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FIRST MID BANCSHARES, INC. - Quarter Report: 2018 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
Or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 incorporation or organization)
(I.R.S. employer identification no.)
 
1421 Charleston Avenue,
 
Mattoon, Illinois
61938
(Address of principal executive offices)
(Zip code)
 
(217) 234-7454
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the 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 by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes [X ]  No [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer [  ]
Accelerated filer [X]
Non-accelerated filer [  ]
(Do not check if a smaller reporting company)
Smaller reporting company [  ]
 
 
Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  [  ] Yes  [X] No

As of November 8, 2018, 15,297,425 common shares, $4.00 par value, were outstanding.





PART I

ITEM 1.  FINANCIAL STATEMENTS
 
 
 
First Mid-Illinois Bancshares, Inc.
 
 
 
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
(In thousands, except share data)
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Cash and due from banks:
 
 
 
Non-interest bearing
$
53,388

 
$
75,398

Interest bearing
10,435

 
12,990

Federal funds sold
662

 
491

Cash and cash equivalents
64,485

 
88,879

Certificates of deposit investments
2,183

 
1,685

Investment securities:
 

 
 

Available-for-sale, at fair value
599,080

 
578,579

Held-to-maturity, at amortized cost (estimated fair value of $67,395 and $68,457 at September 30, 2018 and December 31, 2017, respectively)
69,409

 
69,332

Loans held for sale
940

 
1,025

Loans
2,399,220

 
1,938,476

Less allowance for loan losses
(23,839
)
 
(19,977
)
Net loans
2,375,381

 
1,918,499

Interest receivable
14,928

 
10,832

Other real estate owned
2,093

 
2,754

Premises and equipment, net
47,327

 
38,266

Goodwill, net
86,641

 
60,150

Intangible assets, net
15,373

 
10,679

Bank owned life insurance
51,443

 
41,883

Other assets
26,194

 
18,976

Total assets
$
3,355,477

 
$
2,841,539

Liabilities and Stockholders’ Equity
 

 
 

Deposits:
 

 
 

Non-interest bearing
$
493,935

 
$
480,283

Interest bearing
2,157,462

 
1,794,356

Total deposits
2,651,397

 
2,274,639

Securities sold under agreements to repurchase
98,875

 
155,388

Interest payable
1,400

 
602

FHLB borrowings
120,736

 
60,038

Other borrowings
29,500

 
10,313

Junior subordinated debentures
28,958

 
24,000

Other liabilities
7,778

 
8,595

Total liabilities
2,938,644

 
2,533,575

Stockholders’ Equity:
 

 
 

Common stock, $4 par value; authorized 30,000,000 shares; issued 15,867,990 and 13,231,225 shares in 2018 and 2017, respectively
65,472

 
54,925

Additional paid-in capital
250,484

 
163,603

Retained earnings
126,955

 
104,683

Deferred compensation
2,553

 
3,540

Accumulated other comprehensive loss
(12,173
)
 
(2,304
)
Less treasury stock at cost, 573,065 shares in 2018 and 570,477 shares in 2017
(16,458
)
 
(16,483
)
Total stockholders’ equity
416,833

 
307,964

Total liabilities and stockholders’ equity
$
3,355,477

 
$
2,841,539


See accompanying notes to unaudited condensed consolidated financial statements.



2






First Mid-Illinois Bancshares, Inc.
 
 
 
Condensed Consolidated Statements of Income (unaudited)
 
(In thousands, except per share data)
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
28,850

 
$
20,385

 
$
75,219

 
$
61,337

Interest on investment securities
4,511

 
4,179

 
13,271

 
12,585

Interest on certificates of deposit investments
13

 
9

 
34

 
41

Interest on federal funds sold
2

 
1

 
5

 
62

Interest on deposits with other financial institutions
112

 
40

 
248

 
217

Total interest income
33,488

 
24,614

 
88,777

 
74,242

Interest expense:
 

 
 

 
 

 
 

Interest on deposits
2,217

 
1,028

 
5,149

 
2,840

Interest on securities sold under agreements to repurchase
72

 
51

 
196

 
137

Interest on FHLB borrowings
559

 
283

 
1,309

 
602

Interest on other borrowings
148

 
143

 
374

 
385

Interest on subordinated debentures
405

 
236

 
1,013

 
680

Total interest expense
3,401

 
1,741

 
8,041

 
4,644

Net interest income
30,087

 
22,873

 
80,736

 
69,598

Provision for loan losses
2,551

 
1,489

 
5,483

 
5,051

Net interest income after provision for loan losses
27,536

 
21,384

 
75,253

 
64,547

Other income:
 

 
 

 
 

 
 

Trust revenues
919

 
925

 
2,934

 
2,696

Brokerage commissions
660

 
536

 
1,986

 
1,550

Insurance commissions
877

 
670

 
3,202

 
3,148

Service charges
2,009

 
1,758

 
5,447

 
5,160

Securities gains, net

 
254

 
901

 
589

Mortgage banking revenue, net
368

 
347

 
939

 
875

ATM / debit card revenue
1,979

 
1,595

 
5,443

 
4,828

Bank owned life insurance
342

 
792

 
933

 
1,355

Other
765

 
784

 
1,982

 
2,925

Total other income
7,919

 
7,661

 
23,767

 
23,126

Other expense:
 

 
 

 
 

 
 

Salaries and employee benefits
11,600

 
9,648

 
32,851

 
29,685

Net occupancy and equipment expense
3,530

 
3,129

 
10,308

 
9,378

Net other real estate owned expense (income)
(61
)
 
385

 
22

 
530

FDIC insurance
174

 
210

 
740

 
679

Amortization of intangible assets
838

 
545

 
2,059

 
1,651

Stationery and supplies
328

 
168

 
725

 
539

Legal and professional
1,071

 
871

 
3,925

 
2,596

Marketing and donations
468

 
338

 
1,253

 
909

Other
6,542

 
2,618

 
11,777

 
9,102

Total other expense
24,490

 
17,912

 
63,660

 
55,069

Income before income taxes
10,965

 
11,133

 
35,360

 
32,604

Income taxes
2,731

 
3,538

 
8,699

 
10,545

Net income
$
8,234

 
$
7,595

 
$
26,661

 
$
22,059

Per share data:
 

 
 

 
 

 
 

Basic net income per common share available to common stockholders
$
0.54

 
$
0.61

 
$
1.91

 
$
1.76

Diluted net income per common share available to common stockholders
$
0.54

 
$
0.61

 
$
1.90

 
$
1.76

Cash dividends declared per common share
$

 
$

 
$
0.34

 
$
0.32


See accompanying notes to unaudited condensed consolidated financial statements.


3






First Mid-Illinois Bancshares, Inc.
 
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (unaudited)
 
 
 
(in thousands)
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
8,234

 
$
7,595

 
$
26,661

 
$
22,059

Other Comprehensive Income (Loss)
 

 
 

 
 

 
 

Unrealized gains (losses) on available-for-sale securities, net of taxes of $1,191 and $327 for three months ended September 30, 2018 and 2017, respectively and $3,796 and $(5,154) for nine months ended September 30, 2018 and 2017, respectively.
(2,919
)
 
(512
)
 
(9,289
)
 
8,068

Amortized holding losses on held-to-maturity securities transferred from available-for-sale, net of taxes of $(8) and $(11) for three months ended September 30, 2018 and 2017, respectively and $(25) and $(32) for nine months ended September 30, 2018 and 2017, respectively.
20

 
16

 
60

 
51

Less: reclassification adjustment for realized gains included in net income, net of taxes of $0 and $99 for three months ended September 30, 2018 and 2017, respectively and $261 and $230 for nine months ended September 30, 2018 and 2017, respectively.

 
(155
)
 
(640
)
 
(359
)
Other comprehensive income (loss), net of taxes
(2,899
)
 
(651
)
 
(9,869
)
 
7,760

Comprehensive income
$
5,335

 
$
6,944

 
$
16,792

 
$
29,819


See accompanying notes to unaudited condensed consolidated financial statements.




4






First Mid-Illinois Bancshares, Inc.
 
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30,
(In thousands)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
26,661

 
$
22,059

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan losses
5,483

 
5,051

Depreciation, amortization and accretion, net
5,431

 
6,241

Change in cash surrender value of bank owned life insurance
(933
)
 
(844
)
Stock-based compensation expense
242

 
300

Gains on investment securities, net
(901
)
 
(589
)
(Gain) loss on sales of repossessed assets, net
(62
)
 
349

Loss on write down of premises and equipment
26

 
337

Gains on sale of loans held for sale, net
(796
)
 
(809
)
Decrease in accrued interest receivable
(1,767
)
 
(323
)
Increase in accrued interest payable
541

 
38

Origination of loans held for sale
(48,214
)
 
(45,076
)
Proceeds from sale of loans held for sale
49,095

 
44,981

Decrease in other assets
575

 
2,475

Decrease in other liabilities
(8,941
)
 
(1,421
)
Net cash provided by operating activities
26,440

 
32,769

Cash flows from investing activities:
 

 
 

Proceeds from maturities of certificates of deposit investments
747

 
12,958

Proceeds from sales of securities available-for-sale
13,152

 
96,184

Proceeds from maturities of securities available-for-sale
40,476

 
52,894

Purchases of securities available-for-sale
(30,082
)
 
(134,807
)
Net increase in loans
(99,308
)
 
(49,198
)
Purchases of premises and equipment
(1,765
)
 
(1,304
)
Proceeds from sales of other real property owned
1,490

 
5,356

Net cash provided by acquisition
10,323

 

Net cash used in investing activities
(64,967
)
 
(17,917
)
Cash flows from financing activities:
 
 
 

Net decrease in deposits
(8,866
)
 
(112,410
)
Increase in federal funds purchased
22,000

 
20,000

Decrease in repurchase agreements
(56,513
)
 
(69,403
)
Proceeds from FHLB advances
45,000

 
52,000

Repayment of FHLB advances
(15,000
)
 
(5,000
)
Repayment from short-term debt

 
(6,813
)
Repayment of long-term debt
(2,813
)
 

Proceeds from issuance of common stock
36,519

 
4,195

Direct expenses related to capital transactions
(2,243
)
 
(213
)
Purchase of treasury stock
(95
)
 

Dividends paid on common stock
(3,856
)
 
(3,467
)
Net cash provided by (used in) financing activities
14,133

 
(121,111
)
Decrease in cash and cash equivalents
(24,394
)
 
(106,259
)
Cash and cash equivalents at beginning of period
88,879

 
175,902

Cash and cash equivalents at end of period
$
64,485

 
$
69,643



5






First Mid-Illinois Bancshares, Inc.
 
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30,
(In thousands)
2018
 
2017
 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
7,243

 
$
4,627

Income taxes
7,919

 
7,969

Supplemental disclosures of noncash investing and financing activities
 

 
 

Loans transferred to other real estate owned
224

 
5,317

Dividends reinvested in common stock
533

 
527

Net tax benefit related to option and deferred compensation plans
160

 
221

Supplemental disclosure of purchase of capital stock of First Bank
 
 
 
Fair value of assets acquired
$
501,285

 
$

Consideration paid:
 
 
 
     Cash paid
10,275

 

     Common stock issued
61,350

 

Total consideration paid
71,625

 

Fair value of liabilities assumed
$
429,660

 
$


See accompanying notes to unaudited condensed consolidated financial statements.


6






Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 1 --  Basis of Accounting and Consolidation

The unaudited condensed consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. (“Company”) and its wholly-owned subsidiaries:  First Mid Bank & Trust, N.A. (“First Mid Bank”), formerly known as First Mid-Illinois Bank & Trust, N.A., First Mid Wealth Management, Mid-Illinois Data Services, Inc. (“MIDS”) and The Checkley Agency, Inc. doing business as First Mid Insurance Group (“First Mid Insurance”).  All significant intercompany balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended September 30, 2018 and 2017, and all such adjustments are of a normal recurring nature.  Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the September 30, 2018 presentation and there was no impact on net income or stockholders’ equity.  The results of the interim period ended September 30, 2018 are not necessarily indicative of the results expected for the year ending December 31, 2018. The Company operates as a one-segment entity for financial reporting purposes.

The 2017 year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and related footnote disclosures although the Company believes that the disclosures made are adequate to make the information not misleading.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2017 Annual Report on Form 10-K.

Website

The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission (“SEC”) can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC.

Capital Raise

On June 13, 2018, the Company and First Mid Bank, entered into an underwriting agreement (the “Underwriting Agreement”) with FIG Partners, LLC, as the representative of the several underwriters named therein (the “Underwriters”), pursuant to which the Company agreed to issue and sell to the Underwriters and the Underwriters agreed to purchase, subject to and upon the terms and conditions of the Underwriting Agreement, an aggregate of 823,799 shares of the Company’s common stock, par value $4.00 per share, at a public offering price of $38.00 per share, in an underwritten public offering (the “Offering”). The Company granted the Underwriters an option for a period of 30 days after the date of the Underwriting Agreement to purchase up to an additional 123,569 shares of common stock at the public offering price, less discounts and commissions. The Underwriters exercised their option in full on June 13, 2018, resulting in 947,368 shares of common stock being offered in the Offering. The Offering closed on June 15, 2018. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $34.0 million.

First BancTrust Corporation

On December 11, 2017, the Company and Project Hawks Merger Sub LLC (formerly known as Project Hawks Merger Sub Corp.), a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Hawks Merger Sub”), entered into an Agreement and Plan of Merger (as amended as of January 18, 2018, the “First Bank Merger Agreement") with First BancTrust Corporation, a Delaware corporation (“First Bank”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of First Bank pursuant to a business combination whereby First Bank merged with and into Hawks Merger Sub, with Hawks Merger Sub as the surviving entity and a wholly-owned subsidiary of the Company (the “First Bank Merger”).


7







Subject to the terms and conditions of the First Bank Merger Agreement, at the effective time of the First Bank Merger, each share of common stock, par value $0.01 per share, of First Bank issued and outstanding immediately prior to the effective time of the First Bank Merger (other than shares held in treasury by First Bank and shares held by stockholders who have properly made and not withdrawn a demand for appraisal rights under Delaware law) converted into and become the right to receive, (a) $5.00 in cash and (b) 0.800 shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld and subject to certain adjustments, all as set forth in the First Bank Merger Agreement.

The First Bank Merger closed on May 1, 2018 and the Company issued an aggregate total of 1,643,900 shares of common stock paying approximately $10,275,000, including cash in lieu of fractional shares. The accounting for the First Bank Merger is presented in Note 8 to the consolidated financial statements. First Bank’s wholly-owned bank subsidiary, First Bank & Trust, merged with and into the Company’s wholly owned bank subsidiary, First Mid Bank, on August 10, 2018. At the time of the bank merger, First Bank & Trust’s banking offices became branches of First Mid Bank.

SCB Bancorp, Inc.

On June 12, 2018, The Company and Project Almond Merger Sub LLC, a newly formed Illinois limited liability company and wholly-owned subsidiary of the Company (“Almond Merger Sub”), entered into an Agreement and Plan of Merger (the “SCB Merger Agreement”) with SCB Bancorp, Inc., an Illinois corporation (“SCB”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of SCB pursuant to a business combination whereby SCB will merge with and into Almond Merger Sub, whereupon the separate corporate existence of SCB will cease and Merger Sub will continue as the surviving company and a wholly-owned subsidiary of the Company (the “SCB Merger”).

Subject to the terms and conditions of the SCB Merger Agreement, at the effective time of the SCB Merger, each share of common stock, par value $7.50 per share, of SCB issued and outstanding immediately prior to the effective time of the SCB Merger (other than shares held in treasury by SCB and shares held by stockholders who have properly made and not withdrawn a demand for appraisal rights under Illinois law) will be converted into and become the right to receive, at the election of each stockholder, either $307.93 in cash or 8.0228 shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld and subject to certain potential adjustments. Overall elections are subject to proration such that, depending on the number of shares of SCB common stock electing shares of the Company’s common stock, between 19 and 32.5 percent of the SCB shares will be exchanged for cash, and between 67.5 and 81 percent will be exchanged for the Company’s common stock. Additionally, SCB’s outstanding stock options will be fully vested upon consummation of the SCB Merger, and all outstanding SCB options that are unexercised prior to the effective time of the SCB Merger will be cashed out. In addition, immediately prior to the closing of the proposed merger, SCB will pay a special dividend to its shareholders in the aggregate amount of approximately $25 million. The SCB Merger is subject to customary closing conditions, including the approval of the appropriate regulatory authorities and of the stockholders of SCB. The SCB Merger is anticipated to be completed in November 2018.

It is anticipated that SCB’s wholly-owned bank subsidiary, Soy Capital Bank and Trust Company (“Soy Capital Bank”), will be merged with and into First Mid Bank at a date following completion of the Merger. At the time of the bank merger, Soy Capital Bank’s banking offices will become branches of First Mid Bank.

At-The-Market Program

On August 16, 2017, the Company entered into a Sales Agency Agreement, pursuant to which the Company may sell, from time to time, up to an aggregate of $20 million of its common stock. Shares of common stock are offered pursuant to the Company's shelf registration statement filed within the SEC. During the nine months ended September 30, 2018, the company sold no shares of common stock under the program. As of September 30, 2018, approximately $16.53 million of common stock remained available for issuance under the At The Market program.






8






Bank Owned Life Insurance

First Mid Bank has purchased life insurance policies on certain senior management. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts that are probable at settlement.

Stock Plans

At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the First Mid-Illinois Bancshares, Inc. 2017 Stock Incentive Plan (“SI Plan”).  The SI Plan was implemented to succeed the Company’s 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its subsidiaries, thereby advancing the interests of the Company and its stockholders.  Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of common stock of the Company on the terms and conditions established in the SI Plan.

A maximum of 149,983 shares of common stock may be issued under the SI Plan. There have been no stock options awarded under any Company plan since 2008. The Company has awarded 13,250 shares of restricted stock during 2018 and 15,450 and 18,391 restricted stock units during 2018 and 2017, respectively.

Employee Stock Purchase Plan

At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”).  The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code.  A maximum of 600,000 shares of common stock may be issued under the ESPP.  

General Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.

Revenue Recognition

Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), establishes a revenue recognition model for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. Most of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans and investment securities, and revenue related to mortgage servicing activities, which are subject to other accounting standards. A description of the revenue-generating activities that are within the scope of ASC 606, and included in other income in the Company’s condensed consolidated statements of income are as follows:

Trust revenues. The Company generates fee income from providing fiduciary services through its trust department. Fees are billed in arrears based upon the preceding period account balance. Revenue from the farm management department is recorded when service is complete, for example when crops are sold.

Brokerage commissions. The primary brokerage revenue is recorded at the beginning of each quarter through billing to customers based on the account asset size on the last day of the previous quarter. If a withdrawal of funds takes place, a prorated refund may occur; this is reflected within the same quarter as the original billing occurred. All performance obligations are met within the same quarter that the revenue is recorded.



9






Insurance commissions. The Company’s insurance agency subsidiary, First Mid Insurance Group (“FMIG”), receives commissions on premiums of new and renewed business policies. FMIG records commission revenue on direct bill policies as the cash is received. For agency bill policies, FMIG retains its commission portion of the customer premium payment and remits the balance to the carrier. In both cases, the entire performance obligation is held by the carriers.

Service charges on deposits. The Company generates revenue from fees charged for deposit account maintenance, overdrafts, wire transfers, and check fees. The revenue related to deposit fees is recognized at the time the performance obligation is satisfied.

ATM/debit card revenue. The Company generates revenue through service charges on the use of its ATM machines and interchange income from the use of Company issued credit and debit cards. The revenue is recognized at the time the service is used and the performance obligation is satisfied.

Other income. Treasury management fees and lock box fees are received and recorded after the service performance obligation is completed. Merchant bank card fees are received from various vendors, however the performance obligation is with the vendors. The Company records gains on the sale of loans and the sale of OREO properties after the transactions are complete and transfer of ownership has occurred.

As each of the Company’s facilities is located in markets with similar economies, no disaggregation of revenue is necessary.

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) included in stockholders’ equity as of September 30, 2018 and December 31, 2017 are as follows (in thousands):

 
Unrealized Gain (Loss) on
Securities
 
Securities with Other-Than-Temporary Impairment Losses
 
Total
September 30, 2018
 
 
 
 
 
Net unrealized losses on securities available-for-sale
$
(16,949
)
 
$

 
$
(16,949
)
Unamortized losses on held-to-maturity securities transferred from available-for-sale
(197
)
 

 
(197
)
Securities with other-than-temporary impairment losses

 

 

Tax benefit
4,973

 

 
4,973

Balance at September 30, 2018
$
(12,173
)
 
$

 
$
(12,173
)
December 31, 2017
 
 
 
 
 
Net unrealized losses on securities available-for-sale
$
(2,619
)
 
$

 
$
(2,619
)
Unamortized losses on held-to-maturity securities transferred from available-for-sale
(281
)
 

 
(281
)
Securities with other-than-temporary impairment losses

 
(345
)
 
(345
)
Tax benefit
841

 
100

 
941

Balance at December 31, 2017
$
(2,059
)
 
$
(245
)
 
$
(2,304
)



10






Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the nine months ended September 30, 2018 and 2017, were as follows (in thousands):
 
Amounts Reclassified from Other Comprehensive Income
Affected Line Item in the Statements of Income
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Realized gains on available-for-sale securities
$

 
$
254

 
$
901

 
$
589

Securities gains, net
 
 
 
 
 
 
 
 
(Total reclassified amount before tax)
 

 
(99
)
 
(261
)
 
(230
)
Income taxes
Total reclassifications out of accumulated other comprehensive income
$

 
$
155

 
$
640

 
$
359

Net reclassified amount

See “Note 3 – Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.


Adoption of New Accounting Guidance

Accounting Standards Update 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification ("ASU 2017-09"). In May 2017, FASB issued ASU 2017-09. This update provides guidance on determining which changes to the terms and conditions of share-based payment awards require the application of modification accounting under Topic 718. The guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments should be applied on a prospective basis to an award modified on or after adoption date. ASU 2017-09 did not have a significant impact on the Company's consolidated financial statement.

Accounting Standards Update 2017-08, Receivables-Nonrefundable Fees and Other Costs ("ASU 2017-08"). In March 2017, FASB issued ASU 2017-08. This update amends the amortization period for certain purchased callable debt securities held at a premium. The update shortens the premium's amortization period to the earliest call date to more closely align the amortization period of premiums to expectations incorporated in market pricing on the underlying securities. For public companies, the update is effective for annual periods beginning after December 15, 2018, and is to be applied on a modified retrospective basis with a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU 2017-08 early and there was not a significant impact on the Company's consolidated financial statements.

Accounting Standards Update 2017-04, Intangibles--Goodwill and Other (Topic 350: Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). In January 2017, FASB issued ASU 2017-04. The amendments in this update simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public companies for the reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Although the Company cannot anticipate future goodwill impairment, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate a material impact on the Company's consolidated financial statements. The current accounting policies and procedures of the Company are not anticipated to change, except for the elimination of the Step 2 analysis.



11






Accounting Standards Update 2016-08, Revenue from Contracts with Customers (Topic 606) (“ASU 2016-08"). In March 2016, the FASB issued ASU 2016-08 which amended the accounting guidance issued by the FASB in May 2014 that revised the criteria for determining when to recognize revenue from contracts with customers and expanded disclosure requirements. The amendment defers the effective date by one year. This accounting guidance can be implemented using either a retrospective method or a cumulative-effect approach. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams.

Accounting Standards Update 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). In January 2016, FASB issued ASU 2016-01 which amends prior guidance to require an entity to measure its equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of same issuer. The new guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The new guidance is effective for reporting periods after January 1, 2018 and did not have a significant impact on the Company's consolidated financial statements other than adoption of the standard resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis. See Note 7 - Fair Value of Assets and Liabilities for further information regarding the valuation of these loans.


Pending New Accounting Guidance

Accounting Standards Update 2016-02, Leases (Topic 842) ("ASU 2016-02"). On February 25, 2016, FASB issued ASU 2016-02 which creates Topic 842, Leases and supersedes Topic 840, Leases. ASU 2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among organizations. Under the new guidance, a lessee will be required to record all leases with lease terms of more than 12 months on their balance sheet as lease liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new guidance will be effective for public companies for fiscal years beginning on or after December 15, 2018, and for private companies for fiscal years beginning on or after December 15, 2019. Early adoption is permitted for all entities. Management continues to evaluate the impact ASU 2016-02 will have on the Company's consolidated financial statements. Upon adoption of the guidance, the Company expects to report increased assets and increased liabilities as a result of recognizing right-of-use assets and lease liabilities on its consolidated balance sheet. However, the determination of the final amount is dependent on the terms of leases in effect and the level of interest rates on January 1, 2019.  The Company does not expect the new guidance will have a material impact on its consolidated statement of income.

Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”). In June 2016, FASB issued ASU 2016-13. The provisions of ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.


12






Management has formed an internal committee to evaluate implementation steps and assess the impact ASU 2016-13 will have on the Company’s consolidated financial statements. The committee has assigned roles and responsibilities, key tasks to complete, and has established a general timeline for implementation. The Company has also engaged an outside consultant to assist with the methodology review and data validation, as well as other key aspects of implementing the standard. The committee meets periodically to discuss the latest developments and ensure progress is being made. The team also keeps current on evolving interpretations and industry practices related to ASU 2016-13. The committee continues to evaluate and validate data resources and different loss methodologies. The committee is still evaluating the impact ASU 2016-13 will have on the Company's consolidated financial statements.

Accounting Standards Update 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”).  In August 2018, FASB issued ASU 2018-13. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, an entity will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.



13






Note 2 -- Earnings Per Share

Basic net income per common share available to common stockholders is calculated as net income less preferred stock dividends divided by the weighted average number of common shares outstanding.  Diluted net income per common share available to common stockholders is computed using the weighted average number of common shares outstanding, increased by the Company’s stock options, unless anti-dilutive.

The components of basic and diluted net income per common share available to common stockholders for the three and nine-month period ended September 30, 2018 and 2017 were as follows:

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Basic Net Income per Common Share
 
 
 
 
 
 
 
Available to Common Stockholders:
 
 
 
 
 
 
 
Net income
$
8,234,000

 
$
7,595,000

 
$
26,661,000

 
$
22,059,000

Weighted average common shares outstanding
15,290,539
 
12,528,674
 
13,982,339
 
12,498,913
Basic earnings per common share
$
0.54

 
$
0.61

 
$
1.91

 
$
1.76

Diluted Net Income per Common Share
 
 
 
 
 
 
 
Available to Common Stockholders:
 
 
 
 
 
 
 
Net income applicable to diluted earnings per share
8,234,000

 
7,595,000

 
$
26,661,000

 
$
22,059,000

Weighted average common shares outstanding
15,290,539

 
12,528,674

 
13,982,339

 
12,498,913

Dilutive potential common shares:
 
 
 
 
 
 
 
Assumed conversion of stock options
2,429

 
6,299

 
3,570

 
6,827

Restricted stock awarded
13,250

 
836

 
13,250

 
836

Dilutive potential common shares
15,679

 
7,135

 
16,820

 
7,663

Diluted weighted average common shares outstanding
15,306,218

 
12,535,809

 
13,999,159

 
12,506,576

Diluted earnings per common share
$
0.54

 
$
0.61

 
$
1.90

 
$
1.76



There were no shares not considered in computing diluted earnings per share for the three and nine-month periods ended September 30, 2018 and 2017 because they were anti-dilutive.
 



14






Note 3 -- 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 September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
September 30, 2018
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations & agencies
$
127,365

 
$

 
$
(4,696
)
 
$
122,669

Obligations of states and political subdivisions
176,273

 
570

 
(3,497
)
 
173,346

Mortgage-backed securities: GSE residential
310,122

 
132

 
(9,585
)
 
300,669

Other securities
2,269

 
127

 

 
2,396

Total available-for-sale
$
616,029

 
$
829

 
$
(17,778
)
 
$
599,080

Held-to-maturity:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations & agencies
$
69,409

 
$

 
$
(2,014
)
 
$
67,395

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations & agencies
$
115,796

 
$
8

 
$
(2,034
)
 
$
113,770

Obligations of states and political subdivisions
165,037

 
2,254

 
(1,025
)
 
166,266

Mortgage-backed securities: GSE residential
295,778

 
493

 
(2,460
)
 
293,811

Trust preferred securities
2,893

 

 
(345
)
 
2,548

Other securities
2,039

 
145

 

 
2,184

Total available-for-sale
$
581,543

 
$
2,900

 
$
(5,864
)
 
$
578,579

Held-to-maturity:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations & agencies
$
69,332

 
$
103

 
$
(978
)
 
$
68,457


Trust preferred securities represents one trust preferred pooled security issued by First Tennessee Financial (“FTN”). This security was sold during the second quarter of 2018.

Realized gains and losses resulting from sales of securities were as follows during the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Gross gains
$

 
$
394

 
$
941

 
$
746

Gross losses

 
(140
)
 
(40
)
 
(157
)





15






The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity presented at amortized cost, at September 30, 2018 and the weighted average yield for each range of maturities (dollars in thousands):
 
One year or less
 
After 1 through 5 years
 
After 5 through 10 years
 
After ten years
 
Total
Available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
85,272

 
$
37,397

 
$

 
$

 
$
122,669

Obligations of state and political subdivisions
16,847

 
78,561

 
76,890

 
1,048

 
173,346

Mortgage-backed securities: GSE residential
4

 
120,920

 
179,745

 

 
300,669

Other securities

 
2,015

 

 
381

 
2,396

Total available-for-sale investments
$
102,123

 
$
238,893

 
$
256,635

 
$
1,429

 
$
599,080

Weighted average yield
2.34
%
 
2.76
%
 
2.95
%
 
3.12
%
 
2.77
%
Full tax-equivalent yield
2.51
%
 
3.12
%
 
3.31
%
 
4.16
%
 
3.10
%
Held to Maturity:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
39,994

 
$
29,415

 
$

 
$

 
$
69,409

Weighted average yield
1.76
%
 
2.08
%
 
%
 
%
 
1.90
%
Full tax-equivalent yield
1.76
%
 
2.08
%
 
%
 
%
 
1.90
%

The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent yields have been calculated using a 21% 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 September 30, 2018.

Investment securities carried at approximately $575 million and $479 million at September 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.



16






The following table presents the aging of gross unrealized losses and fair value by investment category as of September 30, 2018 and December 31, 2017 (in thousands):
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
67,162

 
$
(1,957
)
 
$
55,507

 
$
(2,739
)
 
$
122,669

 
$
(4,696
)
Obligations of states and political subdivisions
101,192

 
(2,338
)
 
18,856

 
(1,159
)
 
120,048

 
(3,497
)
Mortgage-backed securities: GSE residential
234,958

 
(8,724
)
 
45,257

 
(861
)
 
280,215

 
(9,585
)
Total
$
403,312

 
$
(13,019
)
 
$
119,620

 
$
(4,759
)
 
$
522,932

 
$
(17,778
)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
24,510

 
$
(340
)
 
$
42,885

 
$
(1,674
)
 
$
67,395

 
$
(2,014
)
December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
58,584

 
$
(540
)
 
$
47,972

 
$
(1,494
)
 
$
106,556

 
$
(2,034
)
Obligations of states and political subdivisions
42,618

 
(769
)
 
9,267

 
(256
)
 
51,885

 
(1,025
)
Mortgage-backed securities: GSE residential
187,949

 
(1,942
)
 
22,609

 
(518
)
 
210,558

 
(2,460
)
Trust preferred securities

 

 
2,548

 
(345
)
 
2,548

 
(345
)
Total
$
289,151

 
$
(3,251
)
 
$
82,396

 
$
(2,613
)
 
$
371,547

 
$
(5,864
)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
34,101

 
$
(525
)
 
$
14,540

 
$
(453
)
 
$
48,641

 
$
(978
)


U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At September 30, 2018 there were fourteen available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $55,507,000 and unrealized losses of $2,739,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017 , there were eleven available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $47,972,000 and unrealized losses of $1,494,000 in a continuous unrealized loss position for twelve months or more. At September 30, 2018 there were eight held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $42,885,000 and unrealized losses of $1,674,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017 there were seven held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $14,540,000 and unrealized losses of $453,000 in a continuous unrealized loss position for twelve months or more.

Obligations of states and political subdivisions.  At September 30, 2018 there were forty-one obligations of states and political subdivisions with a fair value of $18,856,000 and unrealized losses of $1,159,000 in a continuous loss position for twelve months or more. At December 31, 2017, there were thirty-nine obligations of states and political subdivisions with a fair value of $9,267,000 and unrealized losses of $256,000 in a continuous unrealized loss position for twelve months or more.

Mortgage-backed Securities: GSE Residential. At September 30, 2018 there were thirty-two mortgage-backed securities with a fair value of $45,257,000 and unrealized losses of $861,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017, there were twenty-six mortgage-backed securities with a fair value of $22,609,000 and unrealized losses of $518,000 in a continuous unrealized loss position for twelve months or more.


17







Trust Preferred Securities. At December 31, 2017, there was one trust preferred security with a fair value of $2,548,000 and unrealized loss of $345,000 in a continuous unrealized loss position for twelve months or more. The unrealized loss was primarily due to the long-term nature of the trust preferred security, a lack of demand or inactive market for the security, the impending change to the regulatory treatment of these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities. The company sold this security during the second quarter of 2018.

Other securities. At September 30, 2018 and December 31, 2017, there were no other securities in a continuous unrealized loss position for twelve months or more.

The Company does not believe any other individual unrealized loss as of September 30, 2018 represents OTTI. However, given the continued disruption in the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the other-than-temporary impairment is identified.

Other-than-temporary Impairment. Upon acquisition of a security, the Company determines whether it is within the scope of the accounting guidance for investments in debt and equity securities or whether it must be evaluated for impairment under the accounting guidance for beneficial interests in securitized financial assets.

If the Company determines that a given pooled trust preferred security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

Credit Losses Recognized on Investments. The following table provides information about the trust preferred security for which only a credit loss was recognized in income and other losses were recorded in other comprehensive income (loss) for the nine months ended September 30, 2018 and 2017 (in thousands).

 
Accumulated Credit Losses
 
September 30, 2018
 
September 30, 2017
Credit losses on trust preferred securities held
 
 
 
Beginning of period
$
1,111

 
$
1,111

Additions related to OTTI losses not previously recognized

 

Reductions due to sales / (recoveries)
(1,111
)
 

Reductions due to change in intent or likelihood of sale

 

Additions related to increases in previously recognized OTTI losses

 

Reductions due to increases in expected cash flows

 

End of period
$

 
$
1,111



On May 29, 2018 the Company sold its trust preferred security. This sale resulted in recovery of all of the book value of the security. The net proceeds exceeded the aggregate book value of these securities by approximately $846,000 and this amount was recorded as a security gain during the second quarter of 2018.





18






Note 4 – Loans and Allowance for Loan Losses

Loans are stated at the principal amount outstanding net of unearned discounts, unearned income and allowance for loan losses.  Unearned income includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximated the effective interest rate method.  Interest on substantially all loans is credited to income based on the principal amount outstanding. A summary of loans at September 30, 2018 and December 31, 2017 follows (in thousands):
 
September 30,
2018
 
December 31,
2017
Construction and land development
$
91,768

 
$
107,721

Agricultural real estate
191,812

 
127,232

1-4 Family residential properties
368,759

 
294,483

Multifamily residential properties
100,881

 
61,966

Commercial real estate
818,093

 
684,639

Loans secured by real estate
1,571,313

 
1,276,041

Agricultural loans
120,812

 
86,602

Commercial and industrial loans
541,099

 
445,378

Consumer loans
57,788

 
30,070

All other loans
117,031

 
108,023

Total Gross loans
2,408,043

 
1,946,114

Less: Loans held for sale
940

 
1,025

 
2,407,103

 
1,945,089

Less:
 

 
 

Net deferred loan fees, premiums and discounts
7,883

 
6,613

Allowance for loan losses
23,839

 
19,977

Net loans
$
2,375,381

 
$
1,918,499


Net loans increased $456.9 million as of September 30, 2018 compared to December 31, 2017. Of this increase, approximately $364.9 million is a result of the acquisition of First Bank & Trust. Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or market value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties. 

Most of the Company’s business activities are with customers located near the Company's branch locations in Illinois and Missouri.  At September 30, 2018, the Company’s loan portfolio included $312.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $236.8 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $98.8 million from $213.8 million at December 31, 2017 due to $81.8 million acquired from First Bank & Trust and seasonal paydowns based upon timing of cash flow requirements. Loans concentrated in other grain farming increased $66.0 million from $170.8 million at December 31, 2017.  While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio.

In addition, the Company has $129.5 million of loans to motels and hotels.  The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region.  While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses. The Company also has $235.2 million of loans to lessors of non-residential buildings, $230.2 million of loans to lessors of residential buildings and dwellings, and $96.3 million of loans to other gambling industries.



19






The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the board of directors.  Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation and the vast majority of borrowers are below regulatory thresholds. The Company can occasionally have outstanding balances to one borrower up to but not exceeding the regulatory threshold should underwriting guidelines warrant. The vast majority of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system.  Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint.  In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

The Company’s lending can be summarized into the following primary areas:

Commercial Real Estate Loans.  Commercial real estate loans are generally comprised of loans to small business entities to purchase or expand structures in which the business operations are housed, loans to owners of real estate who lease space to non-related commercial entities, loans for construction and land development, loans to hotel operators, and loans to owners of multi-family residential structures, such as apartment buildings.  Commercial real estate loans are underwritten based on historical and projected cash flows of the borrower and secondarily on the underlying real estate pledged as collateral on the debt.  For the various types of commercial real estate loans, minimum criteria have been established within the Company’s loan policy regarding debt service coverage while maximum limits on loan-to-value and amortization periods have been defined.  Maximum loan-to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while the desired minimum debt coverage ratio is 1.20x. Amortization periods for commercial real estate loans are generally limited to twenty years. The Company’s commercial real estate portfolio is well below the thresholds that would designate a concentration in commercial real estate lending, as established by the federal banking regulators.

Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund accounts receivable that are secured by business assets other than real estate.  These loans are generally written for one year or less. Also, equipment financing is provided to businesses with these loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years. Commercial loans are often accompanied by a personal guaranty of the principal owners of a business.  Like commercial real estate loans, the underlying cash flow of the business is the primary consideration in the underwriting process.  The financial condition of commercial borrowers is monitored at least annually with the type of financial information required determined by the size of the relationship.  Measures employed by the Company for businesses with higher risk profiles include the use of government-assisted lending programs through the Small Business Administration and U.S. Department of Agriculture.

Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment.  Agricultural real estate loans are primarily comprised of loans for the purchase of farmland.  Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices.  Operating lines are typically written for one year and secured by the crop. Loan-to-value ratios on loans secured by farmland generally do not exceed 65% and have amortization periods limited to twenty five years.  Federal government-assistance lending programs through the Farm Service Agency are used to mitigate the level of credit risk when deemed appropriate.

Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties consisting of one-to-four units and home equity loans and lines of credit.  The Company sells the vast majority of its long-term fixed rate residential real estate loans to secondary market investors.  The Company also releases the servicing of these loans upon sale.  The Company retains all residential real estate loans with balloon payment features.  Balloon periods are limited to five years. Residential real estate loans are typically underwritten to conform to industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit scores.  Loans secured by first liens on residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have amortization periods of twenty five years or less. The Company does not originate subprime mortgage loans.



20






Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an automobile or other living expenses.  Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio, employment history, and collateral coverage.  Typically, consumer loans are set up on monthly payments with amortization periods based on the type and age of the collateral.

Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or equipment purchases.  Underwriting guidelines for these loans are consistent with those established for commercial loans with the additional repayment source of the taxing authority of the municipality.

Purchase Credit-Impaired Loans. Loans acquired with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchase credit-impaired ("PCI") loans are accounted for under ASC 310-30, Receivables--Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), and are initially measured at fair value, which includes the estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. The cash flows expected to be collected were estimated using current key assumptions, such as default rates, value of underlying collateral, severity and prepayment speeds.

Allowance for Loan Losses

The allowance for loan losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses existing in the current portfolio. The provision for loan losses is the charge against current earnings that is determined by the Company 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, the Company relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure.  The review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and troubled debt restructurings, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates. The Company estimates the appropriate level of allowance for loan losses by separately evaluating large impaired loans and nonimpaired loans.

The Company has loans acquired from business combinations with uncollected principal balances.  These loans are carried net of a fair value adjustment for credit risk and interest rates and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment.  However, as the acquired loans renew, it is necessary to establish an allowance which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses inherent in such loans.

Impaired loans
The Company individually evaluates certain loans for impairment.  In general, these loans have been internally identified via the Company’s loan grading system as credits requiring management’s attention due to underlying problems in the borrower’s business or collateral concerns.  This evaluation considers expected future cash flows, the value of collateral and also other factors that may impact the borrower’s ability to make payments when due.  For loans greater than $250,000, impairment is individually measured each quarter using one of three alternatives: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price, if available; or (3) the fair value of the collateral less costs to sell for collateral dependent loans and loans for which foreclosure is deemed to be probable. A specific allowance is assigned when expected cash flows or collateral do not justify the carrying amount of the loan. The carrying value of the loan reflects reductions from prior charge-offs.



21






Non-Impaired loans
Non-impaired loans comprise the vast majority of the Company’s total loan portfolio and include loans in accrual status and those credits not identified as troubled debt restructurings. A small portion of these loans are considered “criticized” due to the risk rating assigned reflecting elevated credit risk due to characteristics, such as a strained cash flow position, associated with the individual borrowers. Criticized loans are those assigned risk ratings of Special Mention, Substandard, or Doubtful. Determining the appropriate level of the allowance for loan losses for all non-impaired loans is based on a migration analysis of net losses over a rolling twelve quarter period by loan segment. A weighted average of the net losses is determined by assigning more weight to the most recent quarters in order to recognize current risk factors influencing the various segments of the loan portfolio more prominently than past periods. Environmental factors including changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets are evaluated each quarter to determine if adjustments to the weighted average historical net losses is appropriate given these current influences on the risk profile of each loan segment. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is periodically assessed and adjusted when appropriate. Consumer loans are evaluated for adverse classification based primarily on the Uniform Retail Credit Classification and Account Management Policy established by the federal banking regulators. Classification standards are generally based on delinquency status, collateral coverage, bankruptcy and the presence of fraud.

Due to weakened economic conditions during prior years, the Company established qualitative factor adjustments for each of the loan segments at levels above the historical net loss averages. Some of the economic factors included the potential for reduced cash flow for commercial operating loans from reduction in sales or increased operating costs, decreased occupancy rates for commercial buildings, reduced levels of home sales for commercial land developments, the uncertainty regarding grain prices and increased operating costs for farmers, and increased levels of unemployment and bankruptcy impacting consumer’s ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the allowance for loan losses.

The Company has not materially changed any aspect of its overall approach in the determination of the allowance for loan losses.  However, on an on-going basis the Company continues to refine the methods used in determining management’s best estimate of the allowance for loan losses.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three and nine-months ended September 30, 2018 and 2017 and for the year ended December 31, 2017 (in thousands):
 
Commercial/ Commercial Real Estate
 
Agricultural/ Agricultural Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
Three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
$
18,663

 
$
1,900

 
$
554

 
$
928

 
$

 
$
22,045

Provision charged to expense
1,197

 
247

 
942

 
165

 

 
2,551

Losses charged off
(439
)
 
(93
)
 
(181
)
 
(133
)
 

 
(846
)
Recoveries
5

 

 
2

 
82

 

 
89

Balance, end of period
$
19,426

 
$
2,054

 
$
1,317

 
$
1,042

 
$

 
$
23,839

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
858

 
$

 
$
249

 
$
1

 
$

 
$
1,108

Collectively evaluated for impairment
$
18,157

 
$
2,054

 
$
1,068

 
$
1,041

 
$

 
$
22,320

Acquired with deteriorated credit quality
$
411

 
$

 
$

 
$

 
$

 
$
411



22






 
Commercial/ Commercial Real Estate
 
Agricultural/ Agricultural Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
Three months ended September 30, 2017
 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
$
14,747

 
$
1,743

 
$
969

 
$
716

 
$
34

 
$
18,209

Provision charged to expense
1,440

 
(57
)
 
(2
)
 
72

 
36

 
1,489

Losses charged off
(1,242
)
 

 
(7
)
 
(160
)
 

 
(1,409
)
Recoveries
158

 
1

 
78

 
63

 

 
300

Balance, end of period
$
15,103

 
$
1,687

 
$
1,038

 
$
691

 
$
70

 
$
18,589

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
168

 
$

 
$
125

 
$
2

 
$

 
$
295

Collectively evaluated for impairment
$
14,935

 
$
1,687

 
$
913

 
$
689

 
$
70

 
$
18,294

Acquired with deteriorated credit quality
$

 
$

 
$

 
$

 
$

 
$

 
Commercial/ Commercial Real Estate
 
Agricultural/ Agricultural Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
16,546

 
$
1,742

 
$
886

 
$
803

 
$

 
$
19,977

Provision charged to expense
3,467

 
405

 
1,211

 
400

 

 
5,483

Losses charged off
(715
)
 
(93
)
 
(836
)
 
(397
)
 

 
(2,041
)
Recoveries
128

 

 
56

 
236

 

 
420

Balance, end of period
$
19,426

 
$
2,054

 
$
1,317

 
$
1,042

 
$

 
$
23,839

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
858

 
$

 
$
249

 
$
1

 
$

 
$
1,108

Collectively evaluated for impairment
$
18,157

 
$
2,054

 
$
1,068

 
$
1,041

 
$

 
$
22,320

Acquired with deteriorated credit quality
$
411

 
$

 
$

 
$

 
$

 
$
411

Loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
14,924

 
$
42

 
$
2,708

 
$
159

 
$

 
$
17,833

Collectively evaluated for impairment
1,605,717

 
312,145

 
381,012

 
69,048

 
$

 
2,367,922

Acquired with deteriorated credit quality
11,435

 
4

 
2,961

 
5

 
$

 
14,405

Ending balance
$
1,632,076

 
$
312,191

 
$
386,681

 
$
69,212

 
$

 
$
2,400,160



23






 
 
Commercial/ Commercial Real Estate
 
Agricultural/ Agricultural Real Estate
 
Residential Real Estate
 
Consumer
 
Unallocated
 
Total
Nine months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
12,901

 
$
2,249

 
$
874

 
$
693

 
$
36

 
$
16,753

Provision charged to expense
4,573

 
98

 
167

 
179

 
34

 
5,051

Losses charged off
(2,725
)
 
(662
)
 
(106
)
 
(397
)
 

 
(3,890
)
Recoveries
354

 
2

 
103

 
216

 

 
675

Balance, end of period
$
15,103

 
$
1,687

 
$
1,038

 
$
691

 
$
70

 
$
18,589

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
168

 
$

 
$
125

 
$
2

 
$

 
$
295

Collectively evaluated for impairment
$
14,935

 
$
1,687

 
$
913

 
$
689

 
$
70

 
$
18,294

Acquired with deteriorated credit quality
$

 
$

 
$

 
$

 
$

 
$

Loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
7,635

 
$
513

 
$
1,418

 
$
210

 
$

 
$
9,776

Collectively evaluated for impairment
1,287,821

 
206,669

 
324,920

 
32,892

 

 
1,852,302

Acquired with deteriorated credit quality
5,484

 

 

 

 

 
5,484

Ending balance
$
1,300,940

 
$
207,182

 
$
326,338

 
$
33,102

 
$

 
$
1,867,562

Year ended December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of year
$
12,901

 
$
2,249

 
$
874

 
$
693

 
$
36

 
$
16,753

Provision charged to expense
6,884

 
153

 
100

 
361

 
(36
)
 
7,462

Losses charged off
(3,795
)
 
(662
)
 
(217
)
 
(521
)
 

 
(5,195
)
Recoveries
556

 
2

 
129

 
270

 

 
957

Balance, end of year
$
16,546

 
$
1,742

 
$
886

 
$
803

 
$

 
$
19,977

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
586

 
$
2

 
$
25

 
$
1

 
$

 
$
614

Collectively evaluated for impairment
$
15,951

 
$
1,740

 
$
861

 
$
802

 
$

 
$
19,354

Acquired with deteriorated credit quality
$
9

 
$

 
$

 
$

 
$

 
$
9

Loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
11,372

 
$
488

 
$
1,026

 
$
200

 
$

 
$
13,086

Collectively evaluated for impairment
1,360,156

 
213,033

 
314,097

 
38,870

 

 
1,926,156

Acquired with deteriorated credit quality
259

 

 

 

 

 
259

Ending balance
$
1,371,787

 
$
213,521

 
$
315,123

 
$
39,070

 
$

 
$
1,939,501





24






Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

Credit Quality

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, collateral support, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Company uses the following definitions for risk ratings which are commensurate with a loan considered “criticized”:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current sound-worthiness and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered pass rated loans.



25






The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2018 and December 31, 2017 (in thousands):

 
Construction &
Land Development
 
Agricultural Real Estate
 
1-4 Family Residential
Properties
 
Multifamily Residential
Properties
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Pass
$
90,552

 
$
107,140

 
$
180,273

 
$
120,767

 
$
345,527

 
$
282,441

 
$
90,751

 
$
60,954

Special Mention
439

 
454

 
9,500

 
4,829

 
7,142

 
2,654

 
4,900

 
476

Substandard
364

 

 
1,951

 
1,587

 
14,674

 
8,572

 
4,717

 
368

Doubtful

 

 

 

 

 

 

 

Total
$
91,355

 
$
107,594

 
$
191,724

 
$
127,183

 
$
367,343

 
$
293,667

 
$
100,368

 
$
61,798


 
Commercial Real Estate (Nonfarm/Nonresidential)
 
Agricultural Loans
 
Commercial & Industrial Loans
 
Consumer Loans
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Pass
$
772,696

 
$
647,208

 
$
111,903

 
$
83,469

 
$
524,649

 
$
425,846

 
$
55,865

 
$
29,375

Special Mention
16,716

 
16,941

 
8,048

 
2,304

 
5,841

 
11,492

 
200

 
5

Substandard
25,162

 
17,608

 
819

 
858

 
9,897

 
6,925

 
1,183

 
369

Doubtful

 

 

 

 

 

 

 

Total
$
814,574

 
$
681,757

 
$
120,770

 
$
86,631

 
$
540,387

 
$
444,263

 
$
57,248

 
$
29,749


 
All Other Loans
 
Total Loans
 
2018
 
2017
 
2018
 
2017
Pass
$
113,630

 
$
103,339

 
$
2,285,846

 
$
1,860,539

Special Mention
2,746

 
3,520

 
55,532

 
42,675

Substandard
15

 

 
58,782

 
36,287

Doubtful

 

 

 

Total
$
116,391

 
$
106,859

 
$
2,400,160

 
$
1,939,501



26






The following table presents the Company’s loan portfolio aging analysis at September 30, 2018 and December 31, 2017 (in thousands):

 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days
or More Past Due
 
Total
Past Due
 
Current
 
Total Loans Receivable
 
Total Loans > 90 Days & Accruing
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
773

 
$

 
$
61

 
$
834

 
$
90,521

 
$
91,355

 
$

Agricultural real estate
42

 

 
1,066

 
1,108

 
190,616

 
191,724

 

1-4 Family residential properties
5,777

 
2,313

 
2,002

 
10,092

 
357,251

 
367,343

 

Multifamily residential properties

 
305

 
229

 
534

 
99,834

 
100,368

 

Commercial real estate
3,535

 
1,285

 
3,010

 
7,830

 
806,744

 
814,574

 

Loans secured by real estate
10,127

 
3,903

 
6,368

 
20,398

 
1,544,966

 
1,565,364

 

Agricultural loans
170

 

 
522

 
692

 
120,078

 
120,770

 

Commercial and industrial loans
809

 
467

 
3,989

 
5,265

 
535,122

 
540,387

 

Consumer loans
989

 
447

 
304

 
1,740

 
55,508

 
57,248

 

All other loans

 

 

 

 
116,391

 
116,391

 

Total loans
$
12,095

 
$
4,817

 
$
11,183

 
$
28,095

 
$
2,372,065

 
$
2,400,160

 
$

December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
$
26

 
$
48

 
$

 
$
74

 
$
107,520

 
$
107,594

 
$

Agricultural real estate

 

 
396

 
396

 
126,787

 
127,183

 

1-4 Family residential properties
3,023

 
538

 
1,767

 
5,328

 
288,339

 
293,667

 

Multifamily residential properties

 

 

 

 
61,798

 
61,798

 

Commercial real estate
90

 
38

 
3,566

 
3,694

 
678,063

 
681,757

 

Loans secured by real estate
3,139

 
624

 
5,729

 
9,492

 
1,262,507

 
1,271,999

 

Agricultural loans

 
32

 
158

 
190

 
86,441

 
86,631

 

Commercial and industrial loans
192

 
3

 
770

 
965

 
443,298

 
444,263

 

Consumer loans
178

 
67

 
27

 
272

 
29,477

 
29,749

 

All other loans

 

 

 

 
106,859

 
106,859

 

Total loans
$
3,509

 
$
726

 
$
6,684

 
$
10,919

 
$
1,928,582

 
$
1,939,501

 
$



Impaired Loans

Within all loan portfolio segments, loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Impaired loans, excluding certain troubled debt restructured loans, are placed on nonaccrual status. Impaired loans include nonaccrual loans and loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being modified remain on nonaccrual status until, 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. If the restructured loan is on accrual status prior to being modified, the loan is reviewed to determine if the modified loan should remain on accrual status


27






The Company’s policy is to discontinue the accrual of interest income on all loans for which principal or interest is ninety days past due.  The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal.  Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Interest on loans determined to be troubled debt restructurings is recognized on an accrual basis in accordance with the restructured terms if the loan is in compliance with the modified terms.  Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

The following tables present impaired loans as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Recorded
Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Recorded
Balance
 
Unpaid Principal Balance
 
Specific Allowance
Loans with a specific allowance:
 
 
 
 
 
 
 
 
 
 
 
Construction and land development
$
292

 
$
292

 
$
21

 
$

 
$

 
$

Agricultural real estate

 

 

 
276

 
276

 

1-4 Family residential properties
5,670

 
6,057

 
249

 
1,026

 
1,347

 
25

Multifamily residential properties
4,488

 
4,488

 

 
313

 
313

 

Commercial real estate
13,032

 
13,053

 
783

 
5,544

 
5,565

 
531

Loans secured by real estate
23,482

 
23,890

 
1,053

 
7,159

 
7,501

 
556

Agricultural loans
46

 
609

 

 
212

 
1,009

 
2

Commercial and industrial loans
8,546

 
9,228

 
465

 
5,774

 
6,037

 
64

Consumer loans
164

 
164

 
1

 
200

 
200

 
1

Total loans
$
32,238

 
$
33,891

 
$
1,519

 
$
13,345

 
$
14,747

 
$
623

Loans without a specific allowance:
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
$
67

 
$
67

 
$

 
$

 
$

 
$

Agricultural real estate
171

 
171

 

 
15

 
15

 

1-4 Family residential properties
3,343

 
4,465

 

 
2,239

 
2,664

 

Multifamily residential properties
229

 
229

 

 
55

 
55

 

Commercial real estate
975

 
1,046

 

 
303

 
368

 

Loans secured by real estate
4,785

 
5,978

 

 
2,612

 
3,102

 

Agricultural loans
717

 
154

 

 
545

 

 

Commercial and industrial loans
923

 
958

 

 
909

 
1,249

 

Consumer loans
447

 
959

 

 
102

 
119

 

All other loans
6

 
6

 

 

 

 

Total loans
$
6,878

 
$
8,055

 
$

 
$
4,168

 
$
4,470

 
$

Total loans:
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
$
359

 
$
359

 
$
21

 
$

 
$

 
$

Agricultural real estate
171

 
171

 

 
291

 
291

 

1-4 Family residential properties
9,013

 
10,522

 
249

 
3,265

 
4,011

 
25

Multifamily residential properties
4,717

 
4,717

 

 
368

 
368

 

Commercial real estate
14,007

 
14,099

 
783

 
5,847

 
5,933

 
531

Loans secured by real estate
28,267

 
29,868

 
1,053

 
9,771

 
10,603

 
556

Agricultural loans
763

 
763

 

 
757

 
1,009

 
2

Commercial and industrial loans
9,469

 
10,186

 
465

 
6,683

 
7,286

 
64

Consumer loans
611

 
1,123

 
1

 
302

 
319

 
1

All other loans
6

 
6

 

 

 

 

Total loans
$
39,116

 
$
41,946

 
$
1,519

 
$
17,513

 
$
19,217

 
$
623



28






The following tables present average recorded investment and interest income recognized on impaired loans for the three and nine-month periods ended September 30, 2018 and 2017 (in thousands):
 
 
 
 
 
 
 
 
 
For the three months ended
 
September 30, 2018
 
September 30, 2017
 
Average Investment
in Impaired Loans
 
Interest Income Recognized
 
Average Investment
in Impaired Loans
 
Interest Income Recognized
Construction and land development
$
395

 
$
22

 
$
267

 
$

Agricultural real estate
620

 

 
291

 

1-4 Family residential properties
7,574

 
137

 
3,047

 
5

Multifamily residential properties
3,164

 
126

 
8,017

 
80

Commercial real estate
11,932

 
188

 
5,762

 
6

Loans secured by real estate
23,685

 
473

 
17,384

 
91

Agricultural loans
752

 

 
834

 

Commercial and industrial loans
8,909

 
5

 
2,075

 
2

Consumer loans
234

 

 
296

 

All other loans
8

 

 

 

Total loans
$
33,588

 
$
478

 
$
20,589

 
$
93

 
For the nine months ended
 
September 30, 2018
 
September 30, 2017
 
Average Investment
in Impaired Loans
 
Interest Income Recognized
 
Average Investment
in Impaired Loans
 
Interest Income Recognized
Construction and land development
$
167

 
$
29

 
$
98

 
$

Agricultural real estate
182

 

 
293

 

1-4 Family residential properties
5,672

 
188

 
3,003

 
16

Multifamily residential properties
1,414

 
169

 
10,839

 
229

Commercial real estate
8,595

 
256

 
4,638

 
14

Loans secured by real estate
16,030

 
642

 
18,871

 
259

Agricultural loans
642

 

 
900

 

Commercial and industrial loans
8,109

 
7

 
2,216

 
6

Consumer loans

 

 
307

 

All other loans

 

 

 

Total loans
$
24,781

 
$
649

 
$
22,294

 
$
265


The amount of interest income recognized by the Company within the periods stated above was due to loans modified in troubled debt restructurings that remained on accrual status.  The balance of loans modified in troubled debt restructurings included in the impaired loans at September 30, 2018 stated above that were still accruing was $1,908,000 of 1-4 Family residential properties, $679,000 of commercial real estate and $4,000 of consumer. The balance of loans modified in a troubled debt restructurings at September 30, 2017 included in the impaired loans stated above that were still accruing was $410,000 of 1-4 family residential properties, $5,217,000 of multifamily residential properties, $347,000 commercial real estate, $29,000 commercial and industrial loans, and $1,000 of consumer loans. For the nine months ended September 30, 2018 and 2017, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.





29






Non Accrual Loans

The following table presents the Company’s recorded balance of nonaccrual loans as September 30, 2018 and December 31, 2017 (in thousands). This table excludes purchased impaired loans and performing troubled debt restructurings.
 
September 30,
2018
 
December 31,
2017
Construction and land development
$
67

 
$

Agricultural real estate
171

 
291

1-4 Family residential properties
4,682

 
2,687

Multifamily residential properties
805

 
368

Commercial real estate
8,769

 
5,596

Loans secured by real estate
14,494

 
8,942

Agricultural loans
763

 
757

Commercial and industrial loans
9,473

 
6,658

Consumer loans
598

 
302

All other loans
6

 

Total loans
$
25,334

 
$
16,659


Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $1,096,000 and $366,000 for the nine months ended September 30, 2018 and 2017, respectively.


Purchased Credit-Impaired Loans

The Company acquired certain loans considered to be credit-impaired ("PCI") in its business combinations with First Clover Leaf Bank during the third quarter of 2016 and First Bank & Trust during the second quarter of 2018. At acquisition, these loans evidenced deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these loans is included in the consolidated balance sheet amounts for Loans. The Company had no PCI loans prior to the First Clover Leaf Bank acquisition. The amount of these loans at September 30, 2018 and December 31, 2017 are as follows (in thousands):
 
September 30,
2018
 
December 31,
2017
Construction and land development
$
292

 
$

Agricultural real estate

 

1-4 Family residential properties
$
2,961

 
$

Multifamily residential properties
3,912

 

Commercial real estate
7,164

 
251

Loans secured by real estate
14,329

 
251

Agricultural loans
4

 

Commercial and industrial loans
67

 
8

Consumer loans
5

 

 Carrying amount
14,405

 
259

Allowance for loan losses
411

 
9

Carrying amount, net of allowance
$
13,994

 
$
250


As of September 8, 2016, the First Clover Leaf acquisition date, the principal outstanding of PCI loans totaled $10,650,000 and the fair value of PCI loans totaled $8,688,000. The balance of these loans at September 30, 2018 was $379,000 and the fair value was $241,000. As of May 1, 2018, the First Bank acquisition date, the principal outstanding of PCI loans totaled $20,357,000 and the fair value of PCI loans totaled $16,126,000. The balance of these loans at September 30, 2018 was $17,646,000 and the fair value totaled $14,164,000.


30







For PCI loans, the difference between contractually required payments at acquisition and the cash flow expected to be collected is referred to as the non-accretable difference. Any excess of expected cash flows over the fair value is referred to as the accretable yield. As of September 30, 2018 there is no accretable yield on the PCI loans acquired. Subsequent decreases to the expected cash flows will result in a provision for loan and lease losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income. As of September 30, 2018, there were three loans with a change in expected cash flows and as a result, approximately $411,000 of provision was recorded. As of December 31, 2017, there was one loan with a change in expected cash flows and as a result, approximately $9,000 of provision was recorded.

The PCI loans acquired from First Bank & Trust during the second quarter of 2018 for which it was probable that all contractually required payments would not be collected were as follows (in thousands):

Contractually required payments
$
20,357

Non-accretable difference
(4,231
)
Cash flows expected to be collected at acquisition
16,126

Accretable yield

Fair value of acquired loans at acquisition
$
16,126



Troubled Debt Restructuring

The balance of troubled debt restructurings ("TDRs") at September 30, 2018 and December 31, 2017 was $10.3 million and $8.9 million, respectively.  There was $56,000 and $37,000 in specific reserves established with respect to these loans as of September 30, 2018 and December 31, 2017, respectively. As troubled debt restructurings, these loans are included in nonperforming loans and are classified as impaired which requires that they be individually measured for impairment. The modification of the terms of these loans included one or a combination of the following: a reduction of stated interest rate of the loan; an extension of the maturity date and change in payment terms; or a permanent reduction of the recorded investment in the loan. The following table presents the Company’s recorded balance of troubled debt restructurings at September 30, 2018 and December 31, 2017 (in thousands).
Troubled debt restructurings:
September 30, 2018
 
December 31, 2017
1-4 Family residential properties
2,494

 
874

Commercial real estate
1,883

 
1,376

Loans secured by real estate
4,377

 
2,250

Agricultural loans
606

 
757

Commercial and industrial loans
5,208

 
5,690

Consumer loans
150

 
201

Total
$
10,341

 
$
8,898

Performing troubled debt restructurings:
 

 
 

1-4 Family residential properties
1,908

 
$
578

Commercial real estate
679

 
251

Loans secured by real estate
2,587

 
829

Commercial and industrial loans

 
25

Consumer loans
4

 

Total
$
2,591

 
$
854


The increase in TDRs during the period was was primarily due to loans acquired in the acquisition of First Bank net of loans that paid off during the period.


31






The following table presents loans modified as TDRs during the nine months ended September 30, 2018 and 2017, as a result of various modified loan factors (in thousands):
 
September 30, 2018
 
September 30, 2017
 
Number of Modifications
 
Recorded Investment
 
Type of Modifications
 
Number of Modifications
 
Recorded Investment
 
Type of Modifications
1-4 Family residential properties
15

 
604

 
(b)(c)
 
1

 
17

 
(c)
Commercial real estate
1

 
437

 
(b)(d)
 

 

 

Loans secured by real estate
16

 
1,041

 
 
 
1

 
17

 
 
Agricultural loans

 

 

 
4

 
828

 
(b)(c)(d)
Commercial and industrial loans
2

 
99

 
(b)(c)
 
1

 
27

 
(c)
Consumer Loans
1

 
4

 
(b)(c)
 

 

 

Total
19

 
$
1,144

 
 
 
6

 
$
872

 
 

Type of modifications:
(a) Reduction of stated interest rate of loan
(b) Change in payment terms
(c) Extension of maturity date
(d) Permanent reduction of the recorded investment


A loan is considered to be in payment default once it is 90 days past due under the modified terms.  There were no loans modified as troubled debt restructurings during the prior twelve months that experienced defaults for nine months ended September 30, 2018. There was one loan modified as troubled debt restructuring during the prior twelve months that experienced defaults as of December 31, 2017.

The balance of real estate owned includes $2,093,000 and $2,754,000 of foreclosed real estate properties recorded as a result of obtaining physical possession of the property at September 30, 2018 and December 31, 2017, respectively. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure procedures are in process was $652,000 and $404,000 at September 30, 2018 and December 31, 2017, respectively.



Note 5 -- Goodwill and Intangible Assets

The Company has goodwill from business combinations, intangible assets from branch acquisitions, identifiable intangible assets assigned to core deposit relationships and customer lists of First Mid Insurance. The following table presents gross carrying value and accumulated amortization by major intangible asset class as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
December 31, 2017
 
Gross Carrying Value
Accumulated Amortization
Gross Carrying Value
Accumulated Amortization
Goodwill not subject to amortization (effective 1/1/02)
$
90,401

$
3,760

$
63,910

$
3,760

Intangibles from branch acquisition
3,015

3,015

3,015

3,015

Core deposit intangibles
25,086

13,153

19,862

11,473

Other intangibles
3,731

2,422

3,731

2,285

 
$
122,233

$
22,350

$
90,518

$
20,533




32






Goodwill of $27.4 million was provisionally recorded for acquisition and merger of First Bank during the second quarter of 2018. Goodwill was subsequently adjusted to $26.5 million to reflect proper valuation of financial assets and liabilities. All of the goodwill was assigned to the banking segment of the Company. The Company expects this goodwill will not be deductible for tax purposes.

The following table provides a reconciliation of the purchase price paid for the acquisition of First Bank and the amount of goodwill recorded (in thousands):
Purchase price (in excess of net book value)
 
$
26,946

Purchase accounting adjustments:
 
 
     Fair value of securities
320

 
     Fair value of loans, net
3,463

 
     Fair value of OREO
12

 
     Fair value of mortgage servicing rights
(1,097
)
 
     Fair value of premises and equipment
689

 
     Fair value of time deposits
1,301

 
     Fair value of FHLB advances
(328
)
 
     Fair value of subordinated debentures
(1,451
)
 
     Core deposit intangible
(5,224
)
 
     Other assets and other liabilities, net
1,860

 
 
 
(455
)
Resulting goodwill from acquisition
 
$
26,491


As part of the First Bank acquisition, the Company acquired mortgage servicing rights valued at $1,522,000. The following table summarizes the activity pertaining to mortgage servicing rights included in intangible assets as of September 30, 2018, September 30, 2017 and December 31, 2017 (in thousands):
 
September 30, 2018

 
September 30, 2017

 
December 31, 2017

Beginning Balance
$
844

 

$985

 
$
985

Mortgage servicing rights acquired during period
1,522

 

 

Mortgage servicing rights capitalized
7

 

 

Mortgage servicing rights amortized
(242
)
 
(105
)
 
(141
)
Ending Balance
$
2,131

 

$880

 
$
844


Total amortization expense for the three and nine months ended September 30, 2018 and 2017 was as follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Core deposit intangibles
669

 
466

 
$
1,680

 
$
1,409

Other intangibles
46

 
46

 
137

 
137

Mortgage servicing rights
123

 
33

 
242

 
105

 
$
838

 
$
545

 
$
2,059

 
$
1,651


Aggregate amortization expense for the current year and estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands):
Aggregate amortization expense:
 
     For period 01/01/18-09/30/18
$
2,059

Estimated amortization expense:
 
     For period 07/01/18-12/31/18
718

     For year ended 12/31/19
2,903

     For year ended 12/31/20
2,409

     For year ended 12/31/21
1,943

     For year ended 12/31/22
1,730

     For year ended 12/31/23
1,547



33






In accordance with the provisions of SFAS No. 142,Goodwill and Other Intangible Assets,” codified within ASC 350, the Company performed testing of goodwill for impairment as of September 30, 2018 and determined that, as of that date, goodwill was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets.


  
Note 6 -- Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase were $98.9 million at September 30, 2018, a decrease of $56.5 million from $155.4 million at December 31, 2017. The decrease during the first nine months of 2018 was primarily due to decreases in balances of customers due to changes in cash flow needs for their businesses. All of the transactions have overnight maturities with a weighted average rate of 0.24%.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value.

The collateral is held by a third party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Company in a segregated custodial account under a tri-party agreement. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained, while mitigating the potential of over-collateralization in the event of counterparty default.

Collateral pledged by class for repurchase agreements are as follows (in thousands):
 
September 30, 2018
December 31, 2017
US Treasury securities and obligations of U.S. government corporations & agencies
$
62,202

$
100,895

Mortgage-backed securities: GSE: residential
36,673

54,493

Total
$
98,875

$
155,388



FHLB borrowings increased to $121 million at September 30, 2018 from $60 million at December 31, 2017. Approximately $31 million of this increase resulted from the acquisition of First Bank. At September 30, 2018 the advances were as follows:

$5 million advance with a 6-month maturity, at 2.10%, due October 16, 2018
$10 million advance with a 3-year maturity, at 1.42%, due November 5, 2018
$5 million advance with a 1.5-year maturity, at 1.49%, due December 28, 2018
$4 million advance with a 3-year maturity, at 1.72% due April 12, 2019
$5 million advance with a 2-year maturity, at 1.56%, due June 28, 2019
$10 million advance with a 11-month maturity at 2.81%, due August 30, 2019
$5 million advance with a 15-month maturity, at 2.63%%, due September 27, 2019
$2 million advance with a 5-year maturity, at 1.89%%, due October 17, 2019
$10 million advance with a 14-month maturity at 2.88%, due November 29, 2019
$5 million advance with a 1.5-year maturity, at 2.67%%, due December 27, 2019
$5 million advance with a 2.5-year maturity, at 1.67%, due January 31, 2020
$5 million advance with a 4-year maturity, at 1.79%, due April 13, 2020


34






$10 million advance with a 1.5 year maturity at 2.95%, due May 29, 2020
$5 million advance with a 2-year maturity, at 2.75%, due June 26, 2020
$5 million advance with a 3-year maturity, at 1.75%, due July 31, 2020
$5 million advance with a 6-year maturity, at 2.30%, due August 24, 2020
$5 million advance with a 3.5-year maturity, at 1.83%, due February 1, 2021
$5 million advance with a 5-year maturity, at 1.85%, due April 12, 2021
$5 million advance with a 7-year maturity, at 2.55%, due October 1, 2021
$5 million advance with a 5-year maturity, at 2.71%, due March 21, 2022
$5 million advance with a 8-year maturity, at 2.40%, due January 9, 2023



Note 7 -- Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.  There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1
Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2
Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-Sale Securities. The fair value of available-for-sale securities is determined by various valuation
methodologies.  Where quoted market prices are available in an active market, securities are classified within Level 1. If
quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independent sources of market parameters, including but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows.  Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include investments in trust preferred securities.

Fair value determinations for Level 3 measurements of securities are the responsibility of the Treasury function of the Company.  The Company contracts with a pricing specialist to generate fair value estimates on a monthly basis.  The Treasury function of the Company challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States, analyzes the changes in fair value and compares these changes to internally developed expectations and monitors these changes for appropriateness.


35






The trust preferred securities are collateralized debt obligation securities that are backed by trust preferred securities issued by banks, thrifts, and insurance companies. The market for these securities at December 31, 2017 was not active and markets for similar securities were also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market was also inactive and continues to be, as a result of the Dodd-Frank Act’s elimination of trust preferred securities from Tier 1 capital for certain holding companies. Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:

The few observable transactions and market quotations that were available were not reliable for purposes of determining fair value at December 31, 2017,

An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates, and

The trust preferred securities held by the Company were classified within Level 3 of the fair value hierarchy because we determined that significant adjustments are required to determine fair value at the measurement date.

The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of September 30, 2018 and December 31, 2017 (in thousands):
 
 
 
Fair Value Measurements Using
 
 
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable Inputs
(Level 3)
September 30, 2018
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
122,669

 
$

 
$
122,669

 
$

Obligations of states and political subdivisions
173,346

 

 
173,346

 

Mortgage-backed securities
300,669

 

 
300,669

 

Other securities
2,396

 
381

 
2,015

 

Total available-for-sale securities
$
599,080

 
$
381

 
$
598,699

 
$

December 31, 2017
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
113,770

 
$

 
$
113,770

 
$

Obligations of states and political subdivisions
166,266

 

 
166,266

 

Mortgage-backed securities
293,811

 

 
293,811

 

Trust preferred securities
2,548

 

 

 
2,548

Other securities
2,184

 
172

 
2,012

 

Total available-for-sale securities
$
578,579

 
$
172

 
$
575,859

 
$
2,548




36






The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2018 and 2017 is summarized as follows (in thousands):
 
 
Trust Preferred Securities
 
 
Three months ended
 
Nine months ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Beginning balance
 
$

 
$
2,424

 
$
2,548

 
$
1,652

Transfers into Level 3
 

 

 

 

Transfers out of Level 3
 

 

 

 

Total gains or losses:
 
 
 
 
 
 
 
 
Included in net income
 

 

 

 

Included in other comprehensive income (loss)
 

 
318

 
18

 
1,166

Purchases, issuances, sales and settlements:
 
 

 
 
 

 
 
Purchases
 

 

 

 

Issuances
 

 

 

 

Sales
 

 

 
(2,522
)
 

Settlements
 

 
(41
)
 
(44
)
 
(117
)
Ending balance
 
$

 
$
2,701

 
$

 
$
2,701

Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date
 
$

 
$

 
$

 
$


Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent). Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment.  Allowable methods for determining the amount of impairment and estimating fair value include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Management establishes a specific allowance for impaired loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a change in specific allowance has occurred as of September 30, 2018 was $10,640,000 and a fair value of $9,356,000 resulting in specific loss exposures of $1,284,000.

When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for loan losses.  Losses are recognized in the period an obligation becomes uncollectible.  The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future.

Foreclosed Assets Held For Sale. Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total


37






carrying amount of other real estate owned as of September 30, 2018 was $2,093,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $0.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2018 and December 31, 2017 (in thousands):
 
Fair Value Measurements Using
 
 
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant
Unobservable Inputs
(Level 3)
September 30, 2018
 
 
 
 
 
 
 
Impaired loans (collateral dependent)
$
9,356

 
$

 
$

 
$
9,356

December 31, 2017
 

 
 

 
 

 
 

Impaired loans (collateral dependent)
$
3,053

 
$

 
$

 
$
3,053

Foreclosed assets held for sale
91

 

 

 
91



Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Trust Preferred Securities. The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities was offered quotes and comparability adjustments.  Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement.  Generally, changes in either of those inputs will not affect the other input.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill at September 30, 2018 and December 31, 2017 (in thousands).
September 30, 2018
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted Average)
Impaired loans (collateral dependent)
$
9,356

 
Third party valuations
 
Discount to reflect realizable value
 
0
%
-
40%
(
20%
)
December 31, 2017
Fair Value
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted Average)
Trust Preferred Securities
$
2,548

 
Discounted cash flow
 
Discount rate
 
12.7%
 
 
 
Constant prepayment rate (1)
 
1.3%
 
 
 
Cumulative projected prepayments
 
21.6%
 
 
 
Probability of default
 
0.5%
 
 
 
Projected cures given deferral
 
0.0%
 
 
 
Loss severity
 
97.7%
 
 
 
Impaired loans (collateral dependent)
$
3,053

 
Third party valuations
 
Discount to reflect realizable value
 
0
%
-
40%
(
20%
)
Foreclosed assets held for sale
 
$
91

 
Third party valuations
 
Discount to reflect realizable value less estimated selling costs
 
0
%
-
40%
(
35%
)
(1) Every five years


38






Other. The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Cash Equivalents, Federal Funds Sold, Interest Receivable and Federal Reserve and Federal Home Loan Bank Stock. The carrying amount approximates fair value.

Certificates of Deposit Investments. The fair value of certificates of deposit investments is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Held-to-Maturity Securities. Fair Value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans Held for Sale. Loans expected to be sold are classified as held for sale and are recorded at the lower of aggregate cost or market value.

Loans. For September 30, 2018, fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. This is not comparable with the fair values disclosed for December 31, 2017, which were based on an entrance price basis. For that date, fair values of variable rate loans that reprice frequently and with no significant change in credit risk were based on carrying values. The fair values of other loans as of that date were estimated using discounted cash flow analyses which used interest rates then being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value.

Deposits. Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount of these deposits approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Securities Sold Under Agreements to Repurchase. The fair value of securities sold under agreements to repurchased is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Federal Funds Purchased. The carrying amount approximates fair value.

Interest Payable. The carrying amount approximates fair value.

Junior Subordinated Debentures, Federal Home Loan Bank Borrowings and Other Borrowings. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.




39






The following tables present estimated fair values of the Company’s financial instruments at September 30, 2018 and December 31, 2017 in accordance with ASC 825 (in thousands):
 
Carrying
Amount
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
September 30, 2018
 
 
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
63,823

 
$
63,823

 
$
63,823

 
$

 
$

Federal funds sold
662

 
662

 
662

 

 

Certificates of deposit investments
2,183

 
2,183

 

 
2,183

 

Available-for-sale securities
599,080

 
599,080

 
381

 
598,699

 

Held-to-maturity securities
69,409

 
67,395

 

 
67,395

 

Loans held for sale
940

 
940

 

 
940

 

Loans net of allowance for loan losses
2,375,381

 
2,325,734

 

 

 
2,325,734

Interest receivable
14,928

 
14,928

 

 
14,928

 

Federal Reserve Bank stock
7,390

 
7,390

 

 
7,390

 

Federal Home Loan Bank stock
3,880

 
3,880

 

 
3,880

 

Financial Liabilities
 

 
 

 
 

 
 

 
 

Deposits
$
2,651,397

 
$
2,651,414

 
$

 
$
2,123,040

 
$
528,374

Federal funds purchased
22,000

 
22,000

 
22,000

 

 

Securities sold under agreements to repurchase
98,875

 
98,868

 

 
98,868

 

Interest payable
1,400

 
1,400

 

 
1,400

 

Federal Home Loan Bank borrowings
120,736

 
120,264

 

 
120,264

 

Other borrowings
7,500

 
7,500

 

 
7,500

 

Junior subordinated debentures
28,958

 
23,780

 

 
23,780

 

 
Carrying
Amount
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
December 31, 2017
 
 
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
88,388

 
$
88,388

 
$
88,388

 
$

 
$

Federal funds sold
491

 
491

 
491

 

 

Certificates of deposit investments
1,685

 
1,692

 

 
1,692

 

Available-for-sale securities
578,579

 
578,579

 
172

 
575,859

 
2,548

Held-to-maturity securities
69,332

 
68,457

 

 
68,457

 

Loans held for sale
1,025

 
1,025

 

 
1,025

 

Loans net of allowance for loan losses
1,918,499

 
1,899,678

 

 

 
1,899,678

Interest receivable
10,832

 
10,832

 

 
10,832

 

Federal Reserve Bank stock
5,160

 
5,160

 

 
5,160

 

Federal Home Loan Bank stock
2,407

 
2,407

 

 
2,407

 

Financial Liabilities
 

 
 

 
 
 
 
 
 
Deposits
$
2,274,639

 
$
2,272,868

 
$

 
$
1,930,604

 
$
342,264

Securities sold under agreements to repurchase
155,388

 
155,394

 

 
155,394

 

Interest payable
602

 
602

 

 
602

 

Federal Home Loan Bank borrowings
60,038

 
59,968

 

 
59,968

 

Other borrowings
10,313

 
10,313

 

 
10,313

 

Junior subordinated debentures
24,000

 
18,050

 

 
18,050

 



Note 8 -- Business Combinations

First BancTrust Corporation

On December 11, 2017, the Company and Project Hawks Merger Sub LLC (formerly known as Project Hawks Merger Sub Corp.), a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Hawks Merger Sub”), entered into an Agreement and Plan of Merger (as amended as of January 18, 2018, the “First Bank Merger Agreement") with First BancTrust Corporation, a Delaware corporation (“First Bank”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of First Bank pursuant to a business combination whereby First Bank will merge with and into Hawks Merger Sub, with Hawks Merger Sub as the surviving entity and a wholly-owned subsidiary of the Company (the “First Bank Merger”).

At the effective time of the First Bank Merger, each share of common stock, par value $0.01 per share, of First Bank issued and outstanding immediately prior to the effective time of the First Bank Merger (other than shares held in treasury by First Bank and shares held by stockholders who had properly made and not withdrawn a demand for appraisal rights under Delaware law) converted into and become the right to receive, (a) $5.00 in cash and (b) 0.800 shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld and subject to certain adjustments, all as set forth in the First Bank Merger Agreement.

On May 1, 2018, the Company issued an aggregate total of 1,643,900 shares of common stock valued at $37.32 per share and approximately $10,275,000, including cash in lieu of fractional shares. First Bank’s wholly-owned bank subsidiary, First Bank & Trust, IL (“First Bank & Trust”), merged with and into First Mid Bank on August 10, 2018. At the time of the bank merger, First Bank & Trust’s banking offices became branches of First Mid Bank. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations ("ASC 805"),” and accordingly the assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Fair values are subject to refinement for up to one year after the closing date of May 1, 2018 as additional information regarding the closing date fair values become available. The total consideration paid was used to determine the amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets acquired, goodwill of $26.5 million was recorded for the acquisition. Goodwill recorded in the transaction, which reflects the synergies and economies of scale expected from combining operations and the enhanced revenue opportunities from the Company’s service capabilities, is not tax deductible, and was all assigned to the banking segment of the Company.



40






The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of the First Bank acquisition (in thousands).

Acquired
Book Value
Fair Value Adjustments
As Recorded by
First Bank & Trust
Assets



     Cash & due from banks
$
20,598



$
20,598

     Investment Securities
59,906

(320
)
59,586

     Loans
371,156

(7,875
)
363,281

     Allowance for loan losses
(4,412
)
4,412


     Other real estate owned
547

(12
)
535

     Premises and equipment
10,126

(689
)
9,437

     Goodwill
543

25,948

26,491

     Core deposit intangible

5,224

5,224

     Other assets
16,389

(256
)
16,133

              Total assets acquired
$
474,853

$
26,432

$
501,285

Liabilities and Stockholders' Equity



     Deposits
$
384,323

$
1,301

$
385,624

     FHLB advances
31,000

(328
)
30,672

     Subordinated debentures
6,186

(1,451
)
4,735

     Other liabilities
8,665

(36
)
8,629

              Total liabilities assumed
430,174

(514
)
429,660

              Net assets acquired
$
44,679

$
26,946

$
71,625

 
 
 
 
Consideration Paid
 
 
 
     Cash
 
 
$
10,275

     Common stock
 
 
61,350

              Total consideration paid
 
 
$
71,625


The Company has recognized approximately $7.1 million, pre-tax, of acquisition costs for the First Bank acquisition. These costs are included in legal and professional and other expense. Of the $7.9 million fair value adjustment to loans, approximately $3.6 million is being accreted to interest income over the remaining term of the loans. The differences between fair value and acquired value of the assumed time deposits of $1.3 million, of the assumed FHLB advances of $(328,000) and of the assumed subordinated debentures of $(1,451,000), are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible asset, with a fair value of $5.2 million, will be amortized on an accelerated basis over its estimated life of ten years.









41






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


Three months ended
Nine months ended

September 30,
September 30,
September 30,
September 30,

2018
2017
2018
2017
Net interest income
$
30,087

$
27,373

$
86,813

$
83,289

Provision for loan losses
2,551

1,679

5,683

5,546

Non-interest income
7,919

8,544

24,879

25,758

Non-interest expense
24,490

24,271

68,144

72,157

  Income before income taxes
10,965

9,967

37,865

31,344

Income tax expense
2,731

3,315

9,356

10,147

   Net income
$
8,234

$
6,652

$
28,509

$
21,197

 
 
 
 
 
Earnings per share




   Basic
$
0.54

$
0.47

$
1.94

$
1.50

   Diluted
$
0.54

$
0.47

$
1.94

$
1.50

 
 
 
 
 
Basic weighted average shares outstanding
15,290,539

14,172,574

14,704,888

14,142,813

Diluted weighted average shares outstanding
15,308,218

14,179,709

14,721,708

14,150,476


The unaudited pro forma condensed combined financial statements do not reflect any anticipated cost savings and revenue enhancements. Accordingly, the pro forma results of operations of the Company as of and after the First Bank business combination may not be indicative of the results that actually would have occurred if the combination had been in effect during the periods presented or of the results that may be attained in the future.

Actual revenue and earnings of First Bank & Trust included in the consolidated statement of income of the Company from the acquisition date to September 30, 2018 was $10,660,000 and $3,366,000, respectively.




 



42






ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries as of, and for the three and nine-month periods ended September 30, 2018 and 2017.  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 may contain certain forward-looking statements, 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. 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 risks and uncertainties, including those described in Item 1A-“Risk Factors” and other sections of the Company’s Annual Report on Form 10-K and the Company’s other filings with the SEC, and changes in interest rates, general economic conditions and those in the Company’s market area, 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 and the valuation of the investment portfolio, the Company’s success in raising capital and effecting and integrating acquisitions, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise. Further information concerning the Company and its business, including  a discussion of these and additional factors that could materially affect the Company’s financial results, is included in the Company’s 2017 Annual Report on Form 10-K under the headings “Item 1. Business" and “Item 1A. Risk Factors."

Acquisitions

On May 1, 2018, the Company completed its acquisition of First Bank. Financial results for the third quarter of 2018 include the income and expenses of First Bank & Trust for the period May 1 through September 30, 2018. At the date of the acquisition, the fair value of First Bank's total assets was $501 million, including $363 million of loans. The fair value of First Bank's deposits was $386 million. Net income before taxes was positively impacted by $1,852,000 due to First Bank & Trust's purchase accounting net accretion and amortization expense of intangibles during the quarter. During the third quarter of 2018, the Company also incurred $3,494,000 of pre-tax acquisition expenses related to the acquisition of First Bank, comprised primarily of legal, consulting and change-in-control costs. During the nine months ended September 30, 2018, pre-tax expenses related to the acquisition totaled $6,935,000.

On June 12, 2018, the Company and Almond Merger Sub, entered into an Agreement and Plan of Merger with SCB pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of SCB pursuant to a business combination whereby SCB will merge with and into Almond Merger Sub, whereupon the separate corporate existence of SCB will cease and Almond Merger Sub will continue as the surviving company and a wholly-owned subsidiary of the Company. The Company expects to complete this acquisition in November 2018.


Overview

This overview of management’s discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates which have an impact on the Company’s financial condition and results of operations you should carefully read this entire document.



43






Net income was $26,661,000 and $22,059,000 for the nine months ended September 30, 2018 and 2017, respectively. Diluted net income per common share available to common stockholders was $1.90 and $1.76 for the nine months ended September 30, 2018 and 2017.

The following table shows the Company’s annualized performance ratios for the nine months ended September 30, 2018 and 2017, compared to the performance ratios for the year ended December 31, 2017:
 
Nine months ended
 
Year ended
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
Return on average assets
1.14
%
 
1.04
%
 
0.94
%
Return on average common equity
9.84
%
 
9.96
%
 
8.92
%
Average equity to average assets
11.58
%
 
10.42
%
 
10.59
%

Total assets were $3.4 billion at September 30, 2018, compared to $2.8 billion as of December 31, 2017. From December 31, 2017 to September 30, 2018, cash and interest bearing deposits decreased $24.4 million, net loan balances increased $456.9 million and investment securities increased $20.6 million. Net loan balances were $2.38 billion at September 30, 2018 compared to $1.92 billion at December 31, 2017.

Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.73% for the nine months ended September 30, 2018, up from 3.55% for the same period in 2017. This increase was primarily due to an increase in loan balances, higher yields on investments, and accretion income from the acquisitions of First Bank and First Clover Leaf Bank. Net interest income before the provision for loan losses was $80.7 million compared to net interest income of $69.6 million for the same period in 2017. The increase in net interest income was primarily due to the growth in average earnings assets as a result of loans and investment securities acquired from First Bank offset by an increase in cost of deposits and borrowings.

Total non-interest income of $23,767,000 increased $641,000 or 2.8% from $23,126,000 for the same period last year. Trust revenues increased $238,000, primarily due to an increase in revenue from defined contribution and other retirement accounts, and an increase in brokerage revenue of $436,000, primarily due to an increase in the number of brokerage accounts, and an increase in net securities gains of $312,000 offset by a decrease in other income of $943,000 primarily due to a income tax refund received in 2017 resulting from overpayment of taxes in 2016 by First Clover Leaf Financial Corp.

Total non-interest expense of $63.7 million increased $8,591,000 or 15.6% from $55.1 million for the same period last year. This increase was primarily due to legal and professional costs associated with the acquisition of First Bank and an increase in salaries and benefits expense.

Following is a summary of the factors that contributed to the changes in net income (in thousands):
 
Change in Net Income
2018 versus 2017
 
Three months ended September 30,
 
Nine months ended September 30,
Net interest income
$
7,214

 
$
11,138

Provision for loan losses
(1,062
)
 
(432
)
Other income, including securities transactions
258

 
641

Other expenses
(6,578
)
 
(8,591
)
Income taxes
807

 
1,846

Increase in net income
$
639

 
$
4,602




44






Credit quality is an area of importance to the Company. Total nonperforming loans were $27.9 million at September 30, 2018, compared to $19.8 million at September 30, 2017 and $17.5 million at December 31, 2017. See the discussion under the heading “Loan Quality and Allowance for Loan Losses” for a detailed explanation of these balances. Repossessed asset balances totaled $2.1 million at September 30, 2018 compared to $2.3 million at September 30, 2017 and $2.8 million at December 31, 2017. The Company’s provision for loan losses for the nine months ended September 30, 2018 and 2017 was $5,483,000 and $5,051,000, respectively.  Total loans past due 30 days or more were 1.17% of loans at September 30, 2018 compared to 0.38% at September 30, 2017, and 0.56% of loans at December 31, 2017.  At September 30, 2018, the composition of the loan portfolio remained similar to the same period last year. Loans secured by both commercial and residential real estate comprised approximately 65.2% of the loan portfolio as of September 30, 2018 and 65.6% as of December 31, 2017.

The Company’s capital position remains strong and the Company has consistently maintained regulatory capital ratios above the “well-capitalized” standards. The Company’s Tier 1 capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at September 30, 2018 and 2017 and December 31, 2017 was 13.73%, 12.41% and 11.83%, respectively. The Company’s total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at September 30, 2018 and 2017 and December 31, 2017 was 14.62%, 13.26% and 12.70%, respectively. The increase in these ratios from December 31, 2017 was primarily due to net income added to retained earnings. The increase in these ratios was primarily due to the Company's capital raise that occurred during the second quarter of 2018.

The Company’s liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company maintains various sources of liquidity to fund its cash needs. See the discussion under the heading “Liquidity” for a full listing of sources and anticipated significant contractual obligations.

The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit.  The total outstanding commitments at September 30, 2018 and 2017 were $481 million and $440 million, respectively.  

Federal Deposit Insurance Corporation Insurance Coverage. As FDIC-insured institutions, First Mid Bank is required to pay deposit insurance premium assessments to the FDIC.  A number of requirements with respect to the FDIC insurance system have affect results, including insurance assessment rates. The Company expensed $668,000 and $582,000 for this assessment during the first nine months of 2018 and 2017, respectively.

In addition to its insurance assessment, each insured bank is subject to quarterly debt service assessments in connection with bonds issued by a government corporation that financed the federal savings and loan bailout.  The Company expensed $72,000 and $97,000 during the first nine months of 2018 and 2017 for this assessment, respectively.

Basel III. In September 2010, the Basel Committee on Banking Supervision proposed higher global minimum capital standards, including a minimum Tier 1 common capital ratio and additional capital and liquidity requirements. On July 2, 2013, the Federal Reserve Board approved a final rule to implement these reforms and changes required by the Dodd-Frank Act. This final rule was subsequently adopted by the OCC and the FDIC.

As included in the proposed rule of June 2012, the final rule includes new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and refines the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and First Mid Bank and First Bank beginning in 2015 are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount.



45






The final rule also makes three changes to the proposed rule of June 2012 that impact the Company. First, the proposed rule would have required banking organizations to include accumulated other comprehensive income (“AOCI”) in common equity tier 1 capital. AOCI includes accumulated unrealized gains and losses on certain assets and liabilities that have not been included in net income. Under existing general risk-based capital rules, most components of AOCI are not included in a banking organization's regulatory capital calculations. The final rule allows community banking organizations to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital.

Second, the proposed rule would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposure into two categories in order to determine the applicable risk weight. The final rule, however, retains the existing treatment for residential mortgage exposures under the general risk-based capital rules.

Third, the proposed rule would have required banking organizations with total consolidated assets of less than $15 billion as of December 31, 2009, such as the Company, to phase out over ten years any trust preferred securities and cumulative perpetual preferred securities from its Tier 1 capital regulatory capital. The final rule, however, permanently grandfathers into Tier 1 capital of depository institution holding companies with total consolidated assets of less than $15 billion as of December 31, 2009 any trust preferred securities or cumulative perpetual preferred stock issued before May 19, 2010.

See discussion under the heading "Capital Resources" for a description of the Company's, and First Mid Bank's risk-based capital.

Critical Accounting Policies and Use of Significant Estimates

The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Company’s financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements included in the Company’s 2017 Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

Allowance for Loan Losses. The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. An estimate of potential losses inherent in the loan portfolio are determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, the Company use organizational history and experience with credit decisions and related outcomes. The allowance for loan losses represents the best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The Company formally evaluates the allowance for loan losses quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted.

The Company estimates the appropriate level of allowance for loan losses by separately evaluating impaired and non-impaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a non-impaired loan is more subjective. Generally, the allowance assigned to non-impaired loans is determined based on migration analysis of historical net losses on each loan segment with similar risk characteristics, adjusted for qualitative factors including the volume and severity of identified classified loans, changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be required.


46








Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.

Investment in Debt and Equity Securities. The Company classifies its investments in debt and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting  Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which was codified into ASC 320. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of the Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income.

Deferred Income Tax Assets/Liabilities. The Company’s net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If the Company were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.

Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes,” codified within ASC 740. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.

Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the Company’s balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment as of September 30, 2017 as part of the goodwill impairment test and no impairment was identified.

As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the consolidated balance sheets. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually.



47






Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.

SFAS No. 157, “Fair Value Measurements”, which was codified into ASC 820, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date.

The three levels are defined as follows:

Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 — inputs that are unobservable and significant to the fair value measurement.

At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 7 – Fair Value of Assets and Liabilities.


Results of Operations

Net Interest Income

The largest source of revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities.  The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates.  The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds.  





48






The Company’s average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth for the three and nine months ended September 30, 2018 and 2017 in the following table (dollars in thousands):

 
Three months ended September 30, 2018
 
Three months ended September 30, 2017
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with other financial institutions
$
22,426

 
$
112

 
1.98
%
 
$
11,265

 
$
40

 
1.44
%
Federal funds sold
672

 
2

 
1.18
%
 
490

 
1

 
0.83
%
Certificates of deposit investments
2,605

 
13

 
1.98
%
 
1,685

 
9

 
2.17
%
Investment securities
 

 
 

 
 

 
 

 
 

 
 

Taxable
514,414

 
3,201

 
2.49
%
 
579,025

 
2,984

 
2.06
%
Tax-exempt (1)
175,415

 
1,310

 
2.99
%
 
172,617

 
1,195

 
2.77
%
Loans (2)
2,375,303

 
28,850

 
4.82
%
 
1,840,570

 
20,385

 
4.49
%
Total earning assets
3,090,835

 
33,488

 
4.30
%
 
2,605,652

 
24,614

 
3.83
%
Cash and due from banks
48,794

 
 

 
 

 
52,458

 
 

 
 

Premises and equipment
47,343

 
 

 
 

 
38,877

 
 

 
 

Other assets
184,508

 
 

 
 

 
140,768

 
 

 
 

Allowance for loan losses
(22,782
)
 
 

 
 

 
(18,595
)
 
 

 
 

Total assets
$
3,348,698

 
 

 
 

 
$
2,819,160

 
 

 
 

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 

 
 

 
 

 
 

 
 

 
 

Demand deposits
$
1,232,282

 
$
904

 
0.29
%
 
$
1,131,699

 
$
500

 
0.18
%
Savings deposits
401,731

 
147

 
0.15
%
 
366,541

 
119

 
0.13
%
Time deposits
514,004

 
1,166

 
0.90
%
 
325,070

 
409

 
0.51
%
Securities sold under agreements to repurchase
121,443

 
72

 
0.24
%
 
135,327

 
51

 
0.15
%
FHLB advances
100,897

 
559

 
2.20
%
 
73,051

 
283

 
1.57
%
Fed Funds Purchased
7,584

 
58

 
3.03
%
 
9,467

 
37

 
1.59
%
Junior subordinated debt
28,815

 
405

 
5.58
%
 
23,966

 
236

 
3.99
%
Other debt
10,622

 
90

 
3.36
%
 
12,177

 
106

 
3.53
%
Total interest-bearing liabilities
2,417,378

 
3,401

 
0.56
%
 
2,077,298

 
1,741

 
0.34
%
Non interest-bearing demand deposits
504,274

 
 

 
 

 
425,077

 
 

 
 

Other liabilities
10,984

 
 

 
 

 
11,472

 
 

 
 

Stockholders' equity
416,062

 
 

 
 

 
305,313

 
 

 
 

Total liabilities & equity
$
3,348,698

 
 

 
 

 
$
2,819,160

 
 

 
 

Net interest income
 

 
$
30,087

 
 

 
 

 
$
22,873

 
 

Net interest spread
 

 
 

 
3.74
%
 
 

 
 

 
3.49
%
Impact of non-interest bearing funds
 

 
 

 
0.10
%
 
 

 
 

 
0.06
%
Net yield on interest- earning assets
 

 
 

 
3.84
%
 
 

 
 

 
3.55
%
 
 
 
 
 
 
 
 
 
 
 
 
(1) The tax-exempt income is not recorded on a tax equivalent basis.
(2) Nonaccrual loans and loans held for sale are included in the average balances. Balances are net of unaccreted discount related to loans acquired.


49






 
Nine months ended September 30, 2018
 
Nine months ended September 30, 2017
 
Average
Balance
 
Interest
 
Average
Rate
 
Average
Balance
 
Interest
 
Average
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with other financial institutions
$
18,860

 
$
248

 
1.76
%
 
$
30,200

 
$
217

 
0.96
%
Federal funds sold
599

 
5

 
1.17
%
 
11,901

 
62

 
0.69
%
Certificates of deposit investments
2,273

 
34

 
1.99
%
 
3,867

 
41

 
1.42
%
Investment securities:
 

 
 

 
 

 
 

 
 

 
 

Taxable
505,062

 
9,496

 
2.51
%
 
579,444

 
8,999

 
2.07
%
Tax-exempt (1)
169,896

 
3,775

 
2.96
%
 
172,447

 
3,586

 
2.77
%
Loans (2)
2,193,568

 
75,219

 
4.58
%
 
1,820,264

 
61,337

 
4.51
%
Total earning assets
2,890,258

 
88,777

 
4.11
%
 
2,618,123

 
74,242

 
3.79
%
Cash and due from banks
47,745

 
 

 
 

 
54,011

 
 

 
 

Premises and equipment
43,333

 
 

 
 

 
39,448

 
 

 
 

Other assets
161,267

 
 

 
 

 
141,180

 
 

 
 

Allowance for loan losses
(22,458
)
 
 

 
 

 
(17,993
)
 
 

 
 

Total assets
$
3,120,145

 
 

 
 

 
$
2,834,769

 
 

 
 

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
Interest-bearing deposits
 

 
 

 
 

 
 

 
 

 
 

Demand deposits
$
1,155,724

 
$
2,037

 
0.24
%
 
$
1,129,427

 
$
1,289

 
0.15
%
Savings deposits
388,223

 
429

 
0.15
%
 
368,291

 
353

 
0.13
%
Time deposits
438,869

 
2,683

 
0.82
%
 
353,191

 
1,198

 
0.45
%
Securities sold under agreements to repurchase
143,707

 
196

 
0.18
%
 
149,970

 
137

 
0.12
%
FHLB advances
89,527

 
1,309

 
1.95
%
 
53,076

 
602

 
1.52
%
Fed Funds Purchased
4,883

 
93

 
2.55
%
 
4,334

 
49

 
1.50
%
Junior subordinated debt
26,858

 
1,013

 
5.04
%
 
23,945

 
680

 
3.80
%
Other debt
10,101

 
281

 
3.72
%
 
13,987

 
336

 
3.22
%
Total interest-bearing liabilities
2,257,892

 
8,041

 
0.48
%
 
2,096,221

 
4,644

 
0.30
%
Non interest-bearing demand deposits
492,775

 
 

 
 

 
434,201

 
 

 
 

Other liabilities
8,294

 
 

 
 

 
8,912

 
 

 
 

Stockholders' equity
361,184

 
 

 
 

 
295,435

 
 

 
 

Total liabilities & equity
$
3,120,145

 
 

 
 

 
$
2,834,769

 
 

 
 

Net interest income
 

 
$
80,736

 
 

 
 

 
$
69,598

 
 

Net interest spread
 

 
 

 
3.63
%
 
 

 
 

 
3.49
%
Impact of non-interest bearing funds
 

 
 

 
0.10
%
 
 

 
 

 
0.06
%
Net yield on interest- earning assets
 

 
 

 
3.73
%
 
 

 
 

 
3.55
%

(1) The tax-exempt income is not recorded on a tax equivalent basis.
(2) Nonaccrual loans and loans held for sale are included in the average balances. Balances are net of unaccreted discount related to loans acquired.


50






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 for the three and nine-months ended September 30, 2018, compared to the same periods in 2017 (in thousands):
 
Three months ended September 30, 2018 compared to 2017 Increase / (Decrease)
 
Nine months ended September 30, 2018 compared to 2017
Increase / (Decrease)
 
Total
Change
 
Volume (1)
 
Rate (1)
 
Total
Change
 
Volume (1)
 
Rate (1)
Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
72

 
$
52

 
$
20

 
$
31

 
$
(141
)
 
$
172

Federal funds sold
1

 
1

 

 
(57
)
 
(99
)
 
42

Certificates of deposit investments
4

 
9

 
(5
)
 
(7
)
 
(26
)
 
19

Investment securities:
 

 
 

 
 

 
 

 
 

 
 

Taxable
217

 
(1,659
)
 
1,876

 
497

 
(1,733
)
 
2,230

Tax-exempt (2)
115

 
19

 
96

 
189

 
(54
)
 
243

Loans (3)
8,465

 
6,756

 
1,709

 
13,882

 
12,905

 
977

Total interest income
8,874

 
5,178

 
3,696

 
14,535

 
10,852

 
3,683

Interest-Bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits
 

 
 

 
 

 
 

 
 

 
 

Demand deposits
404

 
51

 
353

 
748

 
28

 
720

Savings deposits
28

 
11

 
17

 
76

 
20

 
56

Time deposits
757

 
327

 
430

 
1,485

 
339

 
1,146

Securities sold under agreements to repurchase
21

 
(33
)
 
54

 
59

 
(10
)
 
69

FHLB advances
276

 
134

 
142

 
707

 
501

 
206

Federal Funds Purchased
21

 
(45
)
 
66

 
44

 
7

 
37

Junior subordinated debt
169

 
57

 
112

 
333

 
91

 
242

Other debt
(16
)
 
(12
)
 
(4
)
 
(55
)
 
(125
)
 
70

Total interest expense
1,660

 
490

 
1,170

 
3,397

 
851

 
2,546

Net interest income
$
7,214

 
$
4,688

 
$
2,526

 
$
11,138

 
$
10,001

 
$
1,137


(1) Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate.
(2) The tax-exempt income is not recorded on a tax-equivalent basis.
(3) Nonaccrual loans have been included in the average balances.

Net interest income increased $11.1 million, or 16.0%, to $80.7 million for the nine months ended September 30, 2018, from $69.6 million for the same period in 2017. Net interest income increased primarily due to the growth in average earning assets including loans and investments acquired from First Bank. The net interest margin increased primarily due higher yields on investments.

For the nine months ended September 30, 2018, average earning assets increased by $272.1 million, or 10.4%, and average interest-bearing liabilities increased $161.7 million or 7.7%, compared with average balances for the same period in 2017.



51






The changes in average balances for these periods are shown below:

Average interest-bearing deposits held by the Company decreased $11.3 million or 37.5%.
Average federal funds sold decreased $11.3 million or 95.0%.
Average certificates of deposits investments decreased $1.6 million or 41.2%
Average loans increased by $373.3 million or 20.5%.
Average securities decreased by $76.9 million or 10.2%.
Average interest-bearing customer deposits increased by $131.9 million or 7.1%.
Average securities sold under agreements to repurchase decreased by $6.3 million or 4.2%.
Average borrowings and other debt increased by $36.0 million or 37.8%.
Net interest margin increased to 3.73% for the first nine months of 2018 from 3.55% for the first nine months of 2017.

To compare the tax-exempt yields on interest-earning assets to taxable yields, the Company also computes non-GAAP net interest income on a tax equivalent basis (TE) where the interest earned on tax-exempt loans and securities is adjusted to an amount comparable to interest subject to normal income taxes assuming a federal tax rate of 21% (referred to as the tax equivalent adjustment). The year-to-date net yield on interest-earning assets (TE) was 3.80% and 3.68% for the first nine months of 2018 and 2017, respectively. The TE adjustments to net interest income for the nine months ended September 30, 2018 and 2017 were $1,481,000 and $2,547,000, respectively.

Provision for Loan Losses

The provision for loan losses for the nine months ended September 30, 2018 and 2017 was $5,483,000 and $5,051,000, respectively.  The increase in provision expense was primarily due to a increase in loan volume. Net charge-offs were $1,621,000 for the nine months ended September 30, 2018, compared to net charge offs of $3,215,000 for September 30, 2017.  Nonperforming loans were $27.9 million and $19.8 million as of September 30, 2018 and 2017, respectively.   For information on loan loss experience and nonperforming loans, see discussion under the “Nonperforming Loans” and “Loan Quality and Allowance for Loan Losses” sections below.

Other Income

An important source of the Company’s revenue is other income.  The following table sets forth the major components of other income for the three and nine-months ended September 30, 2018 and 2017 (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
$ Change
 
2018
 
2017
 
$ Change
Trust revenues
$
919

 
$
925

 
$
(6
)
 
$
2,934

 
$
2,696

 
$
238

Brokerage commissions
660

 
536

 
124

 
1,986

 
1,550

 
436

Insurance commissions
877

 
670

 
207

 
3,202

 
3,148

 
54

Service charges
2,009

 
1,758

 
251

 
5,447

 
5,160

 
287

Security gains, net

 
254

 
(254
)
 
901

 
589

 
312

Mortgage banking revenue, net
368

 
347

 
21

 
939

 
875

 
64

ATM / debit card revenue
1,979

 
1,595

 
384

 
5,443

 
4,828

 
615

Bank Owned Life Insurance
342

 
792

 
(450
)
 
933

 
1,355

 
(422
)
Other
765

 
784

 
(19
)
 
1,982

 
2,925

 
(943
)
Total other income
$
7,919

 
$
7,661

 
$
258

 
$
23,767

 
$
23,126

 
$
641


Following are explanations of the changes in these other income categories for the three months ended September 30, 2018 compared to the same period in 2017:

Trust revenues decreased $6,000 or 0.6% to $919,000 from $925,000. Trust assets, at market value, were $1,163.6 million at September 30, 2018 compared to $895.6 million at September 30, 2017.

Revenues from brokerage increased $124,000 or 23.1% to $660,000 from $536,000 primarily due to an increase in the number of brokerage accounts from new business development efforts.



52






Insurance commissions increased $207,000 or 30.9% to $877,000 from $670,000 primarily due to an increase in commissions and contingency income received from carriers based on claims experience during 2018 compared to 2017.

Fees from service charges increased $251,000 or 14.3% to $2,009,000 from $1,758,000 primarily due to a increase in income from the First Bank acquisition offset by a decrease in service charges based on the number of deposit transactions.

The sale of securities during the three months ended September 30, 2018 resulted in net securities gains of $0 compared to $254,000 during the three months ended September 30, 2017.

Mortgage banking income increased $21,000 or 6.1% to $368,000 from $347,000. Loans sold balances were as follows:

$19.9 million (representing 151 loans) for the three months ended September 30, 2018
$12.7 million (representing 124 loans) for the three months ended September 30, 2017

First Mid Bank generally releases the servicing rights on loans sold into the secondary market.

Revenue from ATMs and debit cards increased $384,000 or 24.1% to $1,979,000 from $1,595,000 due to an increase in electronic transactions.

Bank owned life insurance income decreased $450,000 or 56.8%. The decrease was primarily due to a death benefit of $511,000 received in 2017 that did not occur in 2018.

Other income decreased $19,000 or 2.4% to $765,000 from $784,000 primarily due to income tax refunds received in 2017 resulting from overpayment of taxes in 2016 by First Clover Leaf Financial and a decline in loan late charges and closing fees resulting from less loan transaction activity.

Following are explanations of the changes in these other income categories for the nine months ended September 30, 2018 compared to the same period in 2017:

Trust revenues increased $238,000 or 8.8% to $2,934,000 from $2,696,000 primarily from an increase in revenue from defined contribution and other retirement accounts due to increases in the market value of the assets. Trust assets, at market value, were $1,163.6 million at September 30, 2018 compared to $895.6 million at September 30, 2017.

Revenues from brokerage increased $436,000 or 28.1% to $1,986,000 from $1,550,000 primarily due to an increase in the number of brokerage accounts from new business development efforts.

Insurance commissions increased $54,000 or 1.7% to $3,202,000 from $3,148,000 primarily due to an increase in commissions and contingency income received from carriers based on claims experience during 2018 compared to 2017.

Fees from service charges increased $287,000 or 5.6% to $5,447,000 from $5,160,000 primarily due to a increase in income from the First Bank acquisition offset by a decrease in service charges based on the number of deposit transactions.

The sale of securities during the nine months ended September 30, 2018 resulted in net securities gains of $901,000 compared to $589,000 during the nine months ended September 30, 2017.

Mortgage banking income increased $64,000 or 7.3% to $939,000 from $875,000. Loans sold balances were as follows:

$48.3 million (representing 373 loans) for the nine months ended September 30, 2018
$44.2 million (representing 365 loans) for the nine months ended September 30, 2017

First Mid Bank generally releases the servicing rights on loans sold into the secondary market.


53







Revenue from ATMs and debit cards increased $615,000 or 12.7% to $5,443,000 from $4,828,000 due to an increase in electronic transactions.

Bank owned life insurance income decreased $422,000 or 31.1%. The decrease was primarily due to a death benefit of $511,000 received in 2017 that did not occur in 2018.

Other income decreased $943,000 or 32.2% to $1,982,000 from $2,925,000 primarily due to income tax refunds received in 2017 resulting from overpayment of taxes in 2016 by First Clover Leaf Financial and a decline in loan late charges and closing fees resulting from less loan transaction activity.

Other Expense

The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations.  The following table sets forth the major components of other expense for the three and nine-months ended September 30, 2018 and 2017 (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
$ Change
 
2018
 
2017
 
$ Change
Salaries and employee benefits
$
11,600

 
$
9,648

 
$
1,952

 
$
32,851

 
$
29,685

 
$
3,166

Net occupancy and equipment expense
3,530

 
3,129

 
401

 
10,308

 
9,378

 
930

Net other real estate owned expense (income)
(61
)
 
385

 
(446
)
 
22

 
530

 
(508
)
FDIC insurance
174

 
210

 
(36
)
 
740

 
679

 
61

Amortization of intangible assets
838

 
545

 
293

 
2,059

 
1,651

 
408

Stationery and supplies
328

 
168

 
160

 
725

 
539

 
186

Legal and professional
1,071

 
871

 
200

 
3,925

 
2,596

 
1,329

Marketing and donations
468

 
338

 
130

 
1,253

 
909

 
344

Other operating expenses
6,542

 
2,618

 
3,924

 
11,777

 
9,102

 
2,675

Total other expense
$
24,490

 
$
17,912

 
$
6,578

 
$
63,660

 
$
55,069

 
$
8,591



Following are explanations for the changes in these other expense categories for the three months ended September 30, 2018 compared to the same period in 2017:

Salaries and employee benefits, the largest component of other expense, increased $1,952,000 or 20.2% to $11,600,000 from $9,648,000.  The increase is primarily due to the addition of 112 employees from the First Bank acquisition on May 1, 2018 and merit increases in 2018 for continuing employees during the first quarter of 2018. There were 686 and 584 full-time equivalent employees at September 30, 2018 and 2017, respectively.

Occupancy and equipment expense increased $401,000 or 12.8% to $3,530,000 from $3,129,000. The increase was primarily due to increases maintenance and repair expense, rent expense, and building insurance related to the acquisition of First Bank during the second quarter of 2018.

Net other real estate owned expense (income) decreased $446,000 or 115.8% to $(61,000) from $385,000. The decrease in 2018 was primarily due to more losses on properties sold during 2017 than properties sold in 2018.

Expense for amortization of intangible assets increased $293,000 or 53.8% to $838,000 from $545,000 for the three months ended September 30, 2018 and 2017, respectively. The increase in 2018 was due to additional core deposit intangibles amortization from the acquisition of First Bank.

Other operating expenses increased $3,924,000 or 149.9% to $6,542,000 in 2018 from $2,618,000 in 2017 primarily due costs associated with the acquisition of First Bank.



54






On a net basis, all other categories of operating expenses increased $454,000 or 28.6% to $2,041,000 in 2018 from $1,587,000 in 2017.  The increase is primarily due to an increase in legal and professional fees primarily associated with the acquisition of First Bank.

Following are explanations for the changes in these other expense categories for the nine months ended September 30, 2018 compared to the same period in 2017:

Salaries and employee benefits, the largest component of other expense, increased $3,166,000 or 10.7% to $32,851,000 from $29,685,000.  The increase is primarily due to the addition of 112 employees from the First Bank acquisition and merit increases in 2018 for continuing employees during the first quarter of 2018. There were 686 and 584 full-time equivalent employees at September 30, 2018 and 2017, respectively.

Occupancy and equipment expense increased $930,000 or 9.9% to $10,308,000 from $9,378,000. The increase was primarily due to increases maintenance and repair expense, rent expense, and building insurance related to the acquisition of First Bank.

Net other real estate owned expense decreased $508,000 or 95.8% to $22,000 from $530,000. The decrease in 2018 was primarily due to more gains on properties sold during 2017 than properties sold during 2018.

Expense for amortization of intangible assets increased $408,000 or 24.7% to $2,059,000 from $1,651,000 for the nine months ended September 30, 2018 and 2017, respectively. The increase in 2018 was due to amortization of core deposit intangibles from the First Bank acquisition.

Other operating expenses increased $2,675,000 or 29.4% to $11,777,000 in 2018 from $9,102,000 in 2017 primarily due costs associated with the merger of First Clover Leaf Bank into First Mid Bank during the first quarter of 2017.

On a net basis, all other categories of operating expenses increased $1,920,000 or 40.7% to $6,643,000 in 2018 from $4,723,000 in 2017.  The increase is primarily due to an increase in legal and professional fees primarily associated with the acquisition of First Bank.

Income Taxes

Income tax expense for the three months ended September 30, 2018, amounted to $2.7 million (24.9% effective tax rate) compared to $3.5 million (31.8% effective tax rate) for the three months ended September 30, 2017. Total income tax expense amounted to $8.7 million (24.6% effective tax rate) for the nine months ended September 30, 2018, compared to $10.5 million (32.3% effective tax rate) for the same period in 2017. The decline in effective tax rate for the nine months ended September 30, 2018 compared to the same period in 2017 is primarily due to a change in the federal statutory corporate tax rate from 35% to 21% effective January 1, 2018 following the enactment of certain tax reforms through the Tax Cuts and Jobs Act, offset by an increase in, the State of Illinois tax rate from 7.75% to 9.50% beginning July 1, 2017.

The Company files U.S. federal and state of Illinois, Indiana, and Missouri income tax returns.  The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2015.


55






Analysis of Balance Sheets

Securities

The Company’s overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance.  The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the available-for-sale and held-to-maturity securities as of September 30, 2018 and December 31, 2017 (dollars in thousands):
 
September 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Weighted
Average
Yield
 
Amortized
Cost
 
Weighted
Average
Yield
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
196,774

 
2.27
%
 
$
185,128

 
1.98
%
Obligations of states and political subdivisions
176,273

 
2.99
%
 
165,037

 
2.86
%
Mortgage-backed securities: GSE residential
310,122

 
2.85
%
 
295,778

 
2.59
%
Trust preferred securities

 
%
 
2,893

 
2.15
%
Other securities
2,269

 
3.19
%
 
2,039

 
2.50
%
Total securities
$
685,438

 
2.68
%
 
$
650,875

 
2.55
%

At September 30, 2018, the Company’s investment portfolio increased by $34.6 million from December 31, 2017 primarily due to securities added in the acquisition of First Bank, net of declines due to securities that were sold to provide cash flow to fund loans. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed. The table below presents the credit ratings as of September 30, 2018 for certain investment securities (in thousands):

 
Amortized Cost
 
Estimated Fair Value
 
Average Credit Rating of Fair Value at September 30, 2018 (1)
 
 
 
AAA
 
AA +/-
 
A +/-
 
BBB +/-
 
< BBB -
 
Not rated
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
127,365

 
$
122,669

 
$

 
$
122,669

 
$

 
$

 
$

 
$

Obligations of state and political subdivisions
176,273

 
173,346

 
13,452

 
106,725

 
49,887

 
491

 

 
2,791

Mortgage-backed securities (2)
310,122

 
300,669

 
1,012

 

 

 

 

 
299,657

Other securities
2,269

 
2,396

 

 

 

 
2,015

 

 
381

Total available-for-sale
$
616,029

 
$
599,080

 
$
14,464

 
$
229,394

 
$
49,887

 
$
2,506

 
$

 
$
302,829

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
69,409

 
$
67,395

 
$

 
$
67,395

 
$

 
$

 
$

 
$


(1) Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.

(2) Mortgage-backed securities include mortgage-backed securities (MBS) and collateralized mortgage obligation (CMO) issues from the following government sponsored enterprises: FHLMC, FNMA, GNMA and FHLB. While MBS and CMOs are no longer explicitly rated by credit rating agencies, the industry recognizes that they are backed by agencies which have an implied government guarantee.





56






Other-than-temporary Impairment of Securities

Declines in the fair value, or unrealized losses, of all available for sale investment securities, are reviewed to determine whether the losses are either a temporary impairment or OTTI. Temporary adjustments are recorded when the fair value of a security fluctuates from its historical cost. Temporary adjustments are recorded in accumulated other comprehensive income, and impact the Company’s equity position. Temporary adjustments do not impact net income. A recovery of available for sale security prices also is recorded as an adjustment to other comprehensive income for securities that are temporarily impaired, and results in a positive impact to the Company’s equity position.

OTTI is recorded when the fair value of an available for sale security is less than historical cost, and it is probable that all contractual cash flows will not be collected. Investment securities are evaluated for OTTI on at least a quarterly basis. In conducting this assessment, the Company evaluates a number of factors including, but not limited to:

how much fair value has declined below amortized cost;
how long the decline in fair value has existed;
the financial condition of the issuers;
contractual or estimated cash flows of the security;
underlying supporting collateral;
past events, current conditions and forecasts;
significant rating agency changes on the issuer; and
the Company’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

If the Company intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, the entire amount of OTTI is recorded to noninterest income, and therefore, results in a negative impact to net income. Because the available for sale securities portfolio is recorded at fair value, the conclusion as to whether an investment decline is other-than-temporarily impaired, does not significantly impact the Company’s equity position, as the amount of the temporary adjustment has already been reflected in accumulated other comprehensive income/loss.

If the Company does not intend to sell the security and it is not more-likely-than-not it will be required to sell the security before recovery of its amortized cost basis, only the amount related to credit loss is recognized in earnings.  In determining the portion of OTTI that is related to credit loss, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. The remaining portion of OTTI, related to other factors, is recognized in other comprehensive earnings, net of applicable taxes.

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. See Note 3 -- Investment Securities in the Notes to Condensed Consolidated Financial Statements (unaudited) for a discussion of the Company’s evaluation and subsequent charges for OTTI.



57






Loans

The loan portfolio (net of unearned interest) is the largest category of the Company’s earning assets.  The following table summarizes the composition of the loan portfolio, including loans held for sale, as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
% Outstanding
Loans
 
December 31, 2017
 
% Outstanding
Loans
Construction and land development
$
91,355

 
3.8
%
 
$
107,594

 
5.5
%
Agricultural real estate
191,724

 
8.0
%
 
127,183

 
6.6
%
1-4 Family residential properties
367,343

 
15.3
%
 
293,667

 
15.1
%
Multifamily residential properties
100,368

 
4.2
%
 
61,798

 
3.2
%
Commercial real estate
814,574

 
33.9
%
 
681,757

 
35.2
%
Loans secured by real estate
1,565,364

 
65.2
%
 
1,271,999

 
65.6
%
Agricultural loans
120,770

 
5.0
%
 
86,631

 
4.5
%
Commercial and industrial loans
540,387

 
22.6
%
 
444,263

 
22.9
%
Consumer loans
57,248

 
2.4
%
 
29,749

 
1.5
%
All other loans
116,391

 
4.8
%
 
106,859

 
5.5
%
Total loans
$
2,400,160

 
100.0
%
 
$
1,939,501

 
100.0
%

Gross loan balances increased $460.7 million, or 23.75% primarily due to the loans acquired from First Bank.  The balance of real estate loans held for sale, included in the balances shown above, amounted to $940,000 and $1,025,000 as of September 30, 2018 and December 31, 2017, respectively.

Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. The Company does not have any sub-prime mortgages or credit card loans outstanding which are also generally considered to be higher credit risk.

The following table summarizes the loan portfolio geographically by branch region as of September 30, 2018 and December 31, 2017 (dollars in thousands):
 
September 30, 2018
 
December 31, 2017
 
Principal
balance
 
% Outstanding
Loans
 
Principal
balance
 
% Outstanding
loans
Central region
558,047

 
23.2
%
 
543,938

 
28.0
%
Sullivan region
383,192

 
16.0
%
 
167,977

 
8.7
%
Decatur region
507,115

 
21.1
%
 
378,867

 
19.5
%
Peoria region
284,268

 
11.8
%
 
189,639

 
9.8
%
Highland region
534,235

 
22.3
%
 
525,983

 
27.1
%
Southern region
133,303

 
5.6
%
 
133,097

 
6.9
%
Total all regions
$
2,400,160

 
100.0
%
 
$
1,939,501

 
100.0
%

Loans are geographically dispersed among these regions located in central and southwestern Illinois. While these regions have experienced some economic stress during 2018 and 2017, the Company does not consider these locations high risk areas since these regions have not experienced the significant declines in real estate values seen in some other areas in the United States.






58






The Company does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage of total risk-based capital for the periods shown above. At September 30, 2018 and December 31, 2017, the Company did have industry loan concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):
 
September 30, 2018
 
December 31, 2017
 
Principal
balance
 
% Outstanding
Loans
 
Principal
balance
 
% Outstanding
Loans
Other grain farming
$
236,804

 
9.87
%
 
$
170,758

 
8.80
%
Lessors of non-residential buildings
235,239

 
9.80
%
 
185,967

 
9.59
%
Lessors of residential buildings & dwellings
230,177

 
9.59
%
 
131,756

 
6.79
%
Hotels and motels
129,495

 
5.40
%
 
131,702

 
6.79
%
Other Gambling Industries
96,312

 
4.01
%
 
95,713

 
4.93
%

The Company had no further industry loan concentrations in excess of 25% of total risk-based capital.

The following table presents the balance of loans outstanding as of September 30, 2018, by contractual maturities (in thousands):
 
Maturity (1)
 
One year
or less(2)
 
Over 1 through
5 years
 
Over
5 years
 
Total
Construction and land development
$
69,914

 
$
5,801

 
$
15,640

 
$
91,355

Agricultural real estate
8,589

 
48,546

 
134,589

 
191,724

1-4 Family residential properties
29,049

 
79,514

 
258,780

 
367,343

Multifamily residential properties
12,245

 
50,323

 
37,800

 
100,368

Commercial real estate
75,138

 
322,363

 
417,073

 
814,574

Loans secured by real estate
194,935

 
506,547

 
863,882

 
1,565,364

Agricultural loans
97,040

 
21,121

 
2,609

 
120,770

Commercial and industrial loans
224,985

 
259,302

 
56,100

 
540,387

Consumer loans
5,574

 
44,564

 
7,110

 
57,248

All other loans
16,436

 
37,142

 
62,813

 
116,391

Total loans
$
538,970

 
$
868,676

 
$
992,514

 
$
2,400,160


(1) Based upon remaining contractual maturity.
(2) Includes demand loans, past due loans and overdrafts.

As of September 30, 2018, loans with maturities over one year consisted of approximately $1.4 billion in fixed rate loans and approximately $469 million 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 renewals and borrower requests, which are handled on a case-by-case basis.

Nonperforming Loans and Nonperforming Other Assets

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 (c) loans not included in (a) and (b) above which are defined as “troubled debt restructurings”. Repossessed assets include primarily repossessed real estate and automobiles.

The Company’s policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due.  The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal.  Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual


59






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.

Restructured loans are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven. Repossessed assets represent property acquired as the result of borrower defaults on loans. These assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure or repossession.  Write-downs occurring at foreclosure are charged against the allowance for loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs for subsequent declines in value are recorded in non-interest expense in other real estate owned along with other expenses related to maintaining the properties.

The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets at September 30, 2018 and December 31, 2017 (in thousands):
 
September 30,
2018
 
December 31,
2017
Nonaccrual loans
$
25,334

 
$
16,659

Restructured loans which are performing in accordance with revised terms
2,591

 
854

Total nonperforming loans
27,925

 
17,513

Repossessed assets
2,140

 
2,834

Total nonperforming loans and repossessed assets
$
30,065

 
$
20,347

Nonperforming loans to loans, before allowance for loan losses
1.16
%
 
0.90
%
Nonperforming loans and repossessed assets to loans, before allowance for loan losses
1.25
%
 
1.05
%

The $8,675,000 increase in nonaccrual loans during 2018 resulted from the net of $11,374,000 of loans put on nonaccrual status including $2,242,000 acquired from First Bank offset by $2,075,000 of loans becoming current or paid-off, $124,000 of loans transferred to other real estate and $500,000 of loans charged off.

The following table summarizes the composition of nonaccrual loans (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Balance
 
% of Total
 
Balance
 
% of Total
Construction and land development
$
67

 
0.3
%
 
$

 
%
Agricultural real estate
171

 
0.7
%
 
291

 
1.7
%
1-4 Family residential properties
4,682

 
18.5
%
 
2,687

 
16.1
%
Multifamily Residential properties
805

 
3.2
%
 
368

 
2.2
%
Commercial real estate
8,769

 
34.5
%
 
5,596

 
33.6
%
Loans secured by real estate
14,494

 
57.2
%
 
8,942

 
53.6
%
Agricultural loans
763

 
3.0
%
 
757

 
4.5
%
Commercial and industrial loans
9,473

 
37.4
%
 
6,658

 
40.1
%
Consumer loans
598

 
2.4
%
 
302

 
1.8
%
All Other Loans
6

 
%
 

 
%
Total loans
$
25,334

 
100.0
%
 
$
16,659

 
100.0
%

Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $1,096,000 and $366,000 for the nine months ended September 30, 2018 and 2017, respectively.

The $694,000 decrease in repossessed assets during the first nine months of 2018 resulted from the net of $640,000 of assets acquired from First Bank, $228,000 of additional assets repossessed, $12,000 of write downs and $1,550,000 of repossessed assets sold.


60






The following table summarizes the composition of repossessed assets (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Balance
 
% of Total
 
Balance
 
% of Total
Construction and land development
$
1,614

 
75.4
%
 
$
1,781

 
62.7
%
1-4 family residential properties
479

 
22.4
%
 
413

 
14.6
%
Commercial real estate

 
%
 
560

 
19.8
%
Total real estate
2,093

 
97.8
%
 
2,754

 
97.1
%
Commercial & industrial loans

 
%
 
44

 
1.6
%
Consumer loans
47

 
2.2
%
 
36

 
1.3
%
Total repossessed collateral
$
2,140

 
100.0
%
 
$
2,834

 
100.0
%

Repossessed assets sold during the first nine months of 2018 resulted in net losses of $11,000, of which $23,000 of net losses was related to real estate asset sales and $12,000 of net gains was related to other repossessed assets. Repossessed assets sold during the same period in 2017 resulted in net losses of $354,000, of which $21,000 of net losses was related to real estate asset sales and $333,000 of net losses was related to other repossessed assets.

Loan Quality and Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of the reserve necessary to adequately account for probable losses existing in the current portfolio. 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 that extends to the full range of the Company’s credit exposure.  The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Factors considered by management in evaluating the overall adequacy of the allowance include a migration analysis of the historical net loan losses by loan segment, the level and composition of nonaccrual, past due and renegotiated loans, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates.

Management reviews economic factors including the potential for reduced cash flow for commercial operating loans from reduction in sales or increased operating costs, decreased occupancy rates for commercial buildings, reduced levels of home sales for commercial land developments, the uncertainty regarding grain prices, increased operating costs for farmers, and increased levels of unemployment and bankruptcy impacting consumer’s ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. Management considers the allowance for loan losses a critical accounting policy.

Management recognizes there are risk factors that are inherent in the Company’s loan portfolio.  All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business.  The Company’s operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry.  Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company’s success. At September 30, 2018, the Company’s loan portfolio included $312.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $236.8 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $98.8 million from $213.8 million at December 31, 2017 while loans concentrated in other grain farming increased $66.0 million from $170.8 million at December 31, 2017.  While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio. In addition, the Company has $129.5 million of loans to motels and hotels.  The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region.  While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses. The Company also has $235.2 million of loans to lessors of non-residential buildings, $230.2 million of loans to lessors of residential buildings and dwellings, and $96.3 million of loans to other gambling industries.


61






The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the Board of Directors.  Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed.  The vast majority of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system.  Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint.  In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

The Company minimizes credit risk by adhering to sound underwriting and credit review policies.  Management and the board of directors of the Company review these policies at least annually.  Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval.  The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner.  The board of directors and management review the status of problem loans each month and formally determine a best estimate of the allowance for loan losses on a quarterly basis.  In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses.

Analysis of the allowance for loan losses as of September 30, 2018 and 2017, and of changes in the allowance for the three and nine month periods ended September 30, 2018 and 2017, is as follows (dollars in thousands):

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Average loans outstanding, net of unearned income
$
2,375,303

 
$
1,840,570

 
$
2,193,568

 
$
1,820,264

Allowance-beginning of period
22,045

 
18,209

 
19,977

 
16,753

Charge-offs:
 
 
 
 
 
 
 
Real estate-mortgage
450

 
563

 
1,230

 
914

Commercial, financial & agricultural
263

 
686

 
414

 
2,579

Installment
27

 
18

 
110

 
90

Other
106

 
142

 
287

 
307

Total charge-offs
846

 
1,409

 
2,041

 
3,890

Recoveries:
 

 
 

 
 

 
 

Real estate-mortgage
2

 
85

 
58

 
256

Commercial, financial & agricultural
5

 
152

 
126

 
203

Installment
31

 
11

 
66

 
21

Other
51

 
52

 
170

 
195

Total recoveries
89

 
300

 
420

 
675

Net charge-offs (recoveries)
757

 
1,109

 
1,621

 
3,215

Provision for loan losses
2,551

 
1,489

 
5,483

 
5,051

Allowance-end of period
$
23,839

 
$
18,589

 
$
23,839

 
$
18,589

Ratio of annualized net charge-offs to average loans
0.13
%
 
0.24
%
 
0.10
%
 
0.24
%
Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period)
0.99
%
 
1.00
%
 
0.99
%
 
1.00
%
Ratio of allowance for loan losses to nonperforming loans
85
%
 
94
%
 
85
%
 
94
%

The ratio of allowance for loan losses to loans outstanding was 0.99% as of September 30, 2018 compared to 1.00% as of September 30, 2017. The ratio of the allowance for loan losses to nonperforming loans is 85% as of September 30, 2018 compared to 94% as of September 30, 2017.  The decrease in this ratio is primarily due to the increase in loan balances and the decrease in nonperforming loans to $27.9 million at September 30, 2018 from $19.8 million at September 30, 2017 including $6.6 million in non-performing loans acquired from First Bank during the second quarter of 2018.



62






During the first nine months of 2018, the Company had net charge-offs of $1,621,000 compared to net charge-offs of $3,215,000 in 2017. During the first nine months of 2018, there were significant charge offs of one agricultural loan to one borrower of $93,000, one commercial real estate loan to one borrower of $169,000, three commercial loans to a single borrower of $257,000 and two residential real estate loans to two borrowers of $376,000. During the first nine months of 2017 there were charge offs of commercial real estate loans to three borrowers of $619,000, two agricultural loans to one borrower of $662,000, and nine commercial operating loans to four borrowers of $1,674,000.


Deposits

Funding of the Company’s earning assets is substantially provided by a combination of consumer, commercial and public fund deposits.  The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources.  The following table sets forth the average deposits and weighted average rates for the nine months ended September 30, 2018 and 2017 and for the year ended December 31, 2017 (dollars in thousands):

 
Nine months ended September 30, 2018
 
Nine months ended September 30, 2017
 
Year ended December 31, 2017
 
Average
Balance
 
Weighted
Average
Rate
 
Average
Balance
 
Weighted
Average
Rate
 
Average
Balance
 
Weighted
Average
Rate
Demand deposits:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing
$
492,775

 
%
 
$
434,201

 
%
 
$
438,575

 
%
Interest-bearing
1,155,724

 
0.24
%
 
1,129,427

 
0.15
%
 
1,119,835

 
0.16
%
Savings
388,223

 
0.15
%
 
368,291

 
0.13
%
 
367,261

 
0.13
%
Time deposits
438,869

 
0.82
%
 
353,191

 
0.45
%
 
348,278

 
0.49
%
Total average deposits
$
2,475,591

 
0.28
%
 
$
2,285,110

 
0.17
%
 
$
2,273,949

 
0.18
%

The following table sets forth the high and low month-end balances for the nine months ended September 30, 2018 and 2017 and for the year ended December 31, 2017 (in thousands):
 
Nine months ended September 30, 2018
 
Nine months ended September 30, 2017
 
Year ended
December 31, 2017
High month-end balances of total deposits
$
2,670,864

 
$
2,331,084

 
$
2,331,084

Low month-end balances of total deposits
2,208,941

 
2,217,477

 
2,217,477


During the first nine months of 2018, the average balance of deposits increased by $201.6 million from the average balance for the year ended December 31, 2017. Average non-interest bearing deposits increased by $54.2 million, average interest-bearing balances increased by $35.9 million, savings account balances increased $21.0 million and balances of time deposits increased $90.5 million. The increases were primarily due to the result of deposit balances acquired in the acquisition of First Bank during the second quarter of 2018.

Balances of time deposits of $100,000 or more include time deposits maintained for public fund entities and consumer time deposits. The following table sets forth the maturity of time deposits of $100,000 or more at September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
3 months or less
$
88,445

 
$
31,467

Over 3 through 6 months
38,795

 
34,194

Over 6 through 12 months
66,536

 
54,607

Over 12 months
88,130

 
46,805

Total
$
281,906

 
$
167,073




63






Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase are short-term obligations of First Mid Bank.  These obligations are collateralized with certain government securities that are direct obligations of the United States or one of its agencies.  These retail repurchase agreements are offered as a cash management service to its corporate customers.  Other borrowings consist of Federal Home Loan Bank (“FHLB”) advances, federal funds purchased, loans (short-term or long-term debt) that the Company has outstanding and junior subordinated debentures.

Information relating to securities sold under agreements to repurchase and other borrowings as of September 30, 2018 and December 31, 2017 is presented below (dollars in thousands):
 
September 30, 2018
 
December 31, 2017
Securities sold under agreements to repurchase
$
98,875

 
$
155,388

Fed funds
22,000

 

Federal Home Loan Bank advances:
 

 
 

Fixed term – due in one year or less
19,000

 

Fixed term – due after one year
101,736

 
60,038

Debt:
 

 
 

     Debt due after one year
7,500

 
10,313

Junior subordinated debentures
28,958

 
24,000

Total
$
278,069

 
$
249,739

Average interest rate at end of period
1.47
%
 
1.00
%
Maximum outstanding at any month-end:
 
 
 
Securities sold under agreements to repurchase
$
178,587

 
$
163,626

Federal funds purchased
22,000

 
20,000

Federal Home Loan Bank advances:
 

 
 

FHLB-Overnight
30,000

 
30,000

Fixed term – due in one year or less
19,000

 
5,000

Fixed term – due after one year
101,736

 
60,061

Debt:
 

 
 

Debt due in one year or less

 
4,000

     Debt due after one year
10,313

 
14,063

Junior subordinated debentures
30,221

 
24,000

Averages for the period (YTD):
 

 
 

Securities sold under agreements to repurchase
$
143,707

 
$
144,674

Federal funds purchased
4,883

 
3,996

Federal Home Loan Bank advances:
 

 
 
FHLB-overnight
11,903

 
8,598

Fixed term – due in one year or less
12,922

 
2,356

Fixed term – due after one year
64,703

 
46,452

Debt:
 

 
 

Loans due in one year or less
733

 
658

     Loans due after one year
9,368

 
12,632

Junior subordinated debentures
26,858

 
23,956

Total
$
275,077

 
$
243,322

Average interest rate during the period
1.40
%
 
1.02
%

Securities sold under agreements to repurchase decreased $56.5 million during the first nine months of 2018 primarily due to the seasonal declines in balances and cash flow needs of various customers. FHLB advances represent borrowings by First Mid Bank to economically fund loan demand.  



64






At September 30, 2018 the fixed term advances consisted of $121 million as follows:

$5 million advance with a 6-month maturity, at 2.10%, due October 16, 2018
$10 million advance with a 3-year maturity, at 1.42%, due November 5, 2018
$5 million advance with a 1.5-year maturity, at 1.49%, due December 28, 2018
$4 million advance with a 3-year maturity, at 1.72% due April 12, 2019
$5 million advance with a 2-year maturity, at 1.56%, due June 28, 2019
$10 million advance with a 11-month maturity at 2.81%, due August 30, 2019
$5 million advance with a 15-month maturity, at 2.63%, due September 27, 2019
$2 million advance with a 5-year maturity, at 1.89%, due October 17, 2019
$10 million advance with a 14-month maturity at 2.88%, due November 29, 2019
$5 million advance with a 1.5-year maturity, at 2.67%, due December 27, 2019
$5 million advance with a 2.5-year maturity, at 1.67%, due January 31, 2020
$5 million advance with a 4-year maturity, at 1.79%, due April 30, 2020
$10 million advance with a 1.5 year maturity at 2.95%, due May 29, 2020
$5 million advance with a 2-year maturity, at 2.75%, due June 26, 2020
$5 million advance with a 3-year maturity, at 1.75%, due July 31, 2020
$5 million advance with a 6-year maturity, at 2.30%, due August 24, 2020
$5 million advance with a 3.5-year maturity, at 1.83%, due February 1, 2021
$5 million advance with a 5-year maturity, at 1.85%, due April 12, 2021
$5 million advance with a 7-year maturity, at 2.55%, due October 1, 2021
$5 million advance with a 5-year maturity, at 2.71%, due March 21, 2022
$5 million advance with a 8-year maturity, at 2.40%, due January 9, 2023

The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $10 million. The balance on this line of credit was $0 as of September 30, 2018. This loan was renewed on April 13, 2018 for one year as a revolving credit agreement with a maximum available balance of $10 million. The interest rate is floating at 2.25% over the federal funds rate (4.43% at September 30, 2018). The loan is secured by all of the stock of First Mid Bank. The Company and First Mid Bank were in compliance with the then existing covenants at September 30, 2018 and 2017 and December 31, 2017.

On September 7, 2016, the Company entered into a credit agreement with The Northern Trust Company in the amount of $15 million as a fixed-rate note with a maturity date of September 7, 2020. This credit agreement was amended and restated on April 13, 2018. The interest rate is floating at 2.25% over the federal funds rate (4.43% at September 30, 2018) and interest and principal payments are due quarterly. As of September 30, 2018, the balance due was $7.5 million. The loan is secured by all of the stock of First Mid Bank. The Company used the proceeds of this note to fund the cash portion of the acquisition price of First Clover Leaf. The Company and First Mid Bank were in compliance with the then existing covenants at September 30, 2018 and December 31, 2017.

On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through First Mid-Illinois Statutory Trust I (“Trust I”), a statutory business trust and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering.  The Company established Trust I for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common equity of Trust I, a total of $10,310,000, was invested in junior subordinated debentures of the


65






Company.  The underlying junior subordinated debentures issued by the Company to Trust I mature in 2034, bear interest at three-month London Interbank Offered Rate (“LIBOR”) plus 280 basis points (5.29% and 4.21% at September 30, 2018 and December 31, 2017), reset quarterly, and are callable at par, at the option of the Company, quarterly. The Company used the proceeds of the offering for general corporate purposes.

On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through First Mid-Illinois Statutory Trust II (“Trust II”), a statutory business trust and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering.  The Company established Trust II for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common equity of Trust II, a total of $10,310 000, was invested in junior subordinated debentures of the Company.  The underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points, 3.93% and 3.19% at September 30, 2018 and December 31, 2017, respectively). The net proceeds to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield Bancorp, Inc. in 2006.

On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First Clover Financial. The $4,000,000 of trust preferred securities and an additional $124,000 additional investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (4.18% and 3.44% at September 30, 2018 and December 31, 2017, respectively) and resets quarterly.

On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First BancTrust Corporation. The $6,000,000 of trust preferred securities and an additional $186,000 additional investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (4.03% and 3.29% at September 30, 2018 and December 31, 2017, respectively) and resets quarterly.

The trust preferred securities issued by Trust I, Trust II, CLST I and FBTCST I are included as Tier 1 capital of the Company for regulatory capital purposes.  On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1 capital for regulatory purposes.  The final rule provided a five-year transition period, ending September 30, 2010, for application of the revised quantitative limits. On March 17, 2009, the Federal Reserve Board adopted an additional final rule that delayed the effective date of the new limits on inclusion of trust preferred securities in the calculation of Tier 1 capital until March 31, 2012. The application of the revised quantitative limits did not and is not expected to have a significant impact on its calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized. The Dodd-Frank Act, signed into law July 21, 2010, removes trust preferred securities as a permitted component of a holding company’s Tier 1 capital after a three-year phase-in period beginning January 1, 2013 for larger holding companies. For holding companies with less than $15 billion in consolidated assets, existing issues of trust preferred securities are grandfathered and not subject to this new restriction. Similarly, the final rule implementing the Basel III reforms allows holding companies with less than $15 billion in consolidated assets as of December 31, 2009 to continue to count toward Tier 1 capital any trust preferred securities issued before May 19, 2010. New issuances of trust preferred securities, however would not count as Tier 1 regulatory capital.

In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This rule is generally referred to as the “Volcker Rule.” On December 10, 2013, the federal banking agencies issued final rules to implement the prohibitions required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry regarding the adverse impact the final rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets if (1) the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the offering proceeds received by the collateralized debt obligation were invested primarily in qualifying trust preferred


66






collateral, and (3) the banking entity’s interests in the collateralized debt obligation was acquired on or prior to December 10, 2013.  Although the Volcker Rule impacts many large banking entities, the Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company or First Mid Bank.


Interest Rate Sensitivity

The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk.  Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of interest-bearing assets differ significantly from the maturity or repricing characteristics of interest-bearing liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities.  This balance serves to limit the adverse effects of changes in interest rates.  The Company’s asset liability management committee (ALCO) oversees the interest rate sensitivity position and directs the overall allocation of funds.

In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as “static GAP” analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet.



67






The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at September 30, 2018 (dollars in thousands):
 
Rate Sensitive Within
 
Fair Value
 
1 year
 
1-2 years
 
2-3 years
 
3-4 years
 
4-5 years
 
Thereafter
 
Total
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and other interest-bearing deposits
$
11,097

 
$

 
$

 
$

 
$

 
$

 
$
11,097

 
$
11,097

Certificates of deposit investments
1,233

 
950

 

 

 

 

 
2,183

 
2,183

Taxable investment securities
381

 

 
21,435

 
26,376

 
38,403

 
408,548

 
495,143

 
493,129

Nontaxable investment securities

 
697

 
2,843

 
5,750

 
1,987

 
162,069

 
173,346

 
173,346

Loans
1,033,171

 
313,006

 
398,454

 
272,566

 
255,081

 
127,882

 
2,400,160

 
2,350,513

Total
$
1,045,882


$
314,653


$
422,732


$
304,692


$
295,471


$
698,499


$
3,081,929


$
3,030,268

Interest-bearing liabilities:
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Savings and NOW accounts
$
286,823

 
$
98,946

 
$
98,946

 
$
98,946

 
$
98,946

 
$
464,699

 
$
1,147,306

 
$
1,147,306

Money market accounts
344,478

 
21,686

 
21,686

 
21,686

 
21,686

 
50,577

 
481,799

 
481,799

Other time deposits
355,253

 
105,973

 
36,680

 
17,411

 
12,095

 
945

 
528,357

 
528,374

Short-term borrowings/debt
120,875

 

 

 

 

 

 
120,875

 
120,868

Long-term borrowings/debt
80,194

 
52,000

 
10,000

 
10,000

 
5,000

 

 
157,194

 
151,544

Total
$
1,187,623

 
$
278,605

 
$
167,312

 
$
148,043

 
$
137,727

 
$
516,221

 
$
2,435,531

 
$
2,429,891

Rate sensitive assets – rate sensitive liabilities
$
(141,741
)
 
$
36,048

 
$
255,420

 
$
156,649

 
$
157,744

 
$
182,278

 
$
646,398

 
 

Cumulative GAP
(141,741
)
 
(105,693
)
 
149,727

 
306,376

 
464,120

 
646,398

 
 

 
 

Cumulative amounts as % of total Rate sensitive assets
(4.6
)%
 
1.2
 %
 
8.3
%
 
5.1
%
 
5.1
%
 
5.9
%
 
 
 
 
Cumulative Ratio
(4.6
)%
 
(3.4
)%
 
4.9
%
 
9.9
%
 
15.1
%
 
21.0
%
 
 
 
 

The static GAP analysis shows that at September 30, 2018, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis.  The Company’s ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank’s and First Bank's historical experience and with known industry trends.  ALCO meets at least monthly to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities.  The Company is currently experiencing downward pressure on asset yields resulting from the extended period of historically low interest rates and heightened competition for loans. A continuation of this environment could result in a decline in interest income and the net interest margin.


68






Capital Resources

At September 30, 2018, the Company’s stockholders' equity increased $109 million, or 35%, to $417 million from $308 million as of December 31, 2017. During the first nine months of 2018, net income contributed $26.7 million to equity before the payment of dividends to stockholders, stock issued in the acquisition for First Bank contributed $61.4 million and stock issued following the capital raise, net of direct issuance costs, contributed $34 million. Dividends paid to common stock holders decreased equity by $4.4 million. The change in market value of available-for-sale investment securities decreased stockholders' equity by $9.9 million, net of tax.

The Company is subject to various regulatory capital requirements administered by the federal banking agencies.  Bank holding companies follow minimum regulatory requirements established by the Board of Governors of the Federal Reserve System (“Federal Reserve System”), and First Mid Bank and First Bank follows similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency (“OCC”).  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 regulatory capital standards to ensure capital adequacy require the the Company and its subsidiary bank to maintain a minimum capital amounts and ratios (set forth in the table below). Management believes that, as of September 30, 2018 and December 31, 2017, the Company and First Mid Bank met all capital adequacy requirements.



69






To be categorized as well-capitalized, total risk-based capital, Tier 1 risk-based capital, common equity Tier 1 risk-based capital and Tier 1 leverage ratios must be maintained as set forth in the following table (dollars in thousands):
 
Actual
 
Required Minimum For Capital Adequacy Purposes
 
To Be Well-Capitalized Under Prompt Corrective Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Total Capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Company
$
389,391

 
14.62
%
 
$
262,942

 
> 9.875%
 
N/A

 
N/A
First Mid Bank
343,076

 
12.92

 
262,154

 
> 9.875
 
$
265,473

 
> 10.00%
Tier 1 Capital (to risk-weighted assets)
 

 
 

 
 

 
 
 
 

 
 
Company
365,552

 
13.73

 
209,688

 
> 7.875
 
N/A

 
N/A
First Mid Bank
319,237

 
12.03

 
209,060

 
> 7.875
 
212,378

 
> 8.00
Common Equity Tier 1 Capital (to risk-weighted assets)
 
 

 
 
 
 

 
 
Company
335,552

 
12.60

 
169,748

 
> 6.375
 
N/A

 
N/A
First Mid Bank
319,237

 
12.03

 
169,239

 
> 6.375
 
172,557

 
> 6.50
Tier 1 Capital (to average assets)
 

 
 

 
 

 
 
 
 

 
 
Company
365,552

 
11.24

 
130,116

 
> 4.00
 
N/A

 
N/A
First Mid Bank
319,237

 
9.83

 
129,853

 
> 4.00
 
162,316

 
> 5.00
December 31, 2017
 

 
 

 
 
 
 
 
 

 
 
Total Capital (to risk-weighted assets)
 

 
 

 
 

 
 
 
 

 
 
Company
$
290,843

 
12.70
%
 
$
211,848

 
> 9.25%
 
N/A

 
N/A
First Mid Bank
282,621

 
12.39

 
211,064

 
> 9.25
 
$
228,177

 
> 10.00%
Tier 1 Capital (to risk-weighted assets)
 

 
 
 
 

 
 
 
 

 
 
Company
270,866

 
11.83

 
166,043

 
> 7.25
 
N/A

 
N/A
First Mid Bank
262,644

 
11.51

 
165,428

 
> 7.25
 
182,542

 
> 8.00
Common Equity Tier 1 Capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
Company
246,866

 
10.78

 
131,690

 
> 5.75
 
N/A

 
N/A
First Mid Bank
262,644

 
11.51

 
131,202

 
> 5.75
 
148,315

 
> 6.50
Tier 1 Capital (to average assets)
 

 
 

 
 

 
 
 
 

 
 
Company
270,866

 
9.91

 
109,381

 
> 4.00
 
N/A

 
N/A
First Mid Bank
262,644

 
9.63

 
109,113

 
> 4.00
 
136,392

 
> 5.00

The Company's risk-weighted assets, capital and capital ratios for September 30, 2018 are computed in accordance with Basel III capital rules which were effective January 1, 2015. Prior periods are computed following previous rules. See heading "Basel III" in the Overview section of this report for a more detailed description of the Basel III rules. As of September 30, 2018, both the Company and First Mid Bank had capital ratios above the required minimums for regulatory capital adequacy, and First Mid Bank had capital ratios that qualified it for treatment as well-capitalized under the regulatory framework for prompt corrective action with respect to banks.  


Stock Plans

Participants may purchase Company stock under the following four plans of the Company: the Deferred Compensation Plan, the First Retirement and Savings Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan.  For more detailed information on these plans, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.



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At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan").  The SI Plan was implemented to succeed the Company’s 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders.  Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.

A maximum of 149,983 shares of common stock may be issued under the SI Plan.  There were no stock options granted in 2017 or 2016.  The Company awarded 13,250 restricted stock awards during 2018 and 15,450 and 18,391 as stock unit awards during 2018 and 2017, respectively.


Employee Stock Purchase Plan

At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”).  The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code.  A maximum of 600,000 shares of common stock may be issued under the ESPP.  


Stock Repurchase Program

Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock.  The repurchase programs approved by the Board of Directors are as follows:

On August 5, 1998, repurchases of up to 3%, or $2 million, of the Company’s common stock.
In March 2000, repurchases up to an additional 5%, or $4.2 million of the Company’s common stock.
In September 2001, repurchases of $3 million of additional shares of the Company’s common stock.
In August 2002, repurchases of $5 million of additional shares of the Company’s common stock.
In September 2003, repurchases of $10 million of additional shares of the Company’s common stock.
On April 27, 2004, repurchases of $5 million of additional shares of the Company’s common stock.
On August 23, 2005, repurchases of $5 million of additional shares of the Company’s common stock.
On August 22, 2006, repurchases of $5 million of additional shares of the Company’s common stock.
On February 27, 2007, repurchases of $5 million of additional shares of the Company’s common stock.
On November 13, 2007, repurchases of $5 million of additional shares of the Company’s common stock.
On December 16, 2008, repurchases of $2.5 million of additional shares of the Company’s common stock.
On May 26, 2009, repurchases of $5 million of additional shares of the Company’s common stock.
On February 22, 2011, repurchases of $5 million of additional shares of the Company’s common stock.
On November 13, 2012, repurchases of $5 million of additional shares of the Company's common stock.
On November 19, 2013, repurchases of $5 million additional shares of the Company's common stock.
On October 28, 2014, repurchases of $5 million additional shares of the Company's common stock.

During the nine months ended September 30, 2018, the Company repurchased 2,588 shares at $95,109. These shares were a result of of cancellation of shares withheld in conjunction with vested options of one First Bank employee. The shares were withheld to cover payroll taxes. Since 1998, the Company has repurchased a total of 2,066,315 shares at a total price of approximately $70.4 million.  As of September 30, 2018, the Company is authorized per all repurchase programs to purchase $6.3 million in additional shares.




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Liquidity

Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of the business.  Financial obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing.  The Company’s liquidity management focuses on the ability to obtain funds economically through assets that may be converted into cash at minimal costs or through other sources. The Company’s other sources of cash include overnight federal fund lines, Federal Home Loan Bank advances, deposits of the State of Illinois, the ability to borrow at the Federal Reserve Bank of Chicago, and the Company’s operating line of credit with The Northern Trust Company.  Details for the sources include:

First Mid Bank has $65 million available in overnight federal fund lines, including $30 million from First Tennessee Bank, N.A., $10 million from U.S. Bank, N.A., $10 million from Wells Fargo Bank, N.A. and $15 million from The Northern Trust Company.  Availability of the funds is subject to First Mid Bank meeting minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total average assets.  As of September 30, 2018, First Mid Bank met these regulatory requirements.

First Mid Bank and First Bank can 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 September 30, 2018, the excess collateral at the FHLB would support approximately $408.9 million of additional advances for First Mid Bank and First Bank.

First Mid Bank is a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged.

In addition, as of September 30, 2018, the Company had a revolving credit agreement in the amount of $10 million with The Northern Trust Company with an outstanding balance of $0 and $10 million in available funds.  This loan was renewed on April 13, 2018 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of First Mid Bank, including requirements for operating and capital ratios. The Company and its subsidiary bank were in compliance with the then existing covenants at September 30, 2018 and 2017 and December 31, 2017.

Management continues to monitor its expected liquidity requirements carefully, focusing primarily on cash flows from:

lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions;
deposit activities, including seasonal demand of private and public funds;
investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Treasury and government agency securities; and
operating activities, including scheduled debt repayments and dividends to stockholders.

The following table summarizes significant contractual obligations and other commitments at September 30, 2018 (in thousands):
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Time deposits
$
528,357

 
$
355,253

 
$
142,653

 
$
29,506

 
$
945

Debt
38,430

 
3,750

 
3,750

 

 
30,930

Other borrowings
219,875

 
142,875

 
62,000

 
15,000

 

Operating leases
43,273

 
2,472

 
4,027

 
3,799

 
32,975

Supplemental retirement
549

 
100

 
108

 
100

 
241

 
$
830,484

 
$
504,450

 
$
212,538

 
$
48,405

 
$
65,091


For the nine months ended September 30, 2018, net cash of $26.4 million and $14.1 million was provided from operating activities and financing activities, respectively, and $65.0 million was used in investing activities. In total, cash and cash equivalents decreased by $24.4 million since year-end 2017.



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Off-Balance Sheet Arrangements

First Mid Bank and First Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include lines of credit, letters of credit and other commitments to extend credit.  Each of these instruments involves, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets.  The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments.

The off-balance sheet financial instruments whose contract amounts represent credit risk at September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Unused commitments and lines of credit:
 
 
 
Commercial real estate
$
88,778

 
$
73,268

Commercial operating
263,748

 
223,960

Home equity
43,180

 
38,318

Other
77,897

 
69,333

Total
$
473,603

 
$
404,879

Standby letters of credit
$
7,862

 
$
10,626


The increase in 2018 is primarily due to the acquisition of First Bank. Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded within ninety days.  Lines of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long as there is no violation of any condition established in the loan agreement.  Both commitments to originate credit and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the lines and some commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties.  Standby letters of credit are primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers.  The maximum amount of credit that would be extended under letters of credit is equal to the total off-balance sheet contract amount of such instrument.


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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the market risk faced by the Company since December 31, 2017.  For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.


ITEM 4.  CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report.  Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.  Further, there have been no changes in the Company’s internal control over financial reporting during the last fiscal quarter that have materially affected or that are reasonably likely to affect materially the Company’s internal control over financial reporting.





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PART II

ITEM 1.
LEGAL PROCEEDINGS

On February 13, 2018, an alleged class action complaint was filed by a purported stockholder of First Bank in the United States District Court for the District of Delaware captioned Parshall v. First BancTrust Corporation (Case No. 1:18-cv-00218) against the Company, Merger Sub, First Bank and members of First Bank’s board of directors (the “Lawsuit”). The Lawsuit related to the Agreement and Plan of Merger, dated as of December 11, 2017 (as amended by the First Amendment to Agreement and Plan of Merger entered into as of January 18, 2018), among the Company, Merger Sub and First Bank and the merger contemplated thereby (the “Merger”). Among other things, the Lawsuit alleged that the Registration Statement on Form S-4 filed with the SEC by the Company on January 22, 2018 failed to disclose allegedly material information relating to the Company’s and First Bank’s financial projections, the analyses performed by First Bank’s financial advisor, and alleged potential conflicts of interest of First Bank’s officers, directors and financial advisor.  The plaintiff sought, among other relief, to enjoin the Merger from proceeding. The Company believes that the factual allegations in the Lawsuit were without merit.

On March 9, 2018, in order to moot plaintiff’s disclosure claims, reduce the expenses, burdens, risks and uncertainties inherent in litigation and avoid the risk of delaying or adversely affecting the Merger, in exchange for the plaintiff agreeing to withdraw the Lawsuit and dismiss his claims with prejudice, the Company and First Bank made additional supplemental disclosures to the proxy statement/prospectus related to the Merger that was first mailed to stockholders of First Bank on or about February 9, 2018. The agreement between the parties did not release or otherwise prejudice any potential claims of any member of the putative class other than the plaintiff and did not constitute any admission by any of the defendants as to the merits of any claims. In addition, in connection with the mootness of the disclosure claims, the parties contemplate that plaintiff’s counsel will seek an award of attorneys’ fees and expenses.

From time to time the Company and its subsidiaries may be involved in litigation that the Company believes is a type common to our industry. None of any such existing claims are believed to be individually material at this time to the Company, although the outcome of any such existing claims cannot be predicted with certainty.


ITEM 1A.  RISK FACTORS

Various risks and uncertainties, some of which are difficult to predict and beyond the Company’s control, could negatively impact the Company.  As a financial institution, the Company is exposed to interest rate risk, liquidity risk, credit risk, operational risk, risks from economic or market conditions, and general business risks among others.  Adverse experience with these or other risks could have a material impact on the Company’s financial condition and results of operations, as well as the value of its common stock.  See the risk factors and “Supervision and Regulation” described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
 
 
 
 
 
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total Number of Shares Purchased
 
(b) Average Price Paid per Share
 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2018 - July 31, 2018
0
 
$0.00
 
0
 
$
6,280,000

August 1, 2018 - August 31, 2018
0
 
$0.00
 
0
 
$
6,280,000

September 1, 2018 - September 30, 2018
0
 
$0.00
 
0
 
$
6,280,000

Total
0
 
$0.00
 
0
 
$
6,280,000

See heading “Stock Repurchase Program” for more information regarding stock purchases.


75







ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.
OTHER INFORMATION

None.

ITEM 6.
EXHIBITS

The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that follows the Signature Page and that immediately precedes the exhibits filed.


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Exhibit Index to Quarterly Report on Form 10-Q
Exhibit Number
Description and Filing or Incorporation Reference
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2018 and December 31, 2017, (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017, (iii) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017, and (iv) the Notes to Consolidated Financial Statements.


77






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:  November 8, 2018
dively.jpg
Joseph R. Dively
President and Chief Executive Officer


smith.jpg
Matthew K. Smith
Chief Financial Officer







78