Amend Bylaw, Shareholder Vote, Other Events, Exhibits
8-K
2019-04-12
Enter Agreement, Off-BS Arrangement, Exhibits
8-K
2019-01-24
Earnings, Exhibits
8-K
2019-01-24
Earnings, Exhibits
8-K
2018-11-15
Regulation FD, Other Events, Exhibits
8-K
2018-10-25
Earnings, Exhibits
8-K
2018-10-24
Other Events, Exhibits
8-K
2018-10-23
Enter Agreement, Off-BS Arrangement, Exhibits
8-K
2018-10-10
Other Events
8-K
2018-10-09
Other Events
8-K
2018-09-25
Officers, Exhibits
8-K
2018-09-12
Other Events
8-K
2018-07-26
Earnings, Exhibits
8-K
2018-06-13
Enter Agreement, Other Events, Exhibits
8-K
2018-06-12
Enter Agreement, Regulation FD, Other Events, Exhibits
8-K
2018-05-01
Off-BS Arrangement, Regulation FD, Other Events, Exhibits
8-K
2018-04-25
Officers, Amend Bylaw, Shareholder Vote, Other Events, Exhibits
8-K
2018-04-13
Enter Agreement, Off-BS Arrangement, Exhibits
8-K
2018-03-29
Other Events
8-K
2018-03-15
Other Events
8-K
2018-03-09
Other Events
8-K
2018-03-02
Other Events
8-K
2018-02-23
Officers
8-K
2018-02-12
Other Events
8-K
2018-01-25
Earnings, Exhibits
8-K
2018-01-23
Officers, Exhibits
8-K
2018-01-18
Enter Agreement, Exhibits
Comparables
GWPH
GW Pharmaceuticals
5,610
OMAB
Central North Airport Group
2,420
THFF
First Financial
504
CVCY
Central Valley Community Bancorp
273
KFFB
Kentucky First Federal Bancorp
63
MMND
Mastermind
0
PRKR
Parkervision
0
WNDM
Wound Management Technologies
0
CLRI
Cleartronic
0
EMG
Emergent Capital
0
FMBH 2019-03-31
Content
Part I
Note 1 -- Basis of Accounting and Consolidation
Note 2 -- Earnings per Share
Note 3 -- Investment Securities
Note 4 - Loans and Allowance for Loan Losses
Note 5 -- Goodwill and Intangible Assets
Note 6 -- Repurchase Agreements and Other Borrowings
Note 7 -- Fair Value of Assets and Liabilities
Note 8 -- Business Combinations
Note 9 -- Leases
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-31.1
fmbh-ex311x2019331.htm
EX-31.2
fmbh-ex312x2019331.htm
EX-32.1
fmbh-ex321x2019331.htm
EX-32.2
fmbh-ex322x2019331.htm
First Mid Illinois Bancshares Earnings 2019-03-31
FMBH 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 fmbh-2019331x10q.htm 10-Q Document
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 March 31, 2019
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 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)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
FMBH
NASDAQ Global Market
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 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 May 7, 2019, 16,677,128 common shares, $4.00 par value, were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
First Mid Bancshares, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
March 31, 2019
December 31, 2018
Assets
Cash and due from banks:
Non-interest bearing
$
62,767
$
63,593
Interest bearing
169,285
77,142
Federal funds sold
496
665
Cash and cash equivalents
232,548
141,400
Certificates of deposit investments
7,320
7,569
Investment securities:
Available-for-sale, at fair value
695,618
692,274
Held-to-maturity, at amortized cost (estimated fair value of $68,743 and $67,909 at March 31, 2019 and December 31, 2018, respectively)
69,462
69,436
Loans held for sale
1,233
1,508
Loans
2,595,761
2,643,011
Less allowance for loan losses
(26,704
)
(26,189
)
Net loans
2,569,057
2,616,822
Interest receivable
16,073
16,881
Other real estate owned
3,796
2,534
Premises and equipment, net
59,237
59,117
Goodwill, net
104,997
105,277
Intangible assets, net
32,464
33,820
Bank owned life insurance
65,914
65,484
Right of use lease assets
13,531
—
Other assets
24,369
27,612
Total assets
$
3,895,619
$
3,839,734
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing
$
628,944
$
575,784
Interest bearing
2,417,269
2,412,902
Total deposits
3,046,213
2,988,686
Securities sold under agreements to repurchase
157,760
192,330
Interest payable
2,166
1,758
FHLB borrowings
119,791
119,745
Other borrowings
6,257
7,724
Junior subordinated debentures
29,042
29,000
Lease liabilities
13,533
—
Other liabilities
23,705
24,627
Total liabilities
3,398,467
3,363,870
Stockholders’ Equity:
Common stock, $4 par value; authorized 30,000,000 shares; issued 17,251,505 and 17,219,012 shares in 2019 and 2018, respectively
71,006
70,876
Additional paid-in capital
294,837
293,937
Retained earnings
144,708
131,392
Deferred compensation
2,074
2,761
Accumulated other comprehensive income (loss)
1,155
(6,473
)
Less treasury stock at cost, 574,377 shares in 2019 and 2018
(16,628
)
(16,629
)
Total stockholders’ equity
497,152
475,864
Total liabilities and stockholders’ equity
$
3,895,619
$
3,839,734
See accompanying notes to unaudited condensed consolidated financial statements.
2
First Mid Bancshares, Inc.
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except per share data)
Three months ended March 31,
2019
2018
Interest income:
Interest and fees on loans
$
32,104
$
21,007
Interest on investment securities
5,209
4,081
Interest on certificates of deposit investments
38
9
Interest on federal funds sold
3
1
Interest on deposits with other financial institutions
697
60
Total interest income
38,051
25,158
Interest expense:
Interest on deposits
4,378
1,262
Interest on securities sold under agreements to repurchase
260
59
Interest on FHLB borrowings
723
275
Interest on other borrowings
—
108
Interest on subordinated debentures
438
259
Total interest expense
5,799
1,963
Net interest income
32,252
23,195
Provision for loan losses
947
1,055
Net interest income after provision for loan losses
31,305
22,140
Other income:
Wealth management revenues
3,645
1,742
Insurance commissions
5,555
1,487
Service charges
1,802
1,635
Securities gains, net
54
20
Mortgage banking revenue, net
239
161
ATM / debit card revenue
2,016
1,604
Bank owned life insurance
430
276
Other
898
562
Total other income
14,639
7,487
Other expense:
Salaries and employee benefits
16,574
10,194
Net occupancy and equipment expense
4,455
3,273
Net other real estate owned expense
53
76
FDIC insurance
279
281
Amortization of intangible assets
1,356
505
Stationery and supplies
287
211
Legal and professional
1,194
1,137
Marketing and donations
454
354
Other
3,658
2,343
Total other expense
28,310
18,374
Income before income taxes
17,634
11,253
Income taxes
4,318
2,863
Net income
$
13,316
$
8,390
Per share data:
Basic net income per common share available to common stockholders
$
0.80
$
0.66
Diluted net income per common share available to common stockholders
0.80
0.66
See accompanying notes to unaudited condensed consolidated financial statements.
3
First Mid Bancshares, Inc.
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
Three months ended March 31,
2019
2018
Net income
$
13,316
$
8,390
Other Comprehensive Income (Loss)
Unrealized gains (losses) on available-for-sale securities, net of taxes of $(3,123) and $2,540 for three months ended March 31, 2019 and 2018, respectively.
7,645
(6,221
)
Amortized holding losses on held-to-maturity securities transferred from available-for-sale, net of taxes of $(8) for three months ended March 31, 2019 and 2018.
21
20
Less: reclassification adjustment for realized gains included in net income, net of taxes of $16 and $6 for three months ended March 31, 2019 and 2018, respectively.
(38
)
(14
)
Other comprehensive income (loss), net of taxes
7,628
(6,215
)
Comprehensive income
$
20,944
$
2,175
See accompanying notes to unaudited condensed consolidated financial statements.
4
First Mid Bancshares, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the three months ended March 31, 2019 and 2018
(In thousands, except share and per share data)
Common Stock
Additional Paid-In-Capital
Deferred Compensation
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Treasury Stock
Total
December 31, 2018
$
70,876
$
293,937
$
131,392
$
2,761
$
(6,473
)
$
(16,629
)
$
475,864
Net income
—
—
13,316
—
—
—
13,316
Other comprehensive income, net of tax
—
—
—
—
7,628
—
7,628
Issuance of 5,761 common shares pursuant to Deferred Compensation Plan
23
171
—
—
—
—
194
Issuance of 25,950 restricted shares pursuant to the 2017 Stock Incentive Plan
104
760
—
—
—
—
864
Issuance of 782 common shares pursuant to the Employee Stock Purchase Plan
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31,
(In thousands)
2019
2018
Cash flows from operating activities:
Net income
$
13,316
$
8,390
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
947
1,055
Depreciation, amortization and accretion, net
2,430
1,731
Change in cash surrender value of bank owned life insurance
(430
)
(276
)
Stock-based compensation expense
128
80
Operating lease payments
(664
)
—
Gains on investment securities, net
(54
)
(20
)
(Gain) loss on sales of repossessed assets, net
(5
)
50
Loss on write down of premises and equipment
—
1
Gains on sale of loans held for sale, net
(180
)
(174
)
Decrease in accrued interest receivable
808
650
Increase in accrued interest payable
493
114
Origination of loans held for sale
(12,098
)
(11,762
)
Proceeds from sale of loans held for sale
12,553
11,652
Decrease (increase) in other assets
507
(488
)
Decrease in other liabilities
(333
)
(291
)
Net cash provided by operating activities
17,418
10,712
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments
249
—
Proceeds from sales of securities available-for-sale
12,631
6,527
Proceeds from maturities of securities available-for-sale
23,020
12,754
Purchases of securities available-for-sale
(28,431
)
(19,883
)
Net decrease (increase) in loans
45,188
(38,223
)
Purchases of premises and equipment
(987
)
(234
)
Proceeds from sales of other real property owned
354
792
Net cash provided by (used in) investing activities
52,024
(38,267
)
Cash flows from financing activities:
Net increase in deposits
57,527
17,252
Decrease in repurchase agreements
(34,570
)
(22,953
)
Repayment of long-term debt
(1,467
)
(938
)
Proceeds from issuance of common stock
216
150
Net cash provided by (used in) financing activities
21,706
(6,489
)
Increase (decrease) in cash and cash equivalents
91,148
(34,044
)
Cash and cash equivalents at beginning of period
141,400
88,879
Cash and cash equivalents at end of period
$
232,548
$
54,835
6
First Mid Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31,
(In thousands)
2019
2018
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
$
5,391
$
1,856
Income taxes
2,035
2,320
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned
1,630
50
Initial recognition of right-of-use assets
14,116
—
Initial recognition of lease liabilities
14,116
—
See accompanying notes to unaudited condensed consolidated financial statements.
7
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 Bancshares, Inc. (“Company”) formerly known as First Mid-Illinois Bancshares, Inc., and its wholly-owned subsidiaries: First Mid Bank & Trust, N.A. (“First Mid Bank”), Soy Capital Bank and Trust Company ("Soy Capital Bank") (which merged with and into First Mid Bank on April 6, 2019), First Mid Wealth Management, Mid-Illinois Data Services, Inc. (“MIDS”) and First Mid Insurance Group, Inc. (“First Mid Insurance”). The Company changed its name to First Mid Bancshares, Inc. on April 25, 2019. 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 March 31, 2019 and 2018, 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 March 31, 2019 presentation and there was no impact on net income or stockholders’ equity. The results of the interim period ended March 31, 2019 are not necessarily indicative of the results expected for the year ending December 31, 2019. The Company operates as a one-segment entity for financial reporting purposes.
The 2018 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 2018 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
8
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”).
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 were converted into and became 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. In addition, immediately prior to the closing of the proposed merger, SCB paid special dividend to its shareholders in the aggregate amount of approximately $25 million. The SCB Merger was subject to customary closing conditions, including the approval of the appropriate regulatory authorities and of the stockholders of SCB. The SCB Merger was completed on November 15, 2018 and an aggregate of 1,330,571 shares of common stock were issued, and approximately $19,046,000 was paid, to the stockholders of SCB, including cash in lieu of fractional shares. Soy Capital Bank and Trust Company (“Soy Capital Bank”), merged with and into First Mid Bank on April 6, 2019. At the time of the bank merger, Soy Capital Bank’s banking offices became 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 three months ended March 31, 2019, the company sold no shares of common stock under the program. As of March 31, 2019, approximately $16.53 million of common stock remained available for issuance under the At The Market program.
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.
9
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 15,540 and 28,700 restricted stock units during 2019 and 2018, 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. As of March 31, 2019, 782 shares were issued pursuant to 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.
Insurance commissions. The Company’s insurance agency subsidiary, First Mid Insurance, receives commissions on premiums of new and renewed business policies. First Mid Insurance records commission revenue on direct bill policies as the cash is received. For agency bill policies, First Mid Insurance 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.
10
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.
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of March 31, 2019, substantially all of the Company's leases are operating leases for real estate property for bank branches, ATM locations, and office space. For leases in effect at January 1, 2019 and for leases commencing thereafter, the Company recognizes a lease liability and a right-of-use asset, based on the present value of lease payments over the lease term. The discount rate used in determining present value was the Company's incremental borrowing rate which is the FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the commencement date for leases subsequently entered into.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) included in stockholders’ equity as of March 31, 2019 and December 31, 2018 are as follows (in thousands):
Unrealized Gain (Loss) on
Securities
Securities with Other-Than-Temporary Impairment Losses
Total
March 31, 2019
Net unrealized gains on securities available-for-sale
$
1,764
$
—
$
1,764
Unamortized losses on held-to-maturity securities transferred from available-for-sale
(138
)
—
(138
)
Securities with other-than-temporary impairment losses
—
—
—
Tax expense
(471
)
—
(471
)
Balance at March 31, 2019
$
1,155
$
—
$
1,155
December 31, 2018
Net unrealized losses on securities available-for-sale
$
(8,951
)
$
—
$
(8,951
)
Unamortized losses on held-to-maturity securities transferred from available-for-sale
(166
)
—
(166
)
Securities with other-than-temporary impairment losses
—
—
—
Tax benefit
2,644
—
2,644
Balance at December 31, 2018
$
(6,473
)
$
—
$
(6,473
)
11
Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the three months ended March 31, 2019 and 2018, were as follows (in thousands):
Amounts Reclassified from Other Comprehensive Income
Affected Line Item in the Statements of Income
Three months ended March 31,
2019
2018
Realized gains on available-for-sale securities
$
54
$
20
Securities gains, net
(Total reclassified amount before tax)
(16
)
(6
)
Income taxes
Total reclassifications out of accumulated other comprehensive income
$
38
$
14
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 was 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.
12
Pending New Accounting Guidance
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.
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 is currently focusing on data and model validation and expects to begin parallel processing with the existing allowance for loan losses model during the second quarter of 2019. Once the parallel processing is in place, the committee will focus on evaluating the analysis output and refining the model assumptions.The committee is still evaluating the impact ASU 2016-13 will have on the Company's consolidated financial statements. In addition, the committee is contemplating required changes to current accounting policies, developing procedures and related controls, and determining required reporting disclosures.
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-month period ended March 31, 2019 and 2018 were as follows:
Three months ended March 31,
2019
2018
Basic Net Income per Common Share
Available to Common Stockholders:
Net income
$
13,316,000
$
8,390,000
Weighted average common shares outstanding
16,665,999
12,671,017
Basic earnings per common share
$
0.80
$
0.66
Diluted Net Income per Common Share
Available to Common Stockholders:
Net income applicable to diluted earnings per share
$
13,316,000
$
8,390,000
Weighted average common shares outstanding
16,665,999
12,671,017
Dilutive potential common shares:
Assumed conversion of stock options
—
3,980
Restricted stock awarded
38,780
13,250
Dilutive potential common shares
38,780
17,230
Diluted weighted average common shares outstanding
16,704,779
12,688,247
Diluted earnings per common share
$
0.80
$
0.66
There were no shares not considered in computing diluted earnings per share for the three-month periods ended March 31, 2019 and 2018 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 March 31, 2019 and December 31, 2018 were as follows (in thousands):
Amortized Cost
Gross Unrealized Gains
Gross Unrealized (Losses)
Fair Value
March 31, 2019
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies
$
190,845
$
926
$
(1,044
)
$
190,727
Obligations of states and political subdivisions
188,572
2,996
(465
)
191,103
Mortgage-backed securities: GSE residential
312,159
1,399
(2,074
)
311,484
Other securities
2,278
26
—
2,304
Total available-for-sale
$
693,854
$
5,347
$
(3,583
)
$
695,618
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies
$
69,462
$
11
$
(730
)
$
68,743
December 31, 2018
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies
$
201,380
$
504
$
(3,235
)
$
198,649
Obligations of states and political subdivisions
193,195
1,224
(1,840
)
192,579
Mortgage-backed securities: GSE residential
304,372
486
(6,186
)
298,672
Other securities
2,278
96
—
2,374
Total available-for-sale
$
701,225
$
2,310
$
(11,261
)
$
692,274
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies
$
69,436
$
—
$
(1,527
)
$
67,909
Realized gains and losses resulting from sales of securities were as follows during the three months ended March 31, 2019 and 2018 (in thousands):
Three months ended March 31,
2019
2018
Gross gains
$
84
$
20
Gross losses
(30
)
—
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 March 31, 2019 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
$
148,125
$
42,602
$
—
$
—
$
190,727
Obligations of state and political subdivisions
26,862
85,494
77,798
949
191,103
Mortgage-backed securities: GSE residential
657
214,585
96,242
—
311,484
Other securities
—
2,014
—
290
2,304
Total available-for-sale investments
$
175,644
$
344,695
$
174,040
$
1,239
$
695,618
Weighted average yield
2.64
%
2.85
%
2.92
%
3.06
%
2.82
%
Full tax-equivalent yield
2.79
%
3.12
%
3.43
%
4.07
%
3.12
%
Held to Maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
49,940
$
19,522
$
—
$
—
$
69,462
Weighted average yield
1.83
%
2.06
%
—
%
—
%
1.90
%
Full tax-equivalent yield
1.83
%
2.06
%
—
%
—
%
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 March 31, 2019.
Investment securities carried at approximately $574 million and $628 million at March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018 (in thousands):
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
March 31, 2019
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
998
$
—
$
82,772
$
(1,044
)
$
83,770
$
(1,044
)
Obligations of states and political subdivisions
1,382
(3
)
30,225
(462
)
31,607
(465
)
Mortgage-backed securities: GSE residential
1,952
(5
)
199,536
(2,069
)
201,488
(2,074
)
Total
$
4,332
$
(8
)
$
312,533
$
(3,575
)
$
316,865
$
(3,583
)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
—
$
—
$
63,775
$
(730
)
$
63,775
$
(730
)
December 31, 2018
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
16,095
$
(148
)
$
105,549
$
(3,087
)
$
121,644
$
(3,235
)
Obligations of states and political subdivisions
38,782
(450
)
42,741
(1,390
)
81,523
(1,840
)
Mortgage-backed securities: GSE residential
81,435
(1,150
)
171,321
(5,036
)
252,756
(6,186
)
Total
$
136,312
$
(1,748
)
$
319,611
$
(9,513
)
$
455,923
$
(11,261
)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
19,683
$
(147
)
$
48,226
$
(1,380
)
$
67,909
$
(1,527
)
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At March 31, 2019 there were nineteen available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $82,772,000 and unrealized losses of $1,044,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2018 , there were twenty-three available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $105,549,000 and unrealized losses of $3,087,000 in a continuous unrealized loss position for twelve months or more. At March 31, 2019 there were thirteen held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $63,775,000 and unrealized losses of $730,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2018 there were nine held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $48,226,000 and unrealized losses of $1,380,000 in a continuous unrealized loss position for twelve months or more.
Obligations of states and political subdivisions. At March 31, 2019 there were sixty-one obligations of states and political subdivisions with a fair value of $30,225,000 and unrealized losses of $462,000 in a continuous loss position for twelve months or more. At December 31, 2018, there were eighty-four obligations of states and political subdivisions with a fair value of $42,741,000 and unrealized losses of $1,390,000 in a continuous unrealized loss position for twelve months or more.
Mortgage-backed Securities: GSE Residential. At March 31, 2019 there were seventy-seven mortgage-backed securities with a fair value of $199,536,000 and unrealized losses of $2,069,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2018, there were sixty-nine mortgage-backed securities with a fair value of $171,321,000 and unrealized losses of $5,036,000 in a continuous unrealized loss position for twelve months or more.
Other securities. At March 31, 2019 and December 31, 2018, there were no other securities in a continuous unrealized loss position for twelve months or more.
17
The Company does not believe any other individual unrealized loss as of March 31, 2019 represents other than temporary impairment ("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 three months ended March 31, 2019 and 2018 (in thousands).
Accumulated Credit Losses
March 31, 2019
March 31, 2018
Credit losses on trust preferred securities held
Beginning of period
$
—
$
1,111
Additions related to OTTI losses not previously recognized
—
—
Reductions due to sales / (recoveries)
—
—
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 March 31, 2019 and December 31, 2018 follows (in thousands):
March 31, 2019
December 31, 2018
Construction and land development
$
50,234
$
51,013
Agricultural real estate
237,437
232,409
1-4 Family residential properties
363,569
374,751
Multifamily residential properties
177,949
186,393
Commercial real estate
909,176
911,656
Loans secured by real estate
1,738,365
1,756,222
Agricultural loans
118,125
136,125
Commercial and industrial loans
551,837
559,120
Consumer loans
87,503
92,744
All other loans
111,794
113,925
Total Gross loans
2,607,624
2,658,136
Less: Loans held for sale
1,233
1,508
2,606,391
2,656,628
Less:
Net deferred loan fees, premiums and discounts
10,630
13,617
Allowance for loan losses
26,704
26,189
Net loans
$
2,569,057
$
2,616,822
Net loans decreased $47.8 million as of March 31, 2019 compared to December 31, 2018. The primary reason for the decrease was due to seasonal paydowns in agriculture operating loans and declines in 1-4 Family residential properties, Multifamily residential properties, and commercial and industrial loans due to higher payoffs of acquired loans. 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 March 31, 2019, the Company’s loan portfolio included $355.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $267.1 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased $12.9 million from $368.5 million at December 31, 2018 due to seasonal paydowns based upon timing of cash flow requirements. Loans concentrated in other grain farming decreased $9.0 million from $276.1 million at December 31, 2018. 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 $128.0 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 $228.3 million of loans to lessors of non-residential buildings, $289.2 million of loans to lessors of residential buildings and dwellings, and $103.0 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.
22
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-months ended March 31, 2019 and 2018 and for the year ended December 31, 2018 (in thousands):
Commercial/ Commercial Real Estate
Agricultural/ Agricultural Real Estate
Residential Real Estate
Consumer
Unallocated
Total
Three months ended March 31, 2019
Allowance for loan losses:
Balance, beginning of year
$
21,556
$
2,197
$
1,504
$
932
$
—
$
26,189
Provision charged to expense
584
236
(116
)
243
—
947
Losses charged off
(215
)
(30
)
(52
)
(271
)
—
(568
)
Recoveries
22
9
5
100
—
136
Balance, end of period
$
21,947
$
2,412
$
1,341
$
1,004
$
—
$
26,704
Ending balance:
Individually evaluated for impairment
$
2,257
$
24
$
231
$
3
$
—
$
2,515
Collectively evaluated for impairment
$
18,994
$
2,388
$
1,101
$
1,001
$
—
$
23,484
Acquired with deteriorated credit quality
$
696
$
—
$
9
$
—
$
—
$
705
Loans:
Individually evaluated for impairment
$
10,303
$
45
$
3,763
$
171
$
—
$
14,282
Collectively evaluated for impairment
1,747,455
354,432
372,261
93,948
$
—
2,568,096
Acquired with deteriorated credit quality
12,799
—
1,817
—
$
—
14,616
Ending balance
$
1,770,557
$
354,477
$
377,841
$
94,119
$
—
$
2,596,994
23
Commercial/ Commercial Real Estate
Agricultural/ Agricultural Real Estate
Residential Real Estate
Consumer
Unallocated
Total
Three months ended March 31, 2018
Allowance for loan losses:
Balance, beginning of year
$
16,546
$
1,742
$
886
$
803
$
—
$
19,977
Provision charged to expense
936
(161
)
177
103
—
1,055
Losses charged off
(237
)
—
(103
)
(136
)
—
(476
)
Recoveries
123
—
1
91
—
215
Balance, end of period
$
17,368
$
1,581
$
961
$
861
$
—
$
20,771
Ending balance:
Individually evaluated for impairment
$
486
$
5
$
20
$
—
$
—
$
511
Collectively evaluated for impairment
$
16,877
$
1,576
$
941
$
861
$
—
$
20,255
Acquired with deteriorated credit quality
$
5
$
—
$
—
$
—
$
—
$
5
Loans:
Individually evaluated for impairment
$
11,592
$
202
$
1,115
$
170
$
—
$
13,079
Collectively evaluated for impairment
1,417,379
196,173
311,163
39,650
—
1,964,365
Acquired with deteriorated credit quality
253
—
—
—
—
253
Ending balance
$
1,429,224
$
196,375
$
312,278
$
39,820
$
—
$
1,977,697
Year ended December 31, 2018
Allowance for loan losses:
Balance, beginning of year
$
16,546
$
1,742
$
886
$
803
$
—
$
19,977
Provision charged to expense
6,070
548
1,447
602
—
8,667
Losses charged off
(1,227
)
(93
)
(886
)
(787
)
—
(2,993
)
Recoveries
167
—
57
314
—
538
Balance, end of year
$
21,556
$
2,197
$
1,504
$
932
$
—
$
26,189
Ending balance:
Individually evaluated for impairment
$
1,816
$
—
$
225
$
3
$
—
$
2,044
Collectively evaluated for impairment
$
18,514
$
2,197
$
1,270
$
929
$
—
$
22,910
Acquired with deteriorated credit quality
$
1,226
$
—
$
9
$
—
$
—
$
1,235
Loans:
Individually evaluated for impairment
$
14,422
$
32
$
2,360
$
166
$
—
$
16,980
Collectively evaluated for impairment
1,756,908
367,175
387,961
99,872
—
2,611,916
Acquired with deteriorated credit quality
13,411
4
2,205
3
—
15,623
Ending balance
$
1,784,741
$
367,211
$
392,526
$
100,041
$
—
$
2,644,519
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 March 31, 2019 and December 31, 2018 (in thousands):