest on excess funds sold 77 9 Interest on deposits with financial institutions 47 25 Total interest income 8,276 6,146 Interest expense: Interest on deposits 3,668 2,534 Interest on short-term borrowings 110 86 Interest on long-term debt 320 86 Total interest expense 4,098 2,706 Net interest income 4,178 3,440 Provision for loan losses 48 72 Net interest income after provision for loan losses 4,130 3,368 Other income: Trust fees 305 298 Brokerage and annuity fees 42 127 Service charges 385 357 Securities gains, net - - Mortgage banking income 71 27 Other 181 197 Total other income 984 1,006 Other expense: Salaries and employee benefits 1,878 1,718 Occupancy, furniture and equipment expense, net 569 491 Federal deposit insurance premiums 221 195 Other 1,043 831 Total other expense 3,711 3,235 Income before income taxes 1,403 1,139 Income taxes 453 329 Net income $ 950 $ 810 ======================= Per common share data: Primary earnings per share $ .99 $ .84 Fully diluted earnings per share .94 .81 See accompanying notes to consolidated financial statements. 5 FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME Six months ended June 30, 1995 and 1994 (unaudited) (in thousands, except per share data) 1995 1994 Interest income: Interest and fees on loans $ 12,004 $ 8,787 Interest on investment securities 3,906 3,229 Interest on excess funds sold 137 41 Interest on deposits with financial institutions 67 60 Total interest income 16,114 12,117 Interest expense: Interest on deposits 7,148 5,078 Interest on short-term borrowings 289 164 Interest on long-term debt 460 150 Total interest expense 7,897 5,392 Net interest income 8,217 6,725 Provision for loan losses 90 144 Net interest income after provision for loan losses 8,127 6,581 Other income: Trust fees 608 638 Brokerage and annuity fees 90 217 Service charges 749 685 Securities gains, net - 21 Mortgage banking income 98 99 Other 422 368 Total other income 1,967 2,028 Other expense: Salaries and employee benefits 3,726 3,414 Occupancy, furniture and equipment expense, net 1,118 940 Federal deposit insurance premiums 442 392 Other 2,037 1,585 Total other expense 7,323 6,331 Income before income taxes 2,771 2,278 Income taxes 858 654 Net income $ 1,913 $ 1,624 ====================== Per common share data: Primary earnings per share $ 2.00 $ 1.77 Fully diluted earnings per share 1.90 1.62 See accompanying notes to consolidated financial statements. 6 FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended June 30, 1995 and 1994 (unaudited) (In thousands) 1995 1994 Cash flows from operating activities: Net income $ 950 $ 810 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 48 72 Depreciation, amortization and accretion, net 341 361 Securities (gains), net - - Gain on sale of loans held for sale (8) (4) Origination of mortgage loans held for sale (485) (357) Proceeds from sales of mortgage loans held for sale 847 575 Net (increase) in other assets (1,115) (619) Net increase in other liabilities 916 1,448 Net cash provided by operating activities 1,494 2,286 Cash flows from investing activities: Expenditures for premises and equipment (232) (88) Net (increase) in loans (12,812) (14,569) Proceeds from sales of: Securities available-for-sale - 2,039 Proceeds from maturities of: Investment securities - 7,179 Securities available-for-sale 7,733 - Securities held-to-maturity 469 - Purchases of: Securities available-for-sale (217) (783) Securities held-to-maturity (3,004) (1,388) Net decrease in investment certificates of deposits - 2,185 Net cash (used in) investing activities (8,063) (5,425) Cash flows from financing activities: Net (decrease) in deposits (7,550) (2,549) Net increase in short-term borrowings 8,380 8,140 Repayment of long-term debt - (300) Dividends paid on common stock (176) (298) Dividends paid on preferred stock (143) (143) Net cash provided by financing activities 511 4,850 Increase (decrease) in cash and cash equivalents (6,058) 1,711 Cash and cash equivalents at beginning of period 26,706 12,870 Cash and cash equivalents at end of period $ 20,648 $ 14,581 ====================== Additional disclosure of cash flow information: Interest paid during the period $ 4,111 $ 2,573 Income taxes paid during the period 850 725 Loans transferred to real estate owned 36 156 ====================== See accompanying notes to consolidated financial statements. 7 FIRST MID-ILLINOIS BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 1995 and 1994 (unaudited) (In thousands) 1995 1994 Cash flows from operating activities: Net income $ 1,913 $ 1,624 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 90 144 Depreciation, amortization and accretion, net 674 795 Securities (gains), net - (21) Gain on sale of loans held for sale (17) (47) Origination of mortgage loans held for sale (1,025) (2,195) Proceeds from sales of mortgage loans held for sale 1,396 2,900 Net (increase) decrease in other assets (287) 457 Net increase in other liabilities 702 860 Net cash provided by operating activities 3,446 4,517 Cash flows from investing activities: Expenditures for premises and equipment (371) (167) Net (increase) in loans (14,008) (14,218) Proceeds from sales of: Securities available-for-sale - 8,535 Proceeds from maturities of: Investment securities - 21,618 Securities available-for-sale 10,202 - Securities held-to-maturity 1,287 - Purchases of: Securities available-for-sale (3,679) (11,794) Securities held-to-maturity (3,004) (12,776) Net decrease in investment certificates of deposits - 2,177 Net cash (used in) investing activities (9,573) (6,625) Cash flows from financing activities: Net (decrease) in deposits (298) (9,607) Net increase in short-term borrowings 9,890 5,980 Repayment of long-term debt - (300) Dividends paid on common stock (387) (658) Dividends paid on preferred stock (143) (143) Net cash provided by (used in) financing activities 9,062 (4,728) Increase (decrease) in cash and cash equivalents 2,935 (6,836) Cash and cash equivalents at beginning of period 17,713 21,417 Cash and cash equivalents at end of period $ 20,648 $ 14,581 ====================== Additional disclosure of cash flow information: Interest paid during the period $ 8,283 $ 5,371 Income taxes paid during the period 850 850 Loans transferred to real estate owned 109 156 ====================== See accompanying notes to consolidated financial statements. 8 Notes to the Consolidated Financial Statements 1) The consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. (the "Registrant"), and its wholly owned subsidiaries, First Mid-Illinois Bank & Trust, N.A. (the "Bank"), Heartland Savings Bank ("Heartland") and Mid-Illinois Data Services, Inc. ("MIDS"). Intercompany amounts have been eliminated. On October 4, 1994, the Bank acquired all of the outstanding stock of Downstate Bancshares, Inc. ("DBI") which owned 100% of the stock of Downstate National Bank ("DNB"). DNB had locations in Altamont and Effingham, Illinois. Immediately following the acquisition, DBI was dissolved and DNB was merged with and into the Bank with the Bank being the surviving entity. DBI was purchased for cash of $8,570,000 with $5,570,000 of that amount being internally generated funds and $3,000,000 resulting from additional long-term borrowings of the Registrant. The acquisition of DBI by the Bank was accounted for using the purchase method of accounting whereby the assets and liabilities of DBI were recorded at their fair values as of the acquisition date and the operating results of the DBI operations have been combined with those of the Registrant since October 4, 1994. 2) The financial information reflects all adjustments which, in the opinion of management, are necessary to present a fair statement of the results of the interim periods ended June 30, 1995 and 1994, and all such adjustments are of a normal recurring nature. The results of the interim period ended June 30, 1995, are not necessarily indicative of the results expected for the year ending December 31, 1995. 3) Income for primary and fully diluted earnings per share is adjusted for dividends attributable to preferred stock. Primary earnings per share is based on the weighted average number of common shares outstanding. Fully diluted earnings per share data is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion of the convertible preferred stock. The weighted average number of common equivalent shares used in calculating earnings per share for the periods ended June 30, 1995 and 1994, are as follows: Three months ended Six months ended June 30, June 30, 1995 1994 1995 1994 Primary 885,620 876,769 883,629 876,769 Fully Diluted 1,010,922 1,002,071 1,008,931 1,002,071 4) The Registrant is required to classify its debt securities into one of three categories at the time of purchase: held-to-maturity, available- for-sale or trading. Held-to-maturity securities are those which management has the intent and ability to hold to maturity. These securities are carried at amortized historical cost. Available-for-sale securities are those securities which management may sell prior to maturity as a result of the Registrant's overall asset and liability management strategy. These securities are recorded at fair value. Trading securities are those securities bought and held principally for the purpose of selling them in the near term. Trading securities are recorded at the lower of historical cost or fair value. The Registrant currently has no securities designated as trading. 9 5) Heartland originates residential first mortgage loans both for its portfolio and for sale into the secondary market. Held for sale loans are carried at the lower of aggregate, amortized cost or estimated market value. Mortgage banking income consists of gains or losses on the sale of loans and servicing fee income. Origination costs for loans sold are expensed as incurred. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations-Summary For the second quarter, net income amounted to $950,000 ($.94 per share on a fully diluted basis) in 1995 as compared with $810,000 ($.81 per share on a fully diluted basis) in 1994. A summary of the factors which contributed to the quarterly earnings increase follows (dollars in thousands except per share data): Three months ended June 30, 1995 vs. June 30, 1994 Total Per Share - ----------------------------------------------------------------------------- Net interest income $ 738 $ .72 Provision for loan losses 24 .02 Other income (22) (.02) Other expenses (476) (.47) Income taxes (124) (.12) - ----------------------------------------------------------------------------- Total increase in net income $ 140 $ .13 ============================================================================= Net income for the six month period ended June 30, 1995, amounted to $1,913,000 ($1.90 per share on a fully diluted basis). This represents a $289,000 or 17.8% increase from the earnings of $1,624,000 ($1.62 per share on a fully diluted basis) earnings for the six month period ended June 30, 1994. A summary of the factors which contributed to the earnings increase follows (dollars in thousands, except per share data): Six months ended June 30, 1995 vs. June 30, 1994 Total Per Share - ----------------------------------------------------------------------------- Net interest income $1,492 $ 1.47 Provision for loan losses 54 .05 Other income (61) (.06) Other expenses (992) (.98) Income taxes (204) (.20) - ----------------------------------------------------------------------------- Total increase in net income $ 289 $ .28 ============================================================================= Net Interest Income and Interest Rate Sensitivity During the first six months in 1995, the Registrant's net interest income increased by $1,492,000 (22.2%) as compared with the net interest income for the same period in 1994. Net interest income for the six months ended June 30, 1995, was $8,127,000 as compared with $6,725,000 for the six months ended June 30, 1994. The table which follows sets forth details of average balances, interest income and expense and average rates for the Registrant for 1995 and 1994. The 1995 figures have been annualized based on the actual results through June 30, 1995. The annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur for the year ended December 31, 1995. As can be seen, annualized net interest margin is 3.99% in 1995 (on a tax equivalent basis). The overall cost of interest bearing liabilities has been 68 basis points higher in 1995 than in 1994 and the yield on interest earning assets has been 66 basis points higher in 1995 than in 1994. 11 Beginning in early 1994, economic activity and loan demand began to increase significantly in the Registrant's market area. As the largest financial institution in the area and the one with the most banking outlets, the Registrant's loan totals have increased dramatically. The loan:deposit ratio (a traditional measure of a banks relative lending volume) of the Registrant has increased from 63.9% at December 31, 1993 to 76.0% at June 30, 1995. This rapid growth in loans has caused net interest income to increase because yields on loans are generally 200 - 300 basis points higher than are the yields on the investment products they replace and/or the incremental funding costs of the additional deposits or short term borrowings that the Registrant has acquired to fund the loan growth. As a result of an active asset/liability management effort, this loan growth has not added appreciably to the amount of interest rate or liquidity risk associated with the Registrant's operations. 12 Distribution of Consolidated Assets, Liabilities, and Stockholders' Equity Interest Rates and Interest Differential (dollars in thousands) Six Month Period Ended Year Ended June 30, 1995 December 31, 1994 Avg Bal Int Avg Rate Avg Bal Int Avg Rate INTEREST EARNING ASSETS Investment certificates of deposits $ 99 $ 10 10.26% $ 1,211 $ 51 4.21% Due from banks-interest bearing 2,128 124 5.83% 924 22 2.38% Excess funds sold 4,719 274 5.80% 3,643 156 4.28% Investment securities: Taxable 117,960 7,045 5.97% 117,285 5,772 4.92% Tax-exempt 12,973 768 8.97% 14,546 851 8.86% Loans (net of unearned income) 284,442 24,007 8.44% 243,166 19,576 8.05% Total earning assets 422,321 32,228 7.72% 380,775 26,428 7.06% NONEARNING ASSETS Cash and due from banks 15,014 13,720 Premises and equipment 9,305 8,393 Other nonearning assets 12,512 9,150 Allowance for loan losses (2,654) (2,354) Total assets $456,498 $409,684 ========= ========= INTEREST BEARING LIABILITIES Demand deposits $108,620 $ 2,880 2.65% $110,069 $ 2,764 2.51% Savings deposits 42,733 1,152 2.70% 38,985 1,009 2.59% Time deposits 196,972 10,264 5.21% 170,252 7,298 4.29% Short-term borrowings 18,880 920 4.87% 13,103 471 3.59% Long-term debt 7,700 578 7.51% 5,579 376 6.74% Total interest- bearing liabilities 374,905 15,794 4.21% 337,988 11,918 3.53% NONINTEREST-BEARING LIABILITIES Demand deposits 45,180 37,527 Other liabilities 4,295 3,901 Stockholders' equity 32,118 30,268 Total liabilities & equity $456,498 $409,684 ========= ========= Net interest earnings $16,434 $14,510 ======== ======== Net interest earnings as a % of interest earning assets on a full tax equivalent basis 3.99% 3.93% ===== ===== (1) Full tax equivalent yields on tax exempt securities have been calculated using a 34% tax rate. (2) Nonaccrual loans have been included in the average balances. (3) Interest includes net loan fees. (4) 1995 interest income and expense amounts have been annualized based on results through June 30, 1995. The annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur for the year ending December 31, 1995. 13 The following table describes changes in net interest income attributable to changes in the volume of earning assets compared to changes in interest rates (in thousands). 1995 Compared to 1994 Increase - (Decrease) Total Rate/ Change Volume Rate Volume INTEREST INCOME: Investment certificates of deposit $ (41) $ (47) $ 73 $ (67) Due from banks-interest bearing 102 29 32 41 Excess funds sold 118 46 55 17 Investment securities: Taxable 1,273 33 1,233 7 Tax-exempt (83) (92) 10 (1) Loans 4,431 3,323 948 160 Total interest income 5,800 3,292 2,351 157 INTEREST EXPENSE: Demand deposits 116 (36) 154 (2) Savings deposits 143 97 42 4 Time deposits 2,966 1,145 1,574 247 Short-term borrowings 449 208 167 74 Long-term debt 202 143 43 16 Total interest expense 3,876 1,557 1,980 339 NET INTEREST EARNINGS $ 1,924 $ 1,735 $ 371 $ (182) ======================================= (1) Nonaccrual loans are not material and have been included in the average loan balances for purposes of this computation. No out-of-period adjustments have been included in the above analysis. (2) Changes in rates and volume are computed on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Loan fees included in interest income are not material. Interest on nontaxable securities is shown on a tax-equivalent basis using a 34% tax rate. (3) There were no foreign activities by the Registrant during the six month periods ending June 30, 1995 and June 30, 1994. (4) 1995 interest income and expense amounts have been annualized based on results through June 30, 1995. The annualized amounts are not necessarily indicative of the actual amounts that are expected or that will occur for the year ending December 31, 1995. 14 The following table is the Registrant's "static gap" schedule as of June 30, 1995. This is just one of several tools used by management to monitor the interest rate sensitivity position of the Registrant. Earning assets and interest bearing liabilities are presented below within selected time intervals based on their repricing and maturing characteristics. Interest rate sensitivity is measured by "gaps", (the difference between interest earning assets and interest bearing liabilities within a particular time interval). A positive GAP indicates more assets than liabilities could reprice in that time period and a negative GAP indicates more liabilities could reprice. (dollars in thousands) Number of Months Until Next Repricing Opportunity 0-1 1-3 3-6 6-12 12+ Interest Earning Assets: Investment certificates of deposits $ - $ - $ - $ - $ 99 Due from banks- interest bearing 660 - - - - Excess funds sold 4,425 - - - - Taxable investment securities 42,973 14,144 13,516 12,691 32,291 Non-taxable investment securities 265 10 373 369 11,710 Loans 34,264 13,937 29,018 38,334 180,252 Total $ 82,587 $ 28,091 $ 42,907 $ 51,394 $ 224,352 Interest Bearing Liabilities: Savings and NOW accts $ 108,638 $ - $ - $ - $ - Money market accounts 37,266 - - - - Other time deposits 31,951 35,515 33,201 36,215 61,506 Short-term borrowings 19,980 - - 6,000 3,500 Long-term debt 7,700 - - - - Total $ 205,535 $ 35,515 $ 33,201 $ 42,215 $ 65,006 Periodic GAP $(122,948) $ (7,424) $ 9,706 $ 9,179 $ 159,346 Cumulative GAP $(122,948) $(130,372) $(120,666) $ (111,487)$ 47,859 Gaps as a percent of interest earning assets: Periodic (28.6%) (1.7%) 2.3% 2.1% 37.1% Cumulative (28.6%) (30.3%) (28.0%) (25.9%) 11.2% ====================================================== The above tabulation classifies savings and NOW accounts as immediately repriceable because if rates paid on these accounts were to change, the rates would, most likely, change on all such accounts at the same time. As a practical matter, management is able to exercise a significant amount of control over these rates and they have shown to be very resistant to rate changes. Management of the Registrant continually monitors its interest rate sensitivity position. While the preceding table is an indication of interest rate risk, overall interest rate sensitivity is influenced by other factors such as the competitive environment, the timing and amount of rate changes, loan prepayments and the inherent stability of certain deposits. A number of different factors, including those objectively determined and measurable, as well as those subjectively ascertained, are considered by management in its evaluation of interest rate risk. As a result of this analysis, management 15 believes that the overall level of interest rate risk is manageable and does not believe that changing rates will have a material negative effect on the Registrant's net interest margin. Investment Portfolio and Investment Transactions The Registrant adopted Statement of Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity Securities" effective December 31, 1993. Investment securities that the Registrant has the positive intent and ability to hold to maturity are classified as "held- to-maturity" and reported at amortized cost. All other investment securities are classified as "available-for-sale" and have been reported at their estimated fair value at June 30, 1995, and December 31, 1994. In accordance with FAS 115, the unrealized gains, net of related taxes, in the amount of $135,000 have been included in stockholders' equity at June 30, 1995. Total investment securities designated as available-for-sale represented 50% of the portfolio and held-to-maturity represented 50%. During the three months ended June 30, 1995, neither available-for-sale nor held-to-maturity investment securities were sold. During the three months ended June 30, 1995, $3,000,000 held-to-maturity investment securities and $217,000 available-for-sale investment securities were purchased. The table below provides detailed information for investment securities at June 30, 1995, (in thousands): Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 29,280 $ 296 $ 233 $ 29,343 Obligations of state and political subdivisions 9,105 403 245 9,263 Mortgage backed securities 23,626 149 165 23,610 Other securities 2,105 - - 2,105 Total available-for-sale $ 64,116 $ 848 $ 643 $ 64,321 Held-to-maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 44,855 $ 231 $ 710 $ 44,376 Obligations of state and political subdivisions 4,007 57 24 4,040 Mortgage backed securities 15,159 61 151 15,069 Other securities - - - - Total held-to-maturity $ 64,021 $ 349 $ 885 $ 63,485 Total $ 128,137 $ 1,197 $ 1,528 $ 127,806 ============================================== 16 Information related to investment securities at December 31, 1994 follows (in thousands): Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 34,358 $ - $ 970 $ 33,388 Obligations of state and political subdivisions 9,641 240 160 9,721 Mortgage backed securities 24,751 29 804 23,976 Other securities 1,888 - - 1,888 Total available-for-sale $ 70,638 $ 269 $ 1,934 $ 68,973 Held-to-maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 42,312 $ 6 $ 1,760 $ 40,558 Obligations of state and political subdivisions 4,023 5 101 3,927 Mortgage backed securities 15,969 1 619 15,351 Other securities - - - - Total held-to-maturity $ 62,304 $ 12 $ 2,480 $ 59,836 Total $ 132,942 $ 281 $ 4,414 $ 128,809 ============================================== The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity at June 30, 1995, (dollars in thousands) and their weighted average yields: Available-for-Sale Investment Securities - Approximate Fair Value Maturing One After 1 After 5 After year through through ten or less 5 years 10 years years Total U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 9,963 $ 17,862 $ 1,519 $ - $ 29,344 Mortgage-backed securities 1,062 14,350 4,383 3,815 23,610 Obligations of states and political subdivisions 442 6,589 2,231 - 9,262 Other securities - - - 2,105 2,105 Total Available-for-sale Securities $ 11,467 $ 38,801 $ 8,133 $ 5,920 $ 64,321 ================================================ Weighted Average Yield 4.79% 6.08% 7.25% 8.88% Full Tax Equivalent Yield 4.92% 6.55% 8.18% 8.88% ================================================ 17 Held-to Maturity Investment Securities - Book Value Maturing One After 1 After 5 After year through through ten or less 5 years 10 years years Total U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 4,801 $ 35,072 $ 4,982 $ - $ 44,855 Mortgage-backed securities 1,037 12,446 606 1,070 15,159 Obligations of states and political subdivisions 362 2,312 1,333 - 4,007 Other securities - - - - - Total Held-to-maturity Securities $ 6,200 $ 49,830 $ 6,921 $ 1,070 $ 64,021 ================================================ Weighted Average Yield 5.33% 5.09% 4.61% 6.41% Full Tax Equivalent Yield 5.49% 5.21% 5.12% 6.41% ================================================ The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Full tax equivalent yields have been calculated using a 34% tax rate. The maturities of, and yields on, mortgage backed securities have been calculated using actual quarterly repayment history. However, where securities have call features and market values greater than par, the call date has been used to determine the expected maturity. Except for U.S. Treasury securities and obligations of U.S. Government corporations and agencies, no investment in a single issuer exceeds 10% of stockholders' equity at June 30, 1995. Other securities includes stock in the Federal Home Loan Bank totaling $1,699,000 in 1995 and $507,000 in 1994. 18 Loan Quality and Allowance for Loan Losses The following tables provide information relating to the Registrant's loan portfolio, risk elements within the portfolio and historical loan loss experience. The Registrant adopted Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and Statement of Financial Accounting Standards No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure" ("FAS 118") effective January 1, 1995. FAS 114 applies to all creditors and to all loans that are accounted for at fair value or at the lower of cost or fair value. It requires that impaired loans be measured at the present values of expected future cash flows by discounting those cash flows at the loan's effective interest rate. FAS 118 amends FAS 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. FAS 118 also amends the disclosure requirements of FAS 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. The Registrant had no impaired loans as of June 30, 1995. Loan Portfolio The composition of the Registrant's loan portfolio as of June 30, 1995, December 31, 1994 and 1993 is as follows (in thousands): 1995 1994 1993 Commercial, financial and agricultural $ 64,452 $ 61,520 $ 50,353 Real estate - mortgage 203,408 195,524 151,916 Installment loans to individuals 25,929 22,294 16,360 Other 2,016 2,815 4,590 Total Loans $295,805 $282,153 $223,219 ==================================== The following table presents the aggregate balances of loans outstanding as of June 30, 1995, by maturities, based on remaining scheduled, contractual repayments of principal (in thousands): Over 1 One Year Through Over or Less 5 Years 5 Years Total Commercial, financial and agricultural $45,148 $15,170 $ 4,134 $ 64,452 Real estate - mortgage 40,696 99,733 62,979 203,408 Installment loans to individuals 5,771 19,156 1,002 25,929 Other 578 977 461 2,016 Total Loans $92,193 $135,036 $68,576 $295,805 ========================================== As of June 30, 1995, loans with maturities over one year were comprised of $162,466,000 in fixed rate loans and $41,146,000 in variable rate loans. The loan maturities noted previously are based on the contractual provisions of the individual loans. The Registrant has no general policy regarding rollovers and borrower requests for such are handled on a case by case basis. As of June 30, 1995, the Registrant had loan concentrations in agricultural industries of 12.7% of outstanding loans. The Registrant had no other 19 industry loan concentrations in excess of 10% of outstanding loans. There was no foreign activity required to be disclosed for the reporting period ended June 30, 1995. Non-Performing Loans It is the Registrant's policy to discontinue the accrual of interest income on any loan 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. The following table presents information concerning the aggregate amount of nonperforming loans at the dates indicated. Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due 90 days or more as to interest or principal payments; and (c) loans not included in (a) or (b) above which are "restructured loans" as defined in Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Nonperforming Loans (In thousands) June 30, December 31, 1995 1994 1993 1992 1991 Nonaccrual loans $283 $393 $497 $685 $348 Loans past due ninety days or more and still accruing 400 509 248 585 418 Restructured loans which are performing in accordance with revised terms 664 772 307 383 678 ========= ============================== Interest income that would have been reported in 1995 if nonaccrual and restructured loans had been performing totaled $37,900 for the six month period ended June 30, 1995. Interest income that was included in income totaled $11,900 for the same period. Allowance for Loan Losses The provision for loan losses charged to expense was $90,000 for the six months ended June 30, 1995, as compared to $144,000 for the six months ended June 30, 1994, a $54,000 (37.5%) decrease. This decrease is due to reduced loan charge offs, a lower level of problem loans and more favorable economic conditions which allowed the Registrant to reduce the provision and at the same time improve reserve coverage. Management establishes an allowance for loan losses which reduces the total loans outstanding by an estimate of uncollectible loans. Loans deemed to be uncollectible are charged against and reduce the allowance. The provision for loan losses and recoveries are credited to and increase the allowance. The allowance for loan losses totaled $2,696,000 at June 30, 1995, which represented .9% of total loans. The allowance for loan losses equaled 200.1% and 155.8% of total non-performing loans at June 30, 1995 and December 31, 1994, respectively. 20 A summary of loan loss experience for the periods indicated is as follows (dollars in thousands): Six Months Ended Year Ended June 30, December 31, 1995 1994 1993 1992 1991 Average loans outstanding, net of unearned income $284,442 $243,166 $214,408 $178,919 $127,918 Allowance- beginning of year 2,608 2,110 1,906 1,566 1,505 Balance of acquired subsidiary - 343 - 350 - Charge-offs: Commercial, financial and agricultural 15 29 140 298 273 Real estate-mortgage 9 28 241 350 11 Installment 16 120 86 139 132 Other - - - - - Total charge-offs 40 177 467 787 416 Recoveries: Commercial, financial and agricultural 15 98 150 167 57 Real estate-mortgage - 21 3 18 - Installment 23 45 26 49 33 Total recoveries 38 164 179 234 90 Net charge-offs (recoveries) 2 13 288 553 326 Provision for loan losses 90 168 492 543 387 Allowance-end of period $ 2,696 $ 2,608 $ 2,110 $ 1,906 $ 1,566 =========== ======================================= Ratio of net charge-offs (recoveries) to average loans .00% .01% .13% .31% .25% =========== ======================================= Ratio of allowance for loan losses to loans outstanding (less unearned interest) at end of period .91% .93% .95% .89% 1.17% =========== ======================================= The allowance for loan losses represents management's best estimate of the reserve necessary to adequately cover losses that could ultimately be realized from current loan exposures. In determining the adequacy of the allowance for loan losses, management relies predominantly on a disciplined credit review and approval process which extends to the full range of the Registrant's credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, 21 borrowers who might be facing financial difficulty. Once identified, the magnitude of the exposure to individual borrowers is quantified in the form of specific allocation 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 restructured loans and the current and anticipated economic conditions in the region where the Registrant operates. In addition to the aforementioned consideration, management also considers the experience of other banks, thrifts and bank holding companies. The allowance for loan losses, in management's judgment, would be allocated as follows to cover potential loan losses (in thousands): June 30, 1995 December 31, 1994 Allowance % of Allowance % of for loans for loans loan to total loan to total losses loans losses loans Commercial, financial, and agricultural $ 1,433 21.8% $ 1,481 21.8% Real estate-mortgage 336 68.7% 427 69.3% Installment 124 8.8% 100 7.9% Other - .7% - 1.0% Total allocated 1,893 2,008 Unallocated 803 N/A 600 N/A Allowance at end of reported period $ 2,696 100% $ 2,608 100% ===================== ==================== The allowance is allocated to the individual loan categories by a specific reserve for all classified loans plus a percentage of loans not classified based on historical losses. There were no other interest-bearing assets which would be required to be disclosed as having "risk elements" if such other assets were loans. 22 Deposit Base The following table details the year-to-date average deposits for the indicated periods and weighted average rates at June 30, 1995, December 31, 1994 and 1993 (in thousands): June 30, December 31, December 31, 1995 1994 1993 Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate Demand deposits: Non-interest bearing $ 45,180 - $ 37,527 - $ 31,746 - Interest bearing 108,620 2.65% 110,069 2.51% 107,896 2.68% Savings 42,733 2.70% 38,985 2.59% 35,860 2.88% Time deposits 196,972 5.21% 170,252 4.29% 168,724 4.39% Total average deposits $393,505 3.63% $356,833 3.10% $344,226 3.29% =================================================== The following table sets forth the maturity of time certificates of deposit of $100,000 or more at June 30, 1995 (in thousands): Balance 3 months of less $ 16,665 Over 3 through 6 months 5,262 Over 6 through 12 months 4,415 Over 12 months 5,987 Total $ 32,329 =========== There were no time deposits of $100,000 or more that were issued by foreign offices at June 30, 1995. Short-term Borrowings Short-term borrowings at June 30, 1995, December 31, 1994 and December 31, 1993 are shown (in thousands) in the following table: 1995 1994 1993 Securities sold under agreement to repurchase $19,980 $15,590 $ 9,630 Federal Home Loan Bank advances 9,500 3,500 - Federal funds purchased - 500 - Total short-term borrowings $29,480 $19,590 $ 9,630 ============================== Federal Home Loan Bank advances are secured by stock of the Federal Home Loan Bank of Chicago and by residential mortgage loans. 23 Information concerning such borrowings for the periods ended June 30, 1995, December 31, 1994 and December 31, 1993 is as follows (in thousands): 1995 1994 1993 Maximum amount of borrowings outstanding at any month end $29,480 $23,460 $11,390 Average amount outstanding 19,006 13,103 8,843 Weighted average interest rate-end of period 4.19% 3.55% 2.91% Weighted average interest rate during the year 4.87% 3.59% 2.96% ================================= Other Income Other income decreased $61,000 or 3.0% to $1,967,000 in the first six months of 1995 as compared with $2,028,000 in the same period of 1994. The following table sets forth information regarding the major components of and changes in other income (dollars in thousands). Change Six Months Ended June 30, 1995/1994 1995 1994 Amount Percent Trust fees $ 608 $ 638 $ (30) (4.7)% Brokerage and annuity fees 90 217 (127) (58.5) Service charges 749 685 64 9.3 Securities gains, net - 21 (21) (100.0) Mortgage banking income 98 99 (1) (1.0) Other 422 368 54 14.7 Total other income $1,967 $2,028 $ (61) (3.0)% ========================== ================== Revenues from brokerage and annuity fees have declined significantly in 1995 as compared to 1994. During 1994, yields on annuity products were higher, sometimes by as much as 200 basis points, than rates offered on traditional certificates of deposits. During late 1994 and throughout 1995 however, this rate disparity has disappeared as CD yields have increased and annuity yields have decreased. Accordingly, consumer preference has shifted away from the annuity product. Management does not anticipate that annuity sales will increase significantly from their 1995 levels until such time as these products again attain a rate advantage over certificates of deposits. Service charges on deposits consists of fees on both interest bearing and non-interest bearing accounts and charges for other items, including insufficient funds, overdrafts and stop payment requests. Service charges on deposits increased $64,000 or 9.3% for the six month period ended June 30, 1995 as compared with the same period in 1994. During mid-1994, the Registrant adopted a revised schedule for such fees which has resulted in most of the increase. Other income for the second quarter of 1995 decreased $22,000 (2.2%) to $984,000 from $1,006,000 in the second quarter of 1994. Lower brokerage and annuity fees and other income caused a decrease of $101,000 for the Registrant. Offsetting this $101,000 was an increase in trust fees, service 24 charges and mortgage banking income of $7,000, $28,000 and $44,000 respectively. Other Expense Other expense increased $992,000 or 15.7% to $7,323,000 in the first six months of 1995 as compared with $6,331,000 in the first six months of 1994. Most of this increase is attributable to the acquisition of Downstate Bancshares, Inc. that occurred early in the fourth quarter of 1994. Other expense as a percentage of average assets remained stable at 1.6% during the first six months of 1995 and 1994. The following table sets forth information regarding the major components of and changes in other expense (dollars in thousands). Change Six Months Ended June 30, 1995/1994 1995 1994 Amount Percent Salaries and employee benefits $3,726 $3,414 $ 312 9.1% Occupancy, furniture and equipment, net 1,118 940 178 18.9 Federal deposit insurance premiums 442 392 50 12.8 Other 2,037 1,585 452 28.5 Total other expense $7,323 $6,331 $ 992 15.7% ========================== ================ Salaries and employee benefits, the largest component of other expense, increased $312,000 or 9.1% during the first six months of 1995 as compared with the same period in 1994. The increase was due to a rise in the number of employees on staff (as a result of the aforementioned acquisition) during the comparable periods and regular merit increases which affected payroll beginning January 1, 1995. Net occupancy, furniture and equipment expenses increased $178,000 or 18.9% during the first six months of 1995 compared with the same period in 1994. This increase is attributable in part to the additional buildings and fixed assets acquired as a result of the acquisition in the fourth quarter of 1994 and in part to the remodeling of the Mattoon and Charleston banking facilities. FDIC insurance premiums increased $50,000 or 12.8% in the first half of 1995 compared with 1994 entirely due to the increase in deposits. The FDIC premium rate for the Registrant has remained stable at $.23 per $100 of deposits since the last rate increase effective July 1, 1991. Other expense increased $452,000 or 28.5% for the first six months of 1995 as compared with the same period of 1994. This increase is attributable to a $62,000 or 32.4% increase in advertising, donations and public relations expense. ATM expense increased $21,000 or 50.1% due to the addition of several ATMs during the first six months of 1995. Professional fees associated with certain consulting engagements increased $36,000 or 12.0% for the first six months of 1995 as compared with the comparable period of 1994. Amortization expense increased $150,000 or 97.1% due to the additional goodwill from the Downstate acquisition. Other expense for the second quarter of 1995 totaled $3,711,000 as compared 25 to $3,235,000 during the second quarter of 1994. This increase of $476,000 or 14.7% consisted of higher levels in salaries and benefits of $160,000, occupancy expense of $78,000, FDIC premiums of $26,000 and other of $212,000. Income Taxes The Registrant recorded income tax expense of $858,000 for the six months ended June 30, 1995, as compared to $654,000 for the same period in 1994. The effective income tax rate was 31.0% for the six months ended June 30, 1995, as compared with 28.7% in the same period in 1994. Tax exempt interest as a percentage of total interest income declined in 1995, which contributed to the slightly higher tax rates. Income tax expense for the second quarter of 1995 amounted to $453,000 as compared to $329,000 in the second quarter of 1994. The effective tax rate for the second quarter of 1995 was 32.3% as compared to 28.9% for the same period in 1994. Liquidity Liquidity represents the ability of the Registrant and its subsidiaries to meet the present and future requirements of customers for new loans and deposit withdrawals. Liquidity management focuses on the ability to obtain funds economically and to maintain assets which may be converted into cash at minimal costs. The Registrant has provided for its liquidity needs through growth in core deposits, maturing loans and investment securities, and by maintaining adequate balances in other short-term investments. Management continually and carefully monitors its expected liquidity requirements, focusing primarily on cash flows from operating, investing and financing activities. A summary of the Registrant's cash flows from these sources during the three and six month periods ended June 30, 1995 and 1994 follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 Cash Flow provided by (used in): Operating Activities $ 1,494 $ 2,286 $ 3,446 $ 4,517 Investing Activities (8,063) (5,425) (9,573) (6,625) Financing Activities 511 4,850 9,062 (4,728) Total $ (6,058) $ 1,711 $ 2,935 $ (6,836) ==================== ==================== The Registrant's need for liquidity is influenced by several factors. The increased loan demand brought on by the economic expansion in the Registrant's market area and management's strategic objective of originating and retaining loans in Heartland's portfolio. Also affecting the Registrant's cash flow is its relationship with seasonal customers such as public entities, highway contractors and those associated with the agricultural industry. Capital Resources The Registrant and its subsidiaries have capital ratios which are above the fully-phased in regulatory capital requirements. The requirements call for a minimum total risk-based capital ratio of 8% and a minimum leverage ratio of 3% for the most highly rated banks that do not expect significant growth. 26 All other institutions are required to maintain a ratio of Tier 1 capital to total assets of 4% to 5% depending on their particular circumstances and risk profiles. At June 30, 1995, the Registrant's leverage ratio was 5.96%. A tabulation of the Registrant's and its subsidiaries' risk-based capital ratios as of June 30, 1995, follows: Tier One Risk-Based Total Risk-Based Capital Ratio Capital Ratio First Mid-Illinois Bancshares, Inc. 10.08% 11.07% First Mid-Illinois Bank & Trust, N.A. 11.90% 12.96% Heartland Savings Bank 16.28% 16.94% =============================== Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. These ratios are well in excess of regulatory minimums and will allow the Registrant to operate without capital adequacy concerns. Operating Ratios The following table presents selected financial ratios for the six months ended June 30, 1995 (annualized) and the years ended December 31, 1994 and 1993: 1995 1994 1993 Return on average total assets .84% .83% .85% Return on average stockholders' equity 11.91% 11.35% 11.80% Dividend payout ratio 18.75% 20.89% 21.40% Average total equity to average assets ratio 7.04% 7.38% 7.17% ============================ 27 PART II - OTHER INFORMATION Item 1. Legal Proceedings. There are no material pending legal proceedings to which the Registrant or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. Item 2. Changes in Securities. Not applicable. Item 3. Defaults upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. On May 17, 1995, the Annual Meeting of Stockholders was held. At the meeting, Charles A. Adams, Daniel E. Marvin, Jr. and Ray Anthony Sparks were elected to serve as Class III directors with term expiring in 1998. Continuing Class I directors (term expires in 1996) are Kenneth R. Diepholz and Gary W. Melvin and continuing Class II directors (term expires in 1997) are Richard Anthony Lumpkin, William G. Roley and William S. Rowland. The stockholders also ratified the appointment of KPMG Peat Marwick, LLP as the Registrant's independent public accountants for the year ending December 31, 1995. There were 885,140 issued and outstanding shares of Common Stock at the time of the Annual Meeting. The voting on each item presented at the meeting was as follows: Election of Directors For Withheld Charles A. Adams 794,287 3,996 Daniel E. Marvin, Jr. 794,287 3,996 Ray Anthony sparks 793,887 4,396 The stockholders also voted to ratify the appointment of the Registrant's auditors. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27. Financial Data Schedule (b) Form 8-K None filed during the three month period ended June 30, 1995. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MID-ILLINOIS BANCSHARES, INC. (Registrant) Date: July 31, 1995 /s/ Daniel E. Marvin, Jr. ____________________ _____________________________________ Daniel E. Marvin, Jr. President and Chief Executive Officer Date: July 31, 1995 /s/ William S. Rowland ____________________ ____________________________________ William S. Rowland Chief Financial Officer 29