Company Quick10K Filing
First Mid Illinois Bancshares
Price34.72 EPS2
Shares17 P/E16
MCap580 P/FCF14
Net Debt-108 EBIT76
TEV472 TEV/EBIT6
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

FMBH 10Q Quarterly Report

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 - - Leases
Note 9 - - Derivatives
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-ex311x2020331.htm
EX-31.2 fmbh-ex312x2020331.htm
EX-32.1 fmbh-ex321x2020331.htm
EX-32.2 fmbh-ex322x2020331.htm

First Mid Illinois Bancshares Earnings 2020-03-31

Balance SheetIncome StatementCash 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.


2






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.


3






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.




4






 
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.


5






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



6






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.


7






Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 1 --  Basis of Accounting and Consolidation

The unaudited condensed consolidated financial statements include the accounts of First Mid Bancshares, Inc. (“Company”) formerly known as First Mid-Illinois Bancshares, Inc., and its wholly-owned subsidiaries:  First Mid Bank & Trust, N.A. (“First Mid Bank”), 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.




8






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.



9






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.


10






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
 
 
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.


11







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.


12







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







13






Note 2 -- Earnings Per Share

Basic net income per common share available to common stockholders is calculated as net income less preferred stock dividends divided by the weighted average number of common shares outstanding.  Diluted net income per common share available to common stockholders is computed using the weighted average number of common shares outstanding, increased by the Company’s stock options, unless anti-dilutive. The components of basic and diluted net income per common share available to common stockholders for the three-month period ended March 31, 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.


14






Note 3 -- Investment Securities

The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at March 31, 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
)





15






The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity presented at amortized cost, at March 31, 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.



16






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.





17






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.



18






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.



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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.



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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.



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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





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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.



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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

 
$