First Mid Illinois Bancshares Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow

10-Q 1 fmbh-2020331x10q.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, 2020
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 4, 2020, 16,702,484 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, 2020			December 31, 2019
Assets
Cash and due from banks:
Non-interest bearing	$	80,798		$	76,498
Interest bearing	100,302			7,656
Federal funds sold	927			926
Cash and cash equivalents	182,027			85,080
Certificates of deposit	4,380			4,625
Investment securities:
Available-for-sale, at fair value	617,801			686,048
Held-to-maturity, at amortized cost (estimated fair value of $24,806 and $69,572 at March 31, 2020 and December 31, 2019, respectively)	24,563			69,542
Loans held for sale	1,251			1,820
Loans	2,743,047			2,693,527
Less allowance for credit losses	(32,876		)	(26,911		)
Net loans	2,710,171			2,666,616
Interest receivable	15,422			15,577
Other real estate owned	2,784			3,644
Premises and equipment, net	59,359			59,491
Goodwill, net	104,992			104,992
Intangible assets, net	27,207			28,265
Bank owned life insurance	67,656			67,225
Right of use lease assets	16,542			17,006
Other assets	30,676			29,495
Total assets	$	3,864,831		$	3,839,426
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	642,384		$	633,331
Interest bearing	2,266,243			2,284,035
Total deposits	2,908,627			2,917,366
Securities sold under agreements to repurchase	231,649			208,109
Interest payable	2,029			2,261
FHLB borrowings	119,921			113,895
Other borrowings	5,000			5,000
Junior subordinated debentures	18,900			18,858
Lease liabilities	16,568			17,007
Other liabilities	29,086			30,321
Total liabilities	3,331,780			3,312,817
Stockholders’ Equity:
Common stock, $4 par value; authorized 30,000,000 shares; issued 17,316,886 and 17,287,882 shares in 2020 and 2019, respectively	71,268			71,152
Additional paid-in capital	296,853			295,925
Retained earnings	175,949			166,667
Deferred compensation	2,022			2,760
Accumulated other comprehensive income	5,209			8,360
Less treasury stock at cost, 614,403 shares in 2020 and 2019	(18,250		)	(18,255		)
Total stockholders’ equity	533,051			526,609
Total liabilities and stockholders’ equity	$	3,864,831		$	3,839,426

See accompanying notes to unaudited condensed consolidated financial statements.



First Mid Bancshares, Inc.
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except per share data)	Three months ended March 31,
	2020			2019
Interest income:
Interest and fees on loans	$	30,027		$	32,104
Interest on investment securities	4,589			5,209
Interest on certificates of deposit investments	31			38
Interest on federal funds sold	2			3
Interest on deposits with other financial institutions	92			697
Total interest income	34,741			38,051
Interest expense:
Interest on deposits	3,861			4,378
Interest on securities sold under agreements to repurchase	194			260
Interest on FHLB borrowings	580			723
Interest on other borrowings	15			—
Interest on subordinated debentures	218			438
Total interest expense	4,868			5,799
Net interest income	29,873			32,252
Provision for loan losses	5,481			947
Net interest income after provision for loan losses	24,392			31,305
Other income:
Wealth management revenues	3,626			3,645
Insurance commissions	6,621			5,555
Service charges	1,778			1,802
Securities gains, net	531			54
Mortgage banking revenue, net	308			239
ATM / debit card revenue	1,987			2,016
Bank owned life insurance	431			430
Other	1,228			898
Total other income	16,510			14,639
Other expense:
Salaries and employee benefits	16,500			16,574
Net occupancy and equipment expense	4,242			4,455
Net other real estate owned expense	(46		)	53
FDIC insurance	93			279
Amortization of intangible assets	1,295			1,356
Stationery and supplies	268			287
Legal and professional	1,398			1,194
ATM / debit card	605			803
Marketing and donations	481			454
Other	2,895			2,855
Total other expense	27,731			28,310
Income before income taxes	13,171			17,634
Income taxes	3,172			4,318
Net income	$	9,999		$	13,316
Per share data:
Basic net income per common share	$	0.60		$	0.80
Diluted net income per common share	0.60			0.80

See accompanying notes to unaudited condensed consolidated financial statements.



First Mid Bancshares, Inc.
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)	Three months ended March 31,
	2020			2019
Net income	$	9,999		$	13,316
Other Comprehensive Income (Loss)
Unrealized gains (losses) on available-for-sale securities, net of taxes of $1,139 and $(3,123) for three months ended March 31, 2020 and 2019, respectively.	(2,789		)	7,645
Amortized holding losses on held-to-maturity securities transferred from available-for-sale, net of taxes of $(5) and$(8) for three months ended March 31, 2020 and 2019, respectively.	15			21
Less: reclassification adjustment for realized gains included in net income, net of taxes of $154 and $16 for three months ended March 31, 2020 and 2019, respectively.	(377		)	(38		)
Other comprehensive income (loss), net of taxes	(3,151		)	7,628
Comprehensive income	$	6,848		$	20,944

See accompanying notes to unaudited condensed consolidated financial statements.



First Mid Bancshares, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the three months ended March 31, 2020 and 2019
	Common Stock		Additional Paid-In-Capital						Deferred Compensation			Accumulated Other Comprehensive Income (Loss)
(in thousands)						Retained Earnings									Treasury Stock
																		Total
December 31, 2019	$	71,152	$	295,925		$	166,667		$	2,760		$	8,360		$	(18,255	)	$	526,609
Cumulative impact of ASU2016-13	—		—			(717		)	—			—			—			(717		)
January 1, 2020	71,152		295,925			165,950			2,760			8,360			(18,255		)	525,892
Net income	—		—			9,999			—			—			—			9,999
Other comprehensive loss, net of tax	—		—			—			—			(3,151		)	—			(3,151		)
Issuance of 25,200 restricted shares pursuant to the 2017 Stock Incentive Plan	101		767			—			—			—			—			868
Issuance of 3,804 common shares pursuant to the Employee Stock Purchase Plan	15		71			—			—			—						86
Deferred Compensation	—		—			—			(5		)	—			5			—
Tax benefit related to deferred compensation distributions	—		22			—			—			—			—			22
Grant of restricted units pursuant to 2017 Stock Incentive Plan	—		584			—			—			—			—			584
Release of restricted units pursuant to 2017 Stock Incentive Plan	—		(516		)	—			—			—			—			(516		)
Vested restricted shares/units compensation expense	—		—			—			(733		)	—			—			(733		)
March 31, 2020	$	71,268	$	296,853		$	175,949		$	2,022		$	5,209		$	(18,250	)	$	533,051

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	3		21			—			—			—			—			24
Deferred Compensation	—		—			—			(1		)	—			1			—
Grant of restricted units pursuant to 2017 Stock Incentive Plan	—		(52		)	—			(814		)	—			—			(866		)
Vested restricted shares/units compensation expense	—		—			—			128			—			—			128
March 31, 2019	$	71,006	$	294,837		$	144,708		$	2,074		$	1,155		$	(16,628	)	$	497,152

See accompanying notes to unaudited condensed consolidated financial statements.



First Mid Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)	Three months ended March 31,
(In thousands)	2020			2019
Cash flows from operating activities:
Net income	$	9,999		$	13,316
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	5,481			947
Depreciation, amortization and accretion, net	2,721			2,430
Change in cash surrender value of bank owned life insurance	(431		)	(430		)
Stock-based compensation expense	204			128
Operating lease payments	(677		)	(664		)
Gains on investment securities, net	(531		)	(54		)
Gain on sales of repossessed assets, net	(162		)	(5		)
Gain on sale of premises and equipment	(26		)	—
Gains on sale of loans held for sale, net	(353		)	(180		)
Decrease in accrued interest receivable	155			808
(Decrease) increase in accrued interest payable	(164		)	493
Origination of loans held for sale	(20,039		)	(12,098		)
Proceeds from sale of loans held for sale	20,961			12,553
(Increase) decrease in other assets	(937		)	507
Increase (decrease) in other liabilities	413			(333		)
Net cash provided by operating activities	16,614			17,418
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments	1,225			249
Purchases of certificates of deposit investments	(980		)	—
Proceeds from sales of securities available-for-sale	—			12,631
Proceeds from maturities of securities available-for-sale	108,666			23,020
Proceeds from maturities of securities held-to-maturity	45,000			—
Purchases of securities available-for-sale	(44,830		)	(28,431		)
Net (increase) decrease in loans	(50,059		)	45,188
Purchases of premises and equipment	(786		)	(987		)
Proceeds from sales of other real property owned	1,211			354
Net cash provided by investing activities	59,447			52,024
Cash flows from financing activities:
Net (decrease) increase in deposits	(8,739		)	57,527
Decrease in federal funds purchased	(5,000		)	—
Increase (decrease) in repurchase agreements	23,540			(34,570		)
Proceeds from FHLB advances	15,000			—
Repayment of FHLB advances	(9,000		)	—
Proceeds from long-term debt	5,000			—
Repayment of long-term debt	—			(1,467		)
Proceeds from issuance of common stock	85			216
Net cash provided by financing activities	20,886			21,706
Increase in cash and cash equivalents	96,947			91,148
Cash and cash equivalents at beginning of period	85,080			141,400
Cash and cash equivalents at end of period	$	182,027		$	232,548



First Mid Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)	Three months ended March 31,
(In thousands)	2020		2019
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	5,100	$	5,391
Income taxes	—		2,035
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate	184		1,630
Initial recognition of right-of-use assets	—		14,116
Initial recognition of lease liabilities	—		14,116
Net tax benefit related to option and deferred compensation plans	22		—

See accompanying notes to unaudited condensed consolidated financial statements.

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”), First Mid Wealth Management Company, Mid-Illinois Data Services, Inc. (“MIDS”), First Mid Insurance Group, Inc. (“First Mid Insurance”) and First Mid Captive, Inc. 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, 2020 and 2019, and all such adjustments are of a normal recurring nature. Certain amounts in the prior year’s consolidated financial statements may have been reclassified to conform to the March 31, 2020 presentation and there was no impact on net income or stockholders’ equity. The results of the interim period ended March 31, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020. The Company operates as a one-segment entity for financial reporting purposes. The 2019 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on Form 10-K.

COVID-19

The COVID-19 outbreak is an unprecedented event that provides significant economic uncertainty for a broad spectrum of industries. The Company is focused on supporting its customers, communities and employees during this unique operating environment. Throughout this document, we describe the impact COVID-19 is having, actions taken as a result of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation.

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.

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.

Loan Purchase

On April 21, 2020, First Mid Bank completed an acquisition of loans in the St. Louis metro market totaling $183 million. There were no loans determined to be purchased with deteriorated credit.

Stock Repurchase Plan

On August 16, 2019, the Company adopted a repurchase plan under Rule 10b5-1 and Rule 10b-18 of the Exchange Act. The Company implemented the repurchase plan in connection with its previously announced stock repurchase program. Under the repurchase plan, up to approximately $6.2 million worth of shares of the Company’s common stock could have been repurchased. The 10b5-1 plan expired in early 2020, and there were no shares repurchased under this plan during 2020. During 2019, the Company repurchased approximately $1.1 million in common stock, or 35,427 shares. The Company has approximately $4.9 million in remaining capacity under its existing repurchase program.

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 25,200 and 25,950 shares of restricted stock during 2020 and 2019, respectively, and 16,950 and 16,200 restricted stock units during 2020 and 2019, 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, 2020 and 2019, 3,804 shares and 782 shares, respectively, were issued pursuant to the ESPP.

Captive Insurance Company

First Mid Captive, Inc. ("the Captive"), a wholly-owned subsidiary of the Company which was formed and began operations in December 2019, is a Nevada-based captive insurance company. The Captive insures against certain risks unique to operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today's insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,300,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company's consolidated financial statements and its federal income return.

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.

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 subsidiary, First Mid Wealth Management Company. 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.

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, 2020, 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, 2020 and December 31, 2019 are as follows (in thousands):



	Unrealized Gain (Loss) on Securities
March 31, 2020
Net unrealized gains on securities available-for-sale	$	7,366
Unamortized losses on held-to-maturity securities transferred from available-for-sale	(30		)
Tax expense	(2,127		)
Balance at March 31, 2020	$	5,209



December 31, 2019
Net unrealized gains on securities available-for-sale	$	11,825
Unamortized losses on held-to-maturity securities transferred from available-for-sale	(50		)
Tax Expense	(3,415		)
Balance at December 31, 2019	$	8,360

Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the three months ended March 31, 2020 and 2019, were as follows (in thousands):



	Amounts Reclassified from Other Comprehensive Income						Affected Line Item in the Statements of Income
	Amounts Reclassified from Other Comprehensive Income
	Three months ended March 31,
	2020			2019
Realized gains on available-for-sale securities	$	531		$	54		Securities gains, net
Tax effect	(154		)	(16		)	Income taxes
Total reclassifications out of accumulated other comprehensive income	$	377		$	38		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 2017-04, 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. The Company adopted the guidance effective January 2020. Although the Company cannot anticipate future goodwill impairment, the Company does not anticipate a material impact on the Company's financial statements. The current accounting policies and procedures of the Company have not changed, except for the elimination of Step 2 analysis.

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 is 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 leas guidance. The new guidance is 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. The Company adopted the guidance effective January 1, 2019 and recorded a right of use asset of $14.1 million and a lease liability of $14.1 million.

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. As ASU 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s consolidated financial statements.

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 formed an internal, cross functional committee in 2017 to evaluate implementation steps and assess the impact ASU 2016-13 would have on the Company’s consolidated financial statements. The committee assigned roles and responsibilities, key tasks to complete, and established a general time line for implementation. The Company 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 met periodically to discuss the latest developments and ensure progress was being made. In addition, the committee kept current on evolving interpretations and industry practices related to ASU 2016-13. The committee evaluated and validated data resources and different loss methodologies. Key implementation activities for 2019 included finalization of models, establishing processes and controls, development of supporting analytics and documentation, policies and disclosure, and implementing parallel processing.

The Company adopted ASU 2016-13 using the modified retrospective method for financial assets measured at amortized cost effective January 1, 2020. Results for the periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of approximately $717,000 upon adoption of ASU 2016-13. The transition adjustment included an increase to the allowance for credit losses on loans of $1.7 million and an increase to the allowance for credit losses on off-balance sheet credit exposure of $69,000. There was no allowance for credit losses recorded for held-to-maturity debt securities. The transition adjustment included corresponding increases in deferred tax assets.

The Company adopted ASU 2016-13 using the prospective transition approach for financial assets considered purchased credit deteriorated ("PCD") that were previously classified as purchase credit impaired (" PCI") and accounted for under ASC 310-30 effective January 1 2020. In accordance with the standard, the Company did not reassess whether the PCI assets met the criteria of PCD assets as of the adoption date. The amortized cost of the PCD assets were adjusted to reflect the addition of $833,000 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost) will be accreted into interest income at the effective interest rate over the remaining life of the assets.

The following table illustrates the impact of ASU 2016-13 adoption (in thousands):



	January 1, 2020
	As reported under ASU 2016-13		Pre-ASU 2016-13 Adoption		Impact of ASU 2016-13 Adoption
Assets:
Construction & Land Development	$	1,033	$	1,146	$	(113	)
Farm	1,323		1,093		230
1-4 Family Residential Properties	2,142		1,386		756
Commercial Real Estate	11,739		11,198		541
Agricultural	1,023		1,386		(363		)
Commercial & Industrial	9,428		9,273		155
Consumer	1,895		1,429		466
Allowance for credit losses for all loans	$	28,583	$	26,911	$	1,672
Liabilities:
Allowance for credit losses on off-balance sheet exposures	$	69	$	—	$	69

The following table illustrates the impact of ASU 2013-13 adoption for PCD assets previously classified as PCI included in the table above (in thousands):



	January 1, 2020
	As reported under ASU 2016-13		Pre-ASU 2016-13 Adoption		Impact of ASU 2016-13 Adoption
Construction & Land Development	$	291	$	—	$	291
1-4 Family Residential Properties	48		6		42
Commercial Real Estate	818		359		459
Commercial & Industrial	41		—		41
Allowance for credit losses for PCD loans	$	1,198	$	365	$	833

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, 2020 and 2019 were as follows:



	Three months ended March 31,
	2020		2019
Basic Net Income per Common Share
Available to Common Stockholders:
Net income	$	9,999,000	$	13,316,000
Weighted average common shares outstanding	16,693,183		16,665,999
Basic earnings per common share	$	0.60	$	0.80

Diluted Net Income per Common Share
Available to Common Stockholders:
Net income applicable to diluted earnings per share	$	9,999,000	$	13,316,000
Weighted average common shares outstanding	16,693,183		16,665,999
Dilutive potential common shares:
Restricted stock awarded	46,908		38,780
Dilutive potential common shares	46,908		38,780
Diluted weighted average common shares outstanding	16,740,091		16,704,779
Diluted earnings per common share	$	0.60	$	0.80

There were no shares not considered in computing diluted earnings per share for the three-month periods ended March 31, 2020 and 2019 because they were anti-dilutive.

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, 2020 and December 31, 2019 were as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
March 31, 2020
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	56,067	$	716	$	(94	)	$	56,689
Obligations of states and political subdivisions	167,146		260		(3,904		)	163,502
Mortgage-backed securities: GSE residential	385,194		10,717		(400		)	395,511
Other securities	2,028		112		(41		)	2,099
Total available-for-sale	$	610,435	$	11,805	$	(4,439	)	$	617,801
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	24,563	$	243	$	—		$	24,806

December 31, 2019
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	106,428	$	952	$	(60	)	$	107,320
Obligations of states and political subdivisions	172,460		5,990		(17		)	178,433
Mortgage-backed securities: GSE residential	391,307		5,331		(512		)	396,126
Other securities	4,028		141		—			4,169
Total available-for-sale	$	674,223	$	12,414	$	(589	)	$	686,048
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	69,542	$	99	$	(69	)	$	69,572

All of the Company's held-to-maturity securities are government agency-backed securities for which the risk of loss is minimal. As such, as of March 31, 2020, the Company did not recorded an allowance for credit losses on its held-to-maturity securities.

Realized gains and losses resulting from sales of securities were as follows during the three months ended March 31, 2020 and 2019 (in thousands):



	Three months ended March 31,
	2020		2019
Gross gains	$	531	$	84
Gross losses	—		(30		)

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, 2020 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	$	41,026		$	15,663		$	—		$	—		$	56,689
Obligations of state and political subdivisions	26,677			69,512			65,164			2,149			163,502
Mortgage-backed securities: GSE residential	73,878			310,186			11,447			—			395,511
Other securities	—			1,759			—			340			2,099
Total available-for-sale investments	$	141,581		$	397,120		$	76,611		$	2,489		$	617,801
Weighted average yield	2.42		%	2.67		%	2.93		%	2.88		%	2.65		%
Full tax-equivalent yield	2.63		%	2.87		%	3.93		%	3.79		%	2.96		%
Held to Maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	19,536		$	5,027		$	—		$	—		$	24,563
Weighted average yield	1.93		%	2.06		%	—		%	—		%	1.96		%
Full tax-equivalent yield	1.93		%	2.06		%	—		%	—		%	1.96		%

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, 2020.

Investment securities carried at approximately $582 million and $688 million at March 31, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

The following table presents the aging of gross unrealized losses and fair value by investment category as of March 31, 2020 and December 31, 2019 (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, 2020
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	5,802	$	(94	)	$	—	$	—		$	5,802	$	(94	)
Obligations of states and political subdivisions	119,614		(3,904		)	—		—			119,614		(3,904		)
Mortgage-backed securities: GSE residential	51,736		(315		)	3,679		(85		)	55,415		(400		)
Other securities	709		(41		)	—		—			709		(41		)
Total	$	177,861	$	(4,354	)	$	3,679	$	(85	)	$	181,540	$	(4,439	)
December 31, 2019
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	23,375	$	(60	)	$	—	$	—		$	23,375	$	(60	)
Obligations of states and political subdivisions	3,469		(16		)	347		(1		)	3,816		(17		)
Mortgage-backed securities: GSE residential	67,080		(322		)	20,888		(190		)	87,968		(512		)
Total	$	93,924	$	(398	)	$	21,235	$	(191	)	$	115,159	$	(589	)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	14,996	$	(25	)	$	24,565	$	(44	)	$	39,561	$	(69	)

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At March 31, 2020 and December 31, 2019, there were no available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more. At December 31, 2019, there were four held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $24,565,000 and unrealized losses of $44,000 in a continuous unrealized loss position for twelve months or more.

Obligations of states and political subdivisions. At March 31, 2020, there were no obligations of states and political subdivisions in a continuous loss position for twelve months or more. At December 31, 2019, there was one obligation of states and political subdivisions with a fair value of $347,000 and unrealized losses of $1,000 in a continuous unrealized loss position for twelve months or more.

Mortgage-backed Securities: GSE Residential. At March 31, 2020, there were five mortgage-backed securities with a fair value of $3,679,000 and unrealized losses of $85,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2019, there were fourteen mortgage-backed securities with a fair value of $20,888,000 and unrealized losses of $190,000 in a continuous unrealized loss position for twelve months or more.

The Company does not believe any other individual unrealized loss as of March 31, 2020 represents other than temporary impairment ("OTTI"). However, given the uncertainty of 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.

Note 4 – Loans and Allowance for Loan Losses

Loans are stated at amortized cost net of an allowance for credit losses. Amortized cost is the unpaid principal net of unearned premiums and discounts, and net deferred origination fees and costs. Deferred loan origination fees are reduced by loan origination costs and are 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, 2020 and December 31, 2019 follows (in thousands):



	March 31, 2020		December 31, 2019
Construction and land development	$	123,346	$	94,462
Agricultural real estate	242,541		240,481
1-4 Family residential properties	325,146		336,553
Multifamily residential properties	140,536		155,132
Commercial real estate	1,003,021		997,175
Loans secured by real estate	1,834,590		1,823,803
Agricultural loans	139,014		136,023
Commercial and industrial loans	565,714		528,987
Consumer loans	82,330		83,544
All other loans	123,482		126,807
Total Gross loans	2,745,130		2,699,164
Less: Loans held for sale	1,251		1,820
	2,743,879		2,697,344
Less:
Net deferred loan fees, premiums and discounts	832		3,817
Allowance for credit losses	32,876		26,911
Net loans	$	2,710,171	$	2,666,616

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 fair value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties.

Accrued interest on loans, which is excluded from the amortized cost of the balances above, totaled $12.5 million and $12.3 million at March 31, 2020 and December 31, 2019, respectively.

Most of the Company’s business activities are with customers located near the Company's branch locations in Illinois and Missouri. At March 31, 2020, the Company’s loan portfolio included $381.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $309.4 million was concentrated in corn and other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $5.2 million from $376.4 million at December 31, 2019 due to seasonal timing of cash flow requirements. Loans concentrated in corn and other grain farming increased $7.9 million from $301.5 million at December 31, 2019. The Company's underwriting practices include 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, however these 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 $119.7 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 $294.6 million of loans to lessors of non-residential buildings, $280.9 million of loans to lessors of residential buildings and dwellings, $108.7 million of loans to nursing care facilities, and $123.4 million of loans to other gambling industries.

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.

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.

Allowance for Credit Losses

The allowance for credit losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses expected over the remaining contractual life of the assets. The provision for credit losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit 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 credit losses by evaluating large impaired loans separately from non-impaired 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, and loans identified as troubled debt restructurings, 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 are less than the carrying amount of the loan. The carrying value of the loan reflects reductions from prior charge-offs.

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.

Beginning March 31, 2020, the allowance for credit losses was estimated using the current expected credit loss model ("CECL"). The Company uses the Loss Rate method to estimate the historical loss rate for all non-impaired loans. Under this method, the allowance for credit losses is measured on a collective (pool) basis for non-impaired loans with similar risk characteristics. Historical credit loss experience provides the basis for the estimate of expected credit losses. For each pool, a historical loss rate is computed based on the average remaining contractual life of the pool. Adjustments to historical loss rates are made using qualitative factors relevant to each pool including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. In addition, a twelve-month forecast, using reasonable and supportable future conditions, is prepared that is used to estimate expected changes to existing and historical conditions in the current period.

The Company also considers specific current economic events occurring globally, in the U.S. and in its local markets. In March 2020, in response to the COVID-19 outbreak, its significant disruptions in the U.S. economy and impacts on local markets, First Mid Bank offered a 90-day commercial deferral program, primarily to hotel and restaurant borrowers. In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings. These deferrals were, however, considered in the factors used to estimate the required allowance for credit losses for non-impaired loans. Other COVID-19 related impacts considered included revenue losses of businesses required to restrict or cease services, income loss to workers laid off as a result of COVID-19 restrictions, various federal and state government stimulus programs and additional deferral programs offered by First Mid Bank beginning in April 2020. Other events considered include the status of trade agreements with China, scheduled increases in minimum wage and changes to the minimum salary threshold for overtime provisions, current and projected unemployment rates, current and projected grain and oil prices and economies of local markets where customers work and operate.

Within each pool, risk elements are evaluated that have specific impacts to the borrowers within the pool. These, along with the general risks and events, and the specific lending policies and procedures by loan type described above, are analyzed to estimate the qualitative factors used to adjust the historical loss rates.

During the current period, the following assumptions and factors were considered when determining the historical loss rate and any potential adjustments by loan pool.

Construction and Land Development Loans. The average life of the construction and land development segment was determined to be twelve months. Historical losses in this segment remained very low. Current activity in this industry was deemed essential and has continued during COVID-19 so no adjustment to the qualitative factor was considered necessary.

Farm Loans. The average life of the farm segment was determined to be thirty six months. Historical losses in the segment remain very low. Farmland values have remained steady over an extended period of time and there are no indications that this will change in the next year. There appears to be little or no impact from COVID-19 events on this segment. No adjustments to the qualitative factor was considered necessary.

1- 4 Family Residential Properties Loans. The average life of the 1-4 Family Residential segment was determined to be:

Residential Real Estate-non-owner occupied, fifty four months; Residential Real Estate-owner occupied, fifty four months; Home Equity lines of credit, thirty months. COVID-19 has impacted the finances of consumers from layoffs and furloughs resulting from employers have to reduce or suspend operations. Increased risk in this segment includes consumer ability to make mortgage and rent payments. Some of this impact has been offset by governmental actions such as stimulus payments and extended unemployment benefits. First Mid Bank has also offered short-term loan payment deferral to borrowers in this segment. The historical loss rate for this segment declined for the period but was offset by an increase in the qualitative factor to account for these new potential risks.

Commercial Real Estate Loans. The average life of the commercial real estate segment was determined to be thirty six months. This segment includes the Company's majority of exposure to the hotel industry which has been significantly impacted by COVID-19 events. Other impacted industries in this segment include restaurants and retail establishments. First Mid Bank has implemented a deferral program for borrowers in this segment in order to ease the impact to these borrowers. In addition to a slight increase in the historical loss rate, the qualitative factor for this segment was increased to account for these new risks.

Agricultural Loans. The average life of the agricultural segment was determined to be eighteen months. Losses in this segment are very low, however there was a very slight increase in the historical loss rate. It is believed that borrowers in this segment will benefit from current governmental programs such as PPP and MFP. There does not appear to be impact from COVID-19 at this time. There were no adjustments to the qualitative factor for this period.

Commercial and Industrial Loans. The average life of the commercial and industrial segment was determined to be twenty four months. The COVID-19 impacts include forced closures and scaled-back services for many industries within this segment including retailers, restaurants and video gaming establishments. Some of this risk is offset by government relief programs as well as, First Mid Bank's payment deferral program. In addition to an increase in the historical loss rate, the qualitative factor for this segment was increased to account for these new risks.

Consumer Loans. The average life of the consumer segment was determined to be thirty six months. The financial status of many borrowers has been impacted by COVID-19 events including layoffs and reduced hours. Some of this impact has been offset by government stimulus programs, increased paid leave and increased and extended unemployment benefits. Additionally, First Mid Bank has offered a short-term payment deferral program. The historical loss rate increased for this period and the qualitative factor for the segment was increased to account for the new risks.

Acquired Loans. Prior to January 1, 2020 loans acquired with evidence of credit deterioration since origination and for which it was probable that all contractually required payments would not be collected were considered to be purchased credit impaired at the time of acquisition. Purchase credit-impaired ("PCI") loans were accounted for under ASC 310-30, Receivables--Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), and were initially measured at fair value, which included 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 was 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.

Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date. Accordingly, on January 1, 2020, the amortized cost basis of the PCD loans were adjusted to reflect the addition of $833,000 to the allowance for credit losses.

For acquired loans not deemed purchased credit deteriorated at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit loss expense. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.

The following tables present the activity in the allowance for credit losses based on portfolio segment for the three-months ended March 31, 2020 (in thousands):



	Construction & Land Development			Agricultural Real Estate		1-4 Family Residential Properties			Commercial Real Estate		Agricultural Loans			Commercial & Industrial		Consumer Loans		Total
Three months ended March 31, 2020
Beginning Balance (prior to adoption of ASU 2016-13)	$	1,146		$	1,093	$	1,386		$	11,198	$	1,386		$	9,273	$	1,429	$	26,911
Impact of adopting ASU 2016-13	(113		)	230		756			541		(363		)	155		466		1,672
Provision for credit loss expense	587			12		(77		)	1,961		41			2,815		142		5,481
Loans charged off	—			—		196			84		—			972		171		1,423
Recoveries collected	—			—		62			5		—			23		145		235
Ending balance	$	1,620		$	1,335	$	1,931		$	13,621	$	1,064		$	11,294	$	2,011	$	32,876

Prior to the adoption of ASU 2016-13, the appropriate level of the allowance for loan losses for all non-impaired loans was based on a migration analysis of net losses over a rolling twelve quarter period by loan segment. A weighted average of the net losses was 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. Due to weakened economic conditions during historical 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 following tables present the activity in the allowance for credit losses based on portfolio segment for the three-months ended March 31, 2019 and for the year ended December 31, 2019 (in thousands):



	Construction & Land Development			Agricultural Real Estate		1-4 Family Residential Properties			Commercial Real Estate			Agricultural Loans		Commercial & Industrial		Consumer Loans		Total
Three months ended March 31, 2019
Beginning Balance (prior to adoption of ASU 2016-13)	$	561		$	1,246	$	1,504		$	11,102		$	951	$	9,893	$	932	$	26,189
Provision for credit loss expense	(9		)	36		(41		)	(481		)	188		1,013		241		947
Loans charged off	—			—		130			56			9		104		269		568
Recoveries collected	—			—		8			—			—		28		100		136
Ending balance	$	552		$	1,282	$	1,341		$	10,565		$	1,130	$	10,830	$	1,004	$	26,704



	Construction & Land Development		Agricultural Real Estate			1-4 Family Residential Properties		Commercial Real Estate		Agricultural Loans		Commercial & Industrial		Consumer Loans		Total
Twelve months ended December 31, 2019
Beginning Balance (prior to adoption of ASU 2016-13)	$	561	$	1,246		$	1,504	$	11,102	$	951	$	9,893	$	932	$	26,189
Provision for credit loss expense	585		(153		)	1,268		1,827		459		1,053		1,394		6,433
Loans charged off	—		—			1,477		1,743		24		1,828		1,254		6,326
Recoveries collected	—		—			91		12		—		155		357		615
Ending balance	$	1,146	$	1,093		$	1,386	$	11,198	$	1,386	$	9,273	$	1,429	$	26,911

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.

The following table presents the amortized cost basis of collateral-dependent loans by class of loans that were individually evaluated to determine expected credit losses, and the related allowance for credit losses, as of March 31, 2020 (in thousands):

Collateral

Allowance for Credit Losses

Real Estate

Business Assets

Other

Total

Construction and land development

540

—

Price	34.72	EPS	2
Shares	17	P/E	16
MCap	580	P/FCF	14
Net Debt	-108	EBIT	76
TEV	472	TEV/EBIT	6
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-04
10-K	2019-12-31	Filed 2020-03-09
10-Q	2019-09-30	Filed 2019-11-05
10-Q	2019-06-30	Filed 2019-08-05
10-Q	2019-03-31	Filed 2019-05-07
10-K	2018-12-31	Filed 2019-03-05
10-Q	2018-09-30	Filed 2018-11-09
10-Q	2018-06-30	Filed 2018-08-07
10-Q	2018-03-31	Filed 2018-05-04
10-K	2017-12-31	Filed 2018-03-02
10-Q	2017-09-30	Filed 2017-11-06
10-Q	2017-06-30	Filed 2017-08-04
10-Q	2017-03-31	Filed 2017-05-10
10-K	2016-12-31	Filed 2017-03-06
10-Q	2016-09-30	Filed 2016-11-09
10-Q	2016-06-30	Filed 2016-08-05
10-Q	2016-03-31	Filed 2016-05-06
10-K	2015-12-31	Filed 2016-03-04
10-Q	2015-09-30	Filed 2015-11-09
10-Q	2015-06-30	Filed 2015-08-07
10-Q	2015-03-31	Filed 2015-05-11
10-K	2014-12-31	Filed 2015-03-05
10-Q	2014-09-30	Filed 2014-11-07
10-Q	2014-06-30	Filed 2014-08-07
10-Q	2014-03-31	Filed 2014-05-07
10-K	2013-12-31	Filed 2014-03-06
10-Q	2013-09-30	Filed 2013-11-07
10-Q	2013-06-30	Filed 2013-08-07
10-Q	2013-03-31	Filed 2013-05-07
10-K	2012-12-31	Filed 2013-03-07
10-Q	2012-09-30	Filed 2012-11-08
10-Q	2012-06-30	Filed 2012-08-09
10-Q	2012-03-31	Filed 2012-05-08
10-K	2011-12-31	Filed 2012-03-07
10-Q	2011-09-30	Filed 2011-11-09
10-Q	2011-06-30	Filed 2011-08-08
10-Q	2011-03-31	Filed 2011-05-05
10-K	2010-12-31	Filed 2011-03-03
10-Q	2010-09-30	Filed 2010-11-08
10-Q	2010-06-30	Filed 2010-08-06
10-Q	2010-03-31	Filed 2010-05-06
10-K	2009-12-31	Filed 2010-03-03

8-K	2020-05-19	Other Events
8-K	2020-04-30	Earnings, Regulation FD, Exhibits
8-K	2020-04-29	Officers, Shareholder Vote
8-K	2020-04-10	Enter Agreement, Off-BS Arrangement, Exhibits
8-K	2020-03-20	Officers
8-K	2020-01-23	Earnings, Exhibits
8-K	2019-12-17	Officers
8-K	2019-12-17	Officers, Exhibits
8-K	2019-10-24	Earnings, Exhibits
8-K	2019-09-06	Other Events
8-K	2019-08-16	Other Events
8-K	2019-07-25	Earnings, Exhibits
8-K	2019-04-24	Earnings, Exhibits
8-K	2019-04-24	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	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	Earnings, Exhibits
8-K	2018-04-25	Officers, Amend Bylaw, Shareholder Vote, Other Events, Exhibits
8-K	2018-04-13	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

EX-31.1	fmbh-ex311x2020331.htm
EX-31.2	fmbh-ex312x2020331.htm
EX-32.1	fmbh-ex321x2020331.htm
EX-32.2	fmbh-ex322x2020331.htm

FMBH 10Q Quarterly Report

First Mid Illinois Bancshares Earnings 2020-03-31