Company Quick10K Filing
Quick10K
First Mid Illinois Bancshares
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$35.67 17 $594
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
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
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FMBH 2018-09-30
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
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
EX-31.1 fmbh-ex311x2018930.htm
EX-31.2 fmbh-ex312x2018930.htm
EX-32.1 fmbh-ex321x2018930.htm
EX-32.2 fmbh-ex322x2018930.htm

First Mid Illinois Bancshares Earnings 2018-09-30

FMBH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 fmbh-2018930x10q.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 September 30, 2018
Or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
 
Commission file number 0-13368
 
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
 
Delaware
37-1103704
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
 
1421 Charleston Avenue,
 
Mattoon, Illinois
61938
(Address of principal executive offices)
(Zip code)
 
(217) 234-7454
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]  No [  ]

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

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

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

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

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

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





PART I

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

 
$
75,398

Interest bearing
10,435

 
12,990

Federal funds sold
662

 
491

Cash and cash equivalents
64,485

 
88,879

Certificates of deposit investments
2,183

 
1,685

Investment securities:
 

 
 

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

 
578,579

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

 
69,332

Loans held for sale
940

 
1,025

Loans
2,399,220

 
1,938,476

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

 
1,918,499

Interest receivable
14,928

 
10,832

Other real estate owned
2,093

 
2,754

Premises and equipment, net
47,327

 
38,266

Goodwill, net
86,641

 
60,150

Intangible assets, net
15,373

 
10,679

Bank owned life insurance
51,443

 
41,883

Other assets
26,194

 
18,976

Total assets
$
3,355,477

 
$
2,841,539

Liabilities and Stockholders’ Equity
 

 
 

Deposits:
 

 
 

Non-interest bearing
$
493,935

 
$
480,283

Interest bearing
2,157,462

 
1,794,356

Total deposits
2,651,397

 
2,274,639

Securities sold under agreements to repurchase
98,875

 
155,388

Interest payable
1,400

 
602

FHLB borrowings
120,736

 
60,038

Other borrowings
29,500

 
10,313

Junior subordinated debentures
28,958

 
24,000

Other liabilities
7,778

 
8,595

Total liabilities
2,938,644

 
2,533,575

Stockholders’ Equity:
 

 
 

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

 
54,925

Additional paid-in capital
250,484

 
163,603

Retained earnings
126,955

 
104,683

Deferred compensation
2,553

 
3,540

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

 
307,964

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

 
$
2,841,539


See accompanying notes to unaudited condensed consolidated financial statements.



2






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

 
$
20,385

 
$
75,219

 
$
61,337

Interest on investment securities
4,511

 
4,179

 
13,271

 
12,585

Interest on certificates of deposit investments
13

 
9

 
34

 
41

Interest on federal funds sold
2

 
1

 
5

 
62

Interest on deposits with other financial institutions
112

 
40

 
248

 
217

Total interest income
33,488

 
24,614

 
88,777

 
74,242

Interest expense:
 

 
 

 
 

 
 

Interest on deposits
2,217

 
1,028

 
5,149

 
2,840

Interest on securities sold under agreements to repurchase
72

 
51

 
196

 
137

Interest on FHLB borrowings
559

 
283

 
1,309

 
602

Interest on other borrowings
148

 
143

 
374

 
385

Interest on subordinated debentures
405

 
236

 
1,013

 
680

Total interest expense
3,401

 
1,741

 
8,041

 
4,644

Net interest income
30,087

 
22,873

 
80,736

 
69,598

Provision for loan losses
2,551

 
1,489

 
5,483

 
5,051

Net interest income after provision for loan losses
27,536

 
21,384

 
75,253

 
64,547

Other income:
 

 
 

 
 

 
 

Trust revenues
919

 
925

 
2,934

 
2,696

Brokerage commissions
660

 
536

 
1,986

 
1,550

Insurance commissions
877

 
670

 
3,202

 
3,148

Service charges
2,009

 
1,758

 
5,447

 
5,160

Securities gains, net

 
254

 
901

 
589

Mortgage banking revenue, net
368

 
347

 
939

 
875

ATM / debit card revenue
1,979

 
1,595

 
5,443

 
4,828

Bank owned life insurance
342

 
792

 
933

 
1,355

Other
765

 
784

 
1,982

 
2,925

Total other income
7,919

 
7,661

 
23,767

 
23,126

Other expense:
 

 
 

 
 

 
 

Salaries and employee benefits
11,600

 
9,648

 
32,851

 
29,685

Net occupancy and equipment expense
3,530

 
3,129

 
10,308

 
9,378

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

 
22

 
530

FDIC insurance
174

 
210

 
740

 
679

Amortization of intangible assets
838

 
545

 
2,059

 
1,651

Stationery and supplies
328

 
168

 
725

 
539

Legal and professional
1,071

 
871

 
3,925

 
2,596

Marketing and donations
468

 
338

 
1,253

 
909

Other
6,542

 
2,618

 
11,777

 
9,102

Total other expense
24,490

 
17,912

 
63,660

 
55,069

Income before income taxes
10,965

 
11,133

 
35,360

 
32,604

Income taxes
2,731

 
3,538

 
8,699

 
10,545

Net income
$
8,234

 
$
7,595

 
$
26,661

 
$
22,059

Per share data:
 

 
 

 
 

 
 

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

 
$
0.61

 
$
1.91

 
$
1.76

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

 
$
0.61

 
$
1.90

 
$
1.76

Cash dividends declared per common share
$

 
$

 
$
0.34

 
$
0.32


See accompanying notes to unaudited condensed consolidated financial statements.


3






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

 
$
7,595

 
$
26,661

 
$
22,059

Other Comprehensive Income (Loss)
 

 
 

 
 

 
 

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

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

 
16

 
60

 
51

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

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

Comprehensive income
$
5,335

 
$
6,944

 
$
16,792

 
$
29,819


See accompanying notes to unaudited condensed consolidated financial statements.




4






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

 
$
22,059

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

 
 

Provision for loan losses
5,483

 
5,051

Depreciation, amortization and accretion, net
5,431

 
6,241

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

 
300

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

Loss on write down of premises and equipment
26

 
337

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

 
38

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

 
44,981

Decrease in other assets
575

 
2,475

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

 
32,769

Cash flows from investing activities:
 

 
 

Proceeds from maturities of certificates of deposit investments
747

 
12,958

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

 
96,184

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

 
52,894

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

 
5,356

Net cash provided by acquisition
10,323

 

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

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

 
20,000

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

 
52,000

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

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

Proceeds from issuance of common stock
36,519

 
4,195

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

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

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

 
175,902

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

 
$
69,643



5






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

 
$
4,627

Income taxes
7,919

 
7,969

Supplemental disclosures of noncash investing and financing activities
 

 
 

Loans transferred to other real estate owned
224

 
5,317

Dividends reinvested in common stock
533

 
527

Net tax benefit related to option and deferred compensation plans
160

 
221

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

 
$

Consideration paid:
 
 
 
     Cash paid
10,275

 

     Common stock issued
61,350

 

Total consideration paid
71,625

 

Fair value of liabilities assumed
$
429,660

 
$


See accompanying notes to unaudited condensed consolidated financial statements.


6






Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 1 --  Basis of Accounting and Consolidation

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

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

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

Website

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

Capital Raise

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

First BancTrust Corporation

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


7







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

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

SCB Bancorp, Inc.

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

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

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

At-The-Market Program

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






8






Bank Owned Life Insurance

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

Stock Plans

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

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

Employee Stock Purchase Plan

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

General Litigation

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

Revenue Recognition

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

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

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



9






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

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

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

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

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

Accumulated Other Comprehensive Income (Loss)

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

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

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

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

 

 

Tax benefit
4,973

 

 
4,973

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

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

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

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

 
(345
)
 
(345
)
Tax benefit
841

 
100

 
941

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



10






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

 
$
254

 
$
901

 
$
589

Securities gains, net
 
 
 
 
 
 
 
 
(Total reclassified amount before tax)
 

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

 
$
155

 
$
640

 
$
359

Net reclassified amount

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


Adoption of New Accounting Guidance

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

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

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



11






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

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


Pending New Accounting Guidance

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

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


12






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

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



13






Note 2 -- Earnings Per Share

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

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

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

 
$
7,595,000

 
$
26,661,000

 
$
22,059,000

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

 
$
0.61

 
$
1.91

 
$
1.76

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

 
7,595,000

 
$
26,661,000

 
$
22,059,000

Weighted average common shares outstanding
15,290,539

 
12,528,674

 
13,982,339

 
12,498,913

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

 
6,299

 
3,570

 
6,827

Restricted stock awarded
13,250

 
836

 
13,250

 
836

Dilutive potential common shares
15,679

 
7,135

 
16,820

 
7,663

Diluted weighted average common shares outstanding
15,306,218

 
12,535,809

 
13,999,159

 
12,506,576

Diluted earnings per common share
$
0.54

 
$
0.61

 
$
1.90

 
$
1.76



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



14






Note 3 -- Investment Securities

The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
September 30, 2018
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government corporations & agencies
$
127,365

 
$

 
$
(4,696
)
 
$
122,669

Obligations of states and political subdivisions
176,273

 
570

 
(3,497
)
 
173,346

Mortgage-backed securities: GSE residential
310,122

 
132

 
(9,585
)
 
300,669

Other securities
2,269

 
127

 

 
2,396

Total available-for-sale
$
616,029

 
$
829

 
$
(17,778
)
 
$
599,080

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

 
$

 
$
(2,014
)
 
$
67,395

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

 
$
8

 
$
(2,034
)
 
$
113,770

Obligations of states and political subdivisions
165,037

 
2,254

 
(1,025
)
 
166,266

Mortgage-backed securities: GSE residential
295,778

 
493

 
(2,460
)
 
293,811

Trust preferred securities
2,893

 

 
(345
)
 
2,548

Other securities
2,039

 
145

 

 
2,184

Total available-for-sale
$
581,543

 
$
2,900

 
$
(5,864
)
 
$
578,579

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

 
$
103

 
$
(978
)
 
$
68,457


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

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

 
$
394

 
$
941

 
$
746

Gross losses

 
(140
)
 
(40
)
 
(157
)





15






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

 
$
37,397

 
$

 
$

 
$
122,669

Obligations of state and political subdivisions
16,847

 
78,561

 
76,890

 
1,048

 
173,346

Mortgage-backed securities: GSE residential
4

 
120,920

 
179,745

 

 
300,669

Other securities

 
2,015

 

 
381

 
2,396

Total available-for-sale investments
$
102,123

 
$
238,893

 
$
256,635

 
$
1,429

 
$
599,080

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

 
$
29,415

 
$

 
$

 
$
69,409

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

The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent yields have been calculated using a 21% tax rate.  With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at September 30, 2018.

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



16






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

 
$
(1,957
)
 
$
55,507

 
$
(2,739
)
 
$
122,669

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

 
(2,338
)
 
18,856

 
(1,159
)
 
120,048

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

 
(8,724
)
 
45,257

 
(861
)
 
280,215

 
(9,585
)
Total
$
403,312

 
$
(13,019
)
 
$
119,620

 
$
(4,759
)
 
$
522,932

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

 
$
(340
)
 
$
42,885

 
$
(1,674
)
 
$
67,395

 
$
(2,014
)
December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

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

 
$
(540
)
 
$
47,972

 
$
(1,494
)
 
$
106,556

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

 
(769
)
 
9,267

 
(256
)
 
51,885

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

 
(1,942
)
 
22,609

 
(518
)
 
210,558

 
(2,460
)
Trust preferred securities

 

 
2,548

 
(345
)
 
2,548

 
(345
)
Total
$
289,151

 
$
(3,251
)
 
$
82,396

 
$
(2,613
)
 
$
371,547

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

 
$
(525
)
 
$
14,540

 
$
(453
)
 
$
48,641

 
$
(978
)


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

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

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


17







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

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

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

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

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

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

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

 
$
1,111

Additions related to OTTI losses not previously recognized

 

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

Reductions due to change in intent or likelihood of sale

 

Additions related to increases in previously recognized OTTI losses

 

Reductions due to increases in expected cash flows

 

End of period
$

 
$
1,111



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





18






Note 4 – Loans and Allowance for Loan Losses

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

 
$
107,721

Agricultural real estate
191,812

 
127,232

1-4 Family residential properties
368,759

 
294,483

Multifamily residential properties
100,881

 
61,966

Commercial real estate
818,093

 
684,639

Loans secured by real estate
1,571,313

 
1,276,041

Agricultural loans
120,812

 
86,602

Commercial and industrial loans
541,099

 
445,378

Consumer loans
57,788

 
30,070

All other loans
117,031

 
108,023

Total Gross loans
2,408,043

 
1,946,114

Less: Loans held for sale
940

 
1,025

 
2,407,103

 
1,945,089

Less:
 

 
 

Net deferred loan fees, premiums and discounts
7,883

 
6,613

Allowance for loan losses
23,839

 
19,977

Net loans
$
2,375,381

 
$
1,918,499


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

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

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



19






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

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

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

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

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

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



20






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

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

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

Allowance for Loan Losses

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

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

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



21






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

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

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

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

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
$
18,663

 
$
1,900

 
$
554

 
$
928

 
$

 
$
22,045

Provision charged to expense
1,197

 
247

 
942

 
165

 

 
2,551

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

 
(846
)
Recoveries
5

 

 
2

 
82

 

 
89

Balance, end of period
$
19,426

 
$
2,054

 
$
1,317

 
$
1,042

 
$

 
$
23,839

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
858

 
$

 
$
249

 
$
1

 
$

 
$
1,108

Collectively evaluated for impairment
$
18,157

 
$
2,054

 
$
1,068

 
$
1,041

 
$

 
$
22,320

Acquired with deteriorated credit quality
$
411

 
$

 
$

 
$

 
$

 
$
411



22






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

 
 

 
 

 
 

 
 

Allowance for loan losses:
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
$
14,747

 
$
1,743

 
$
969

 
$
716

 
$
34

 
$
18,209

Provision charged to expense
1,440

 
(57
)
 
(2
)
 
72

 
36

 
1,489

Losses charged off
(1,242
)
 

 
(7
)
 
(160
)
 

 
(1,409
)
Recoveries
158

 
1

 
78

 
63

 

 
300

Balance, end of period
$
15,103

 
$
1,687

 
$
1,038

 
$
691

 
$
70

 
$
18,589

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
168

 
$

 
$
125

 
$
2

 
$

 
$
295

Collectively evaluated for impairment
$
14,935

 
$
1,687

 
$
913

 
$
689

 
$
70

 
$
18,294

Acquired with deteriorated credit quality
$

 
$

 
$

 
$

 
$

 
$

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

 
$
1,742

 
$
886

 
$
803

 
$

 
$
19,977

Provision charged to expense
3,467

 
405

 
1,211

 
400

 

 
5,483

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

 
(2,041
)
Recoveries
128

 

 
56

 
236

 

 
420

Balance, end of period
$
19,426

 
$
2,054

 
$
1,317

 
$
1,042

 
$

 
$
23,839

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
858

 
$

 
$
249

 
$
1

 
$

 
$
1,108

Collectively evaluated for impairment
$
18,157

 
$
2,054

 
$
1,068

 
$
1,041

 
$

 
$
22,320

Acquired with deteriorated credit quality
$
411

 
$

 
$

 
$

 
$

 
$
411

Loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
14,924

 
$
42

 
$
2,708

 
$
159

 
$

 
$
17,833

Collectively evaluated for impairment
1,605,717

 
312,145

 
381,012

 
69,048

 
$

 
2,367,922

Acquired with deteriorated credit quality
11,435

 
4

 
2,961

 
5

 
$

 
14,405

Ending balance
$
1,632,076

 
$
312,191

 
$
386,681

 
$
69,212

 
$

 
$
2,400,160



23






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

 
$
2,249

 
$
874

 
$
693

 
$
36

 
$
16,753

Provision charged to expense
4,573

 
98

 
167

 
179

 
34

 
5,051

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

 
(3,890
)
Recoveries
354

 
2

 
103

 
216

 

 
675

Balance, end of period
$
15,103

 
$
1,687

 
$
1,038

 
$
691

 
$
70

 
$
18,589

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
168

 
$

 
$
125

 
$
2

 
$

 
$
295

Collectively evaluated for impairment
$
14,935

 
$
1,687

 
$
913

 
$
689

 
$
70

 
$
18,294

Acquired with deteriorated credit quality
$

 
$

 
$

 
$

 
$

 
$

Loans:
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
7,635

 
$
513

 
$
1,418

 
$
210

 
$

 
$
9,776

Collectively evaluated for impairment
1,287,821

 
206,669

 
324,920

 
32,892

 

 
1,852,302

Acquired with deteriorated credit quality
5,484

 

 

 

 

 
5,484

Ending balance
$
1,300,940