2011 Annual Report
Beyond the Bricks
All photos are of
First Mid-Illinois Bancshares, Inc.
Corporate Headquarters
1421 Charleston Avenue, Mattoon
1515 Charleston Avenue Mattoon, Illinois 61938www.firstmid.com Five-Year Financial Data
Dollars in thousands, except per share data
SELECTED INCOME STATEMENT DATA:
2011
2010
2009
2008
2007
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
Other income
Other expenses
Income before income taxes
Income taxes
Net income
Dividends on preferred shares
$
56,772
$
50,883
$
51,409
$
57,066
$
59,931
8,504
48,268
3,101
45,167
15,787
43,053
17,901
6,529
11,372
3,576
10,756
40,127
3,737
36,390
13,820
36,927
13,283
4,522
8,761
2,240
15,837
35,572
3,594
31,978
13,455
33,212
12,221
4,007
8,214
1,821
21,344
35,722
3,559
32,163
15,264
31,460
15,967
5,443
10,524
-
28,429
31,502
862
30,640
14,661
30,055
15,246
5,087
10,159
-
Net income available to common stockholders
$
7,796
$
6,521
$
6,393
$
10,524
$
10,159
SELECTED BALANCE SHEET DATA:
ASSETS
Cash and cash equivalents
$
73,102
$ 231,493
$
90,411
$
86,643
$
31,123
Certificates of deposit investments
Investment securities
Loans held for sale
Net loans
Other assets
Total assets
13,231
478,967
1,046
847,908
86,702
10,000
342,866
114
794,074
89,698
9,344
239,156
149
691,139
64,956
-
170,075
537
733,814
58,631
-
185,211
1,974
740,069
57,961
$ 1,500,956
$ 1,468,245
$ 1,095,155
$ 1,049,700
$ 1,016,338
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Borrowings
Other liabilities
Total liabilities
Stockholders’ equity
$ 1,170,734
$ 1,212,710
$ 840,410
$ 806,354
$ 770,583
181,000
8,255
137,427
5,843
1,359,989
1,355,980
140,967
112,265
133,756
9,768
983,934
111,221
152,078
8,490
966,922
82,778
156,170
9,133
935,886
80,452
Total liabilities and stockholders’ equity
$ 1,500,956
$ 1,468,245
$ 1,095,155
$ 1,049,700
$ 1,016,338
Dividends to preferred stockholders
$
3,576
$
2,240
$
1,821
$
-
$
-
Dividends to common stockholders
Dividends per common share*
Basic earnings per common share*
Diluted earnings per common share*
Book value per common share*
2,413
.40
1.29
1.29
16.18
2,309
.38
1.07
1.07
14.46
2,308
.38
1.04
1.04
14.23
2,360
.38
1.69
1.67
13.50
*Share information has been adjusted to reflect the
three-for-two stock split effected in June 2007.
2011 Annual Report • First Mid-Illinois Bancshares, Inc.
2,375
.38
1.60
1.57
12.82
1
Message from the Chairman
First Mid-Illinois Bancshares, Inc. had a successful 2011 with growth in earnings, earnings per share, dividends, capital and
reserves, and reduced levels of non-performing assets and past due loans. Net income for 2011 amounted to $11,372,000
compared to $8,761,000 for 2010 and diluted earnings per share increased to $1.29 per share in 2011 from $1.07 per share
for 2010. Our capital ratios remain strong compared to peer banks and increased during the year as a result of our earnings
and the preferred stock offering early in 2011. Also, book value per share increased to $16.18 on December 31, 2011
compared to $14.46 on December 31, 2010. A complete analysis of our 2011 financial performance is contained in this
Annual Report and I urge all shareholders to review the document.
In late 2010, we completed the acquisition of 10 branch locations in and around Bloomington, Peoria, Galesburg, and
Quincy. This acquisition, and the branches’ integration into the First Mid system, have been successful as we have not only
retained existing customers but developed new relationships and grown in balances and profits in these markets during
the first full year of operations.
Growth in earnings was primarily due to the increase in net interest income. Net interest income was $48.3 million for 2011
compared to $40.1 million in 2010. The acquisition in late 2010 added $135 million in loans and $335 million in deposits.
As a result, total balance sheet assets were higher for the full year of 2011 and average earning assets were $257 million
greater than 2010. In addition to the increase in the size of the balance sheet, we effectively deployed the excess liquidity
obtained in the acquisition during 2011. Loan balances grew to $860 million on December 31, 2011 from $804.6 million on
December 31, 2010 while investment balances also increased by $136 million during this period. The movement of
balances to higher-yielding loans and investments improved our net interest margin during the last half of 2011. In
addition, we lowered our funding costs during the year as higher cost CD balances declined. First Mid’s core deposit base
remains a strength of our balance sheet as we continue to maintain local customer relationships and balances and are not
reliant on any national brokered market deposits. Because of the higher level of liquidity earlier in the year, our net
interest margin for 2011 was 3.51% compared to 3.57% in 2010. The net interest margin for the fourth quarter of 2011
increased to 3.61% compared to 3.35% during the fourth quarter of 2010.
Total non-interest income also increased to $15.8 million for 2011 from $13.8 million in 2010. Revenues from our trust,
brokerage, and insurance areas all increased during the year. Also, fees received on debit and ATM transactions increased
with the greater number of customers and increased number of electronic transactions. We did incur $886,000 of
impairment charges on the trust preferred securities we own. This was down from last year as the level of bank defaults
has slowed. Revenues from our mortgage banking area remain strong from a historical standpoint and similar to 2010 as
low interest rates resulted in significant refinance activity.
Operating expenses for 2011 were $43.1 million compared to $36.9 million for 2010. The higher expenses were reflective of
the personnel and operating costs of the new branch locations for the full year of 2011. The Company’s effective tax rate is
also higher in 2011 due to the increase in State of Illinois taxes this year.
Credit quality is an area where we spent considerable time and resources and the trends in 2011 were positive. Total
non-performing assets declined to $12.0 million (.80% of assets) at December 31, 2011 from $16.6 million (1.13% of assets)
on December 31, 2010. Total loans past due 30 days or more also declined to $6.7 million (.78% of total loans) from
$9.4 million (1.19% of total loans) at year-end 2010. The decrease in non-performing assets was the result of paydowns and
charge-offs taken during the year. Net charge-offs for 2011 totaled $2.4 million compared to $2.8 million in 2010. Our
provision for loan losses also declined to $3.1 million in 2011 compared to $3.7 million in 2010. A measurement which we
monitor closely at First Mid is the ratio of the allowance for possible loan losses to non-accrual loans. This ratio increased
to 165% at December 31, 2011 compared to 111% at December 31, 2010 and remains strong when compared with other
community banks.
In 2011, we took three actions which I believe will position our organization for growth in years ahead. First, we
strengthened our capital position with the issuance of $19.25 million of Series C perpetual, non-cumulative convertible
preferred stock. Following regulatory approval, we anticipate issuing an additional $8.25 million in early 2012 to bring the
2
2011 Annual Report • First Mid-Illinois Bancshares, Inc.
total for this issuance to $27.5 million. This stock is considered
tier 1 capital for regulatory purposes and gives us flexibility to
grow and expand our operations in years to come. Secondly, in
May of 2011, Joe Dively joined our organization as President of
First Mid-Illinois Bank and Trust, N.A. A Coles County native
and graduate of Eastern Illinois University, Joe has been a
member of our Board of Directors since 2004 and brings
significant management and marketing talent to the bank.
Joe was formerly a senior executive with Consolidated
Communications, Inc. based in Mattoon. Finally, in August
2011, we completed the acquisition of the former Masonic
building at 1421 Charleston Avenue in Mattoon and promptly
moved our corporate headquarters to this location. Not only
does this building provide us with an excellent base for the
future, dividends to our shareholders are considered tax
exempt income for State of Illinois income tax purposes as the
building is located in an enterprise zone.
Another significant 2011 event was the retirement of long time
Board Member, Kenneth R. Diepholz. During his 27 years
of service, Ken served as a Director on each of the First
National Bank, Mattoon; First Mid-Illinois Bank & Trust; and
First Mid-Illinois Bancshares Boards. We wish him the best
and are truly thankful for his dedicated service to First Mid.
As I said in prior communications, the operating environment
is now and will most certainly remain challenging. Interest
rates are at historic lows and, while improving somewhat in
recent months, the economic climate in the U.S. remains slow
with loan demand weak. Moreover, the regulatory burden on
community banks intensified in 2011 as regulators began
implementing provisions of the Dodd-Frank legislation of
mid-2010.
That said, I am pleased with the progress that First Mid made
in 2011 and am optimistic about our future. Our earnings
capacity, the strength of our balance sheet, and the quality
of our Board, management and staff position us to take
advantage of opportunities in the future.
Thank you for your continued support of First Mid-Illinois
Bancshares, Inc.
Very Truly Yours,
William S. Rowland
Chairman and Chief Executive Officer
2011 Annual Report • First Mid-Illinois Bancshares, Inc.
3
Comparison of 5 Year Cumulative Total Return*
Among First Mid-Illinois Bancshares, Inc., the S&P 500 Index,
and the NASDAQ Bank Index
$120
$100
$80
$60
$40
$20
$0
12/06
12/07
12/08
12/09
12/10
12/11
First Mid-Illinois Bancshares, Inc.
S&P 500
NASDAQ Bank
* $100 invested on 12/31/06 in stock or index, including
reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2012 S&P, a division of The McGraw-Hill
Companies Inc. All rights reserved.
Stockholder Information
Dividend Reinvestment Plan
Transfer and Dividend Paying Agent
For information concerning the Company’s
Dividend Reinvestment Plan or for stockholder
inquiries concerning dividend checks or their
stockholder records, contact:
Regular Mail:
Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
Street Address for Overnight Delivery:
250 Royall Street, Mail Stop 1A
Canton, MA 02021
(312) 360-5377
www.computershare.com/contactus
Primary Market Makers
Boenning & Scattergood
Powell, OH 43065
(866) 326-8113
Howe Barnes Hoefer & Arnett
Chicago, Illinois 60606
(800) 800-4693
Form 10-K
A copy of the 2011 Annual Report on Form 10-K
with all exhibits filed with the Securities and
Exchange Commission (SEC) is available, free
of charge, at www.firstmid.com by clicking on
“Investor Relations” and then on “SEC Filings.”
All periodic and current reports of First Mid-Illinois
Bancshares, Inc., can be accessed through this
website as soon as reasonably practicable after
these materials are filed with the SEC.
A copy may also be obtained by sending a written
request to Ms. Lee Ann Perry, First Mid-Illinois
Bancshares, Inc., 1421 Charleston Avenue,
P.O. Box 499, Mattoon, Illinois, 61938, or
email lperry@firstmid.com.
Annual Meeting of Stockholders
The annual meeting of stockholders
will be Wednesday, April 25, 2012,
at 4:00 p.m. in the lobby of
First Mid-Illinois Bank & Trust,
1515 Charleston Avenue, Mattoon, Illinois.
4
2011 Annual Report • First Mid-Illinois Bancshares, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
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
(State or other jurisdiction of incorporation or organization)
37-1103704
(I.R.S. Employer Identification No.)
1421 Charleston Avenue, Mattoon, Illinois
(Address of Principal Executive Offices)
61938
(Zip Code)
(217) 234-7454
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $4.00 per share,
and related Common Stock Purchase Rights
(Title of class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X ] No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Accelerated filer [X]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the Registrant, as of
the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $66,949,466. Determination of stock
ownership by non-affiliates was made solely for the purpose of responding to this requirement and the Registrant is not bound by this determination for
any other purpose.
As of March 6, 2012, 6,018,625 shares of the Registrant’s common stock, $4.00 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Portions of the Proxy Statement for 2012 Annual
Meeting of Shareholders to be held on April 25, 2012
Into Form 10-K Part:
III
First Mid-Illinois Bancshares, Inc.
Form 10-K Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Part II
Item 5
Item 6
Item 7
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibit and Financial Statement Schedules
Item 8
Item 9
Item 9A
Item 9B
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Signatures
Exhibit Index
Page
3
12
14
14
15
15
16
18
19
46
48
95
95
97
97
97
97
98
98
98
99
100
2
PART I
ITEM 1.
BUSINESS
Company and Subsidiaries
First Mid-Illinois Bancshares, Inc. (the “Company”) is a financial holding company. The Company is engaged in the business of banking through its
wholly owned subsidiary, First Mid-Illinois Bank & Trust, N.A. (“First Mid Bank”). The Company provides data processing services to affiliates through
another wholly owned subsidiary, Mid-Illinois Data Services, Inc. (“MIDS”). The Company offers insurance products and services to customers through
its wholly owned subsidiary, The Checkley Agency, Inc. doing business as First Mid Insurance Group (“First Mid Insurance”). The Company also wholly
owns two statutory business trusts, First Mid-Illinois Statutory Trust I (“Trust I”), and First Mid-Illinois Statutory Trust II (“Trust II”), both unconsolidated
subsidiaries of the Company.
The Company, a Delaware corporation, was incorporated on September 8, 1981, and pursuant to the approval of the Board of Governors of the Federal
Reserve System (the “Federal Reserve Board”) became the holding company owning all of the outstanding stock of First National Bank, Mattoon (“First
National”) on June 1, 1982. First National changed its name to First Mid-Illinois Bank & Trust, N.A. in 1992. The Company acquired all of the
outstanding stock of a number of community banks or thrift institutions on the following dates, and subsequently combined their operations with those of
the Company:
• Mattoon Bank, Mattoon on April 2, 1984
• State Bank of Sullivan on April 1, 1985
• Cumberland County National Bank in Neoga on December 31, 1985
• First National Bank and Trust Company of Douglas County on December 31, 1986
• Charleston Community Bank on December 30, 1987
• Heartland Federal Savings and Loan Association on July 1, 1992
• Downstate Bancshares, Inc. on October 4, 1994
• American Bank of Illinois on April 20, 2001
• Peoples State Bank of Mansfield on May 1, 2006
In 1997, First Mid Bank acquired the Charleston, Illinois branch location and the customer base of First of America Bank and in 1999 acquired the
Monticello, Taylorville and DeLand branch offices and deposit base of Bank One Illinois, N.A.
First Mid Bank also opened a de novo branch in Decatur, Illinois and a banking center in the Student Union of Eastern Illinois University in Charleston,
Illinois (2000); de novo branches in Champaign, Illinois and Maryville, Illinois (2002), and a de novo branch in Highland, Illinois (2005).
In 2002, the Company acquired all of the outstanding stock of Checkley, an insurance agency located in Mattoon.
In 2009, the Company opened de novo branches in Decatur and Champaign.
On September 10, 2010, the Company acquired 10 Illinois branches (the “Branches”) from First Bank, a Missouri state chartered bank, located in
Bartonville, Bloomington, Galesburg, Knoxville, Peoria and Quincy, Illinois.
Employees
The Company, MIDS, First Mid Insurance and First Mid Bank, collectively, employed 402 people on a full-time equivalent basis as of December 31,
2011. The Company places a high priority on staff development, which involves extensive training, including customer service training. New employees
are selected on the basis of both technical skills and customer service capabilities. None of the employees are covered by a collective bargaining
agreement with the Company. The Company offers a variety of employee benefits.
Business Lines
The Company has chosen to operate in three primary lines of business—community banking and wealth management through First Mid Bank and
insurance brokerage through First Mid Insurance. Of these, the community banking line contributes approximately 90% of the Company’s total
revenues and profits. Within the community banking line, the Company serves commercial, retail and agricultural customers with a broad array of
deposit and loan related products. The wealth management line provides estate planning, investment and farm management services for individuals
and employee benefit services for business enterprises. The insurance brokerage line provides commercial lines insurance to businesses as well as
homeowner, automobile and other types of personal lines insurance to individuals.
All three lines emphasize a “hands on” approach to service so that products and services can be tailored to fit the specific needs of existing and
potential customers. Management believes that by emphasizing this personalized approach, the Company can, to a degree, diminish the trend towards
homogeneous financial services, thereby differentiating the Company from competitors and allowing for slightly higher operating margins in each of the
three lines.
3
Business Strategies
Strategy for Operations and Risk Management. Operationally, the Company centralizes most administrative and clerical tasks within its home office
location in Mattoon, Illinois. This allows branches to maintain customer focus, helps assure compliance with banking regulations, keeps fixed
administrative costs at as low a level as is practicable, and better manages the various forms of risk inherent in this business. This approach also
makes use of technology in day-to-day banking activities thereby reducing the potential for human error. While the Company does not employ every
new technology that is introduced, it attempts to be competitive with other banking organizations with respect to operational technology.
The Company has a comprehensive set of operational policies and procedures that have been developed over time to address risk. These policies are
intended to be as close as possible to “best practices” of the financial services industry and are subjected to continual review by management and the
Board of Directors. The Company’s internal audit function incorporates procedures to determine compliance with these policies.
In the business of banking, credit risk is an important risk as losses from uncollectible loans can significantly diminish capital, earnings and shareholder
value. In order to address this risk, the lending function of First Mid Bank receives significant attention from executive management and the Board of
Directors. An important element of credit risk management is the quality, experience and training of the loan officers of First Mid Bank. The Company
has invested, and will continue to invest, significant resources to ensure the quality, experience and training of First Mid Bank’s loan officers in order to
keep credit losses at a minimum. In addition to the human element of credit risk management, the Company’s loan policies address the additional
aspects of credit risk. Most lending personnel have signature authority that allows them to lend up to a certain amount based on their own judgment as
to the creditworthiness of a borrower. The amount of the signature authority is based on the lending officers’ experience and training. The Senior Loan
Committee, consisting of the most experienced lenders within the organization and three non-employee members of the board of directors, must
approve all underwriting decisions in excess of $2 million and up to 75% of the legal lending limit which was $13.9 million at December 31, 2011. The
Board of Directors must approve all underwriting decisions in excess of 75% of the legal lending limit.
While the underlying nature of lending will result in some amount of loan losses, First Mid Bank’s loan loss experience has been good with average net
charge offs amounting to $2.2 million (.30% of average loans) over the past five years. Nonperforming loans were $7.4 million (.86% of total loans) at
December 31, 2011. These percentages have historically compared well with peer financial institutions and continue to do so today.
Interest rate and liquidity risk are two other forms of risk embedded in the business of financial intermediation. The Company’s Asset Liability
Management Committee, consisting of experienced individuals who monitor all aspects of interest rates and maturities of interest earning assets and
interest paying liabilities, manages these risks. The underlying objectives of interest rate and liquidity risk management are to shelter the Company’s
net interest margin from changes in interest rates while maintaining adequate liquidity reserves to meet unanticipated funding demands. The Company
uses financial modeling technology as a tool, employing a variety of “what if” scenarios to properly plan its activities. Despite the tools and methods
used to monitor this risk, a sustained unfavorable interest rate environment will lead to some amount of compression in the net interest margin. During
2011, the Company’s net interest margin decreased to 3.45% from 3.51% in 2010. This was primarily the result of the impact of an increase in liquidity
from the acquisition of the Branches completed in the third quarter of 2010.
Strategy for Growth. The Company believes that growth of its revenue stream and of its customer base is vital to the goal of increasing the value of its
shareholders’ investment. Management attempts to grow in two primary ways:
•
•
by organic growth through adding new customers and selling more products and services to existing customers; and
by acquisitions.
Virtually all of the Company’s customer-contact personnel, in each of its business lines, are engaged in organic growth efforts to one degree or another.
These personnel are trained to engage in needs-based selling whereby they make an attempt to match its products and services with the particular
financial needs of individual customers and prospective customers. Most senior officers of the organization are required to attend monthly sales
meetings where they report on their business development efforts and results. Executive management uses these meetings as an educational and risk
management opportunity as well. Cross-selling opportunities are encouraged between the business lines.
Within the community banking line, the Company has focused on growing business operating and real estate loans. Total commercial real estate loans
have increased from $203 million at December 31, 2007 to $321 million at December 31, 2011 primarily due to loans acquired in the acquisition of the
Branches completed during the third quarter of 2010. Approximately 64% of the Company’s total revenues were derived from lending activities in the
fiscal year ended December 31, 2011. The Company has also focused on growing the commercial and retail deposit base through growth in checking,
money markets and customer repurchase agreement balances. The wealth management line has focused its growth efforts on estate planning,
investment and farm management services for individuals and employee benefit services for businesses. The insurance brokerage line has focused on
increasing property and casualty insurance for businesses and personal lines insurance to individuals.
Growth through acquisitions has been an integral part of the Company’s strategy for an extended period of time. When reviewing acquisition
possibilities, the Company focuses on those organizations where there is a cultural fit with its existing operations and where there is a strong likelihood
of adding to shareholder value. Most past acquisitions have been cash-based transactions. While the Company expects to continue this trend in the
future, it would consider a stock-based acquisition if the strategic and financial metrics were compelling. The Company viewed the acquisition of the
Branches in the third quarter of 2010 as an unusual opportunity to acquire selected assets, add to its deposit base and expand its geographical reach.
This overall growth strategy has been to grow the customer base without significantly increasing the shareholder base. This requires a certain amount
of financial leverage and the Company monitors its capital base carefully to satisfy all regulatory requirements while maintaining flexibility. The
Company has maintained a Dividend Reinvestment Plan as well as various forms of equity compensation for directors and key managers. It has also
maintained an ongoing share buy back program both as a service to shareholders and a means of maintaining optimal levels of capital.
In 2009, the Company issued and sold Series B 9% Non-Cumulative Perpetual Convertible Preferred Stock (the “Series B Preferred Stock”) issued to
certain investors, and in 2011, the Company issued and sold Series C 8% Non-Cumulative Perpetual Preferred Stock (the “Series C Preferred Stock”) to
certain investors. The Company also uses various forms of long-term debt to augment its capital when appropriate.
4
Markets and Competition
The Company has active competition in all areas in which First Mid Bank presently does business. First Mid Bank competes for commercial and
individual deposits, loans, and trust business with many east central Illinois banks, savings and loan associations, and credit unions. The principal
methods of competition in the banking and financial services industry are quality of services to customers, ease of access to facilities, and pricing of
services, including interest rates paid on deposits, interest rates charged on loans, and fees charged for fiduciary and other banking services.
First Mid Bank operates facilities in the Illinois counties of Adams, Bond, Champaign, Christian, Coles, Cumberland, Dewitt, Douglas, Effingham, Fulton,
Knox, Macon, Madison, McClean, Moultrie, Peoria and Piatt. Each facility primarily serves the community in which it is located. First Mid Bank serves
twenty-five different communities with thirty-eight separate locations in the towns of Altamont, Arcola, Bartonville, Bloomington, Champaign, Charleston,
Decatur, Effingham, Galesburg, Highland, Knoxville, Mansfield, Mahomet, Maryville, Mattoon, Monticello, Neoga, Peoria, Pocahontas, Quincy, Sullivan,
Taylorville, Tuscola, Urbana, and Weldon Illinois. Within the areas of service, there are numerous competing financial institutions and financial services
companies.
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.
SUPERVISION AND REGULATION
General
Financial institutions, financial services companies, and their holding companies are extensively regulated under federal and state law. As a result, the
growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the
requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not
limited to, the Office of the Comptroller of the Currency (the “OCC”), the Federal Reserve Board, the Federal Deposit Insurance Corporation (the
“FDIC”), the Internal Revenue Service and state taxing authorities. Any change in applicable laws, regulations or regulatory policies may have material
effects on the business, operations and prospects of the Company and First Mid Bank. The Company is unable to predict the nature or extent of the
effects that fiscal or monetary policies, economic controls or new federal or state legislation may have on its business and earnings in the future.
Federal and state laws and regulations generally applicable to financial institutions and financial services companies, such as the Company and its
subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the
nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and
regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC’s deposit insurance fund and the depositors, rather than the stockholders, of financial institutions.
The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and do not purport
to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a
material effect on the business of the Company and its subsidiaries.
Financial Modernization Legislation
The 1999 Gramm-Leach-Bliley Act (the “GLB Act”) significantly changed financial services regulation by expanding permissible non-banking activities of
bank holding companies and removing certain barriers to affiliations among banks, insurance companies, securities firms and other financial services
entities. These activities and affiliations can be structured through a holding company structure or, in the case of many of the activities, through a
financial subsidiary of a bank. The GLB Act also established a system of federal and state regulation based on functional regulation, meaning that
primary regulatory oversight for a particular activity generally resides with the federal or state regulator having the greatest expertise in the area.
Banking is supervised by banking regulators, insurance by state insurance regulators and securities activities by the SEC and state securities
regulators. The GLB Act also requires the disclosure of agreements reached with community groups that relate to the Community Reinvestment Act,
and contains various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of
safety in the financial services industry.
The GLB Act repealed the anti-affiliation provisions of the Glass-Steagall Act and revises the Bank Holding Company Act of 1956 (the “BHCA”) to permit
qualifying holding companies, called “financial holding companies,” to engage in, or to affiliate with companies engaged in, a full range of financial
activities, including banking, insurance activities (including insurance portfolio investing), securities activities, merchant banking and additional activities
that are “financial in nature,” incidental to financial activities or, in certain circumstances, complementary to financial activities. A bank holding
company’s subsidiary banks must be “well-capitalized” and “well-managed” and have at least a “satisfactory” Community Reinvestment Act rating for the
bank holding company to elect and maintain its status as a financial holding company.
A significant component of the GLB Act’s focus on functional regulation relates to the application of federal securities laws and SEC oversight of some
bank securities activities previously exempt from broker-dealer registration. Among other things, the GLB Act amended the definitions of “broker” and
“dealer” under the Securities Exchange Act of 1934, as amended, to remove the blanket exemption for banks. Under the GLB Act, banks may conduct
securities activities without broker-dealer registration only if the activities fall within a set of activity-based exemptions designed to allow banks to
conduct only those activities traditionally considered to be primarily banking or trust activities.
5
Securities activities outside these exemptions, as a practical matter, need to be conducted by registered broker-dealer affiliate. The GLB Act also
amended the Investment Advisers Act of 1940 to require the registration of banks that act as investment advisers for mutual funds. The Company
believes that it has taken the necessary actions to comply with these requirements of the GLB Act and the regulations adopted under them.
Anti-Terrorism Legislation
The USA PATRIOT Act of 2001 included the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “IMLAFA”). The
IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers, and certain other financial institutions. The
IMLAFA requires U.S. financial institutions to adopt policies and procedures to combat money laundering and grants the Secretary of the Treasury
broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. The Company has established
policies and procedures for compliance with the IMLAFA and the related regulations. The Company has designated an officer solely responsible for
ensuring compliance with existing regulations and monitoring changes to the regulations as they occur.
Emergency Economic Stabilization Act of 2008
In response to unprecedented financial market turmoil, the Emergency Economic Stabilization Act of 2008 ("EESA") was enacted on October 3, 2008.
EESA authorizes the U.S. Treasury Department (“Treasury”) to provide up to $700 billion in funding for the financial services industry. The Treasury's
authority under the Troubled Asset Relief Program (“TARP”) expired October 3, 2010. The Company decided to not participate in the TARP Capital
Purchase Program.
On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (“TLGP”). The FDIC stated that the purpose of these actions is
to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of 31 days or greater, of
banks, thrifts, and certain holding companies, and by providing full FDIC insurance coverage for all non-interest bearing transaction accounts,
regardless of dollar amount. Inclusion in the program was voluntary. Institutions participating in the senior unsecured debt portion of the program are
assessed fees on a sliding scale, depending on length of maturity for debt actually issued.
First Mid Bank elected to participate in both parts of the TLGP, the Transaction Account Guarantee (“TAG”) Program and the Debt Guarantee Program.
The FDIC’s TAG Program, provided, without charge to depositors, a full guarantee on all non-interest bearing transaction accounts held by any
depositor, regardless of dollar amount, through December 31, 2010. Participation in the TAG Program cost the Company 15 basis points annually on
the amount of the deposits during 2010 and cost 10 basis points annually during 2009. The Company and First Mid Bank did not issue any debt under
the FDIC’s Debt Guarantee Program, which expired in October 2009.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law on July 21, 2010. Generally, the
Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law. Uncertainty remains as to the
ultimate impact of the Act, which could have a material adverse impact either on the financial services industry as a whole, or on the Company’s
business, results of operations and financial condition. The Act, among other things:
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Resulted in the Federal Reserve issuing rules limiting debit-card interchange fees.
After a three-year phase-in period which begins January 1, 2013, existing trust preferred securities for holding companies with consolidated
assets greater than $15 billion and all new issuances of trust preferred securities are removed as a permitted component of a holding
company’s Tier 1 capital. Trust preferred securities outstanding as of May 19, 2010 that were issued by bank holding companies with total
consolidated assets of less than $15 billion, such as First Mid, will continue to count as Tier 1 capital.
Provides for an increase in the FDIC assessment for depository institutions with assets of $10 billion or more, increases in the minimum
reserve ratio for the deposit insurance fund from 1.15% to 1.35% (however, the FDIC is to offset the effect of this increase for holding
companies with total consolidated assets of less than $10 billion, such as First Mid) and changes in the basis for determining FDIC premiums
from deposits to assets.
Creates a new Consumer Financial Protection Bureau that will have rulemaking authority for a wide range of consumer protection laws that
would apply to all banks and certain non-bank financial institutions and would have broad powers to supervise and enforce consumer
protection laws.
Provides for new disclosure and other requirements relating to executive compensation and corporate governance.
Changes standards for Federal preemption of state laws related to federally chartered institutions and their subsidiaries.
Provides mortgage reform provisions including (i) a customer’s ability to repay, (ii) restricting variable-rate lending by requiring the ability to
repay to be determined for variable-rate loans by requiring lenders to evaluate using the maximum rate that will apply during the first five
years of a variable-rate loan term, and (iii) making more loans subject to provisions for higher cost loans and new disclosures.
Creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage,
liquidity, risk management and other requirements as companies grow in size and complexity.
6
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Permanently increases the deposit insurance coverage to $250 thousand and allows depository institutions to pay interest on checking
accounts.
Requires publicly-traded bank holding companies with assets of $10 billion or more to establish a risk committee responsible for enterprise-
wide risk management practices.
The Company
General. As a registered bank holding company under the BHCA that has elected to become a financial holding company under the GLB Act, the
Company is subject to regulation by the Federal Reserve Board. In accordance with Federal Reserve Board policy, the Company is expected to act as
a source of financial strength to First Mid Bank and to commit resources to support First Mid Bank in circumstances where the Company might not do so
absent such policy. The Company is subject to inspection, examination, and supervision by the Federal Reserve Board.
Activities. As a financial holding company, the Company may affiliate with securities firms and insurance companies and engage in other activities that
are financial in nature or incidental or complementary to activities that are financial in nature. A bank holding company that is not also a financial
holding company is limited to engaging in banking and such other activities as determined by the Federal Reserve Board to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
No Federal Reserve Board approval is required for the Company to acquire a company (other than a bank holding company, bank, or savings
association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve
Board. However, the Company generally must give the Federal Reserve Board after-the-fact notice of these activities. Prior Federal Reserve Board
approval is required before the Company may acquire beneficial ownership or control of more than 5% of the voting shares or substantially all of the
assets of a bank holding company, bank, or savings association.
If any subsidiary bank of the Company ceases to be “well-capitalized” or “well-managed” under applicable regulatory standards, the Federal Reserve
Board may, among other actions, order the Company to divest its depository institution. Alternatively, the Company may elect to conform its activities to
those permissible for a bank holding company that is not also a financial holding company.
If any subsidiary bank of the Company receives a rating under the Community Reinvestment Act of less than “satisfactory”, the Company will be
prohibited, until the rating is raised to “satisfactory” or better, from engaging in new activities or acquiring companies other than bank holding
companies, banks, or savings associations.
Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve Board capital
adequacy guidelines. The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding
companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage
of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which
must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies,
with minimum requirements of at least 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent
stockholders’ equity, which includes the Series B 9% Preferred Stock issued by the Company in 2009 and the Series C Preferred Stock subsequently
issued by the Company in 2011, less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships), and total
capital means Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital, limited amounts of unrealized gains on
equity securities and a portion of the Company’s allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements, and higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve Board’s capital guidelines contemplate
that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.
In December 2007, the U.S. bank regulatory agencies adopted final rules that require large, internationally active financial services organizations to use
the most sophisticated and complex methodology for calculating capital requirements reflected in the New Basel Capital Accord, developed by the Basel
Committee on Banking Supervision. These rules became operational in April 2008, but are mandatory only for “core banks,” i.e., banks with
consolidated total assets of $250 billion or more.
In September 2010, the Basel Committee on Banking Supervision proposed higher global minimum capital standards, including a minimum Tier 1
common capital ratio and additional capital and liquidity requirements, with rules expected to be implemented between 2013 and 2019. Adoption in the
U.S. is expected to occur over a similar timeframe, but the final form of the U.S. rules is uncertain. While uncertainty exists in both the final form of the
guidance and whether or not the Company will be required to adopt the guidelines, the Company is closely monitoring the development of the guidance.
As of December 31, 2011, the Company had regulatory capital, calculated on a consolidated basis, in excess of the Federal Reserve Board’s minimum
requirements, and its capital ratios exceeded those required for categorization as well-capitalized under the capital adequacy guidelines established by
bank regulatory agencies with a total risk-based capital ratio of 14.48%, a Tier 1 risk-based ratio of 13.37% and a leverage ratio of 8.99%.
7
Control Acquisitions. The Change in Bank Control Act prohibits a person or group of person from acquiring “control” of a bank holding company
unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the
Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under
Section 12 of the Securities Exchange Act of 1934, as amended, such as the Company, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the Company.
In addition, any company is required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquirer that is a bank holding company) or more of the outstanding common of the Company, or otherwise obtaining control of a “controlling influence”
over the Company or First Mid Bank.
Interstate Banking and Branching. The Dodd-Frank Act expands the authority of banks to engage in interstate branching. The Dodd-Frank Act
allows a state or national bank to open a de novo branch in another state if the law of the state where the branch is to be located would permit a state
bank chartered by that state to open the branch.
Privacy and Security. The GLB Act establishes a minimum federal standard of financial privacy by, among other provisions, requiring banks to adopt
and disclose privacy policies with respect to consumer information and setting forth certain rules with respect to the disclosure to third parties of
consumer information. The Company has adopted and disseminated its privacy policies pursuant to the GLB Act. Regulations adopted under the GLB
Act set standards for protecting the security, confidentiality and integrity of customer information, and require notice to regulators, and in some cases, to
customers, in the event of security breaches. A number of states have adopted their own statutes requiring notification of security breaches. In addition,
the GLB Act requires the disclosure of agreements reached with community groups that relate to the CRA, and contains various other provisions
designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry.
First Mid Bank
General. First Mid Bank is a national bank, chartered under the National Bank Act. The FDIC insures the deposit accounts of First Mid Bank. As a
national bank, First Mid Bank is a member of the Federal Reserve System and is subject to the examination, supervision, reporting and enforcement
requirements of the OCC, as the primary federal regulator of national banks, and the FDIC, as administrator of the deposit insurance fund.
Deposit Insurance. As an FDIC-insured institution, First Mid Bank is required to pay deposit insurance premium assessments to the FDIC.
On October 3, 2008, the FDIC temporarily increased the standard maximum deposit insurance amount (SMDIA) from $100,000 to $250,000 per
depositor. On July 21, 2010, The Dodd-Frank Act permanently raised the SMDIA to $250,000. On November 9, 2010, the FDIC issued a final rule to
implement Section 343 of the Dodd-Frank Act, which provides unlimited deposit insurance coverage for “noninterest-bearing transaction accounts” from
December 31, 2010 through December 31, 2012. Also, the FDIC will no longer charge a separate assessment for the insurance of these accounts
under the Dodd-Frank Act. The Company expensed $0, $95,000 and $49,000 for this program during 2011, 2010 and 2009, respectively.
On February 27, 2009, the FDIC adopted a final rule setting initial base assessment rates beginning April 1, 2009, at 12 to 45 basis points and, due to
extraordinary circumstances, extended the period of the restoration plan to increase the deposit insurance fund to seven years. Also on February 27,
2009, the FDIC issued final rules on changes to the risk-based assessment system which imposes rates based on an institution’s risk to the deposit
insurance fund. The new rates increased the range of annual risk based assessment rates from 5 to 7 basis points to 7 to 24 basis points. The final
rules both increase base assessment rates and incorporate additional assessments for excess reliance on brokered deposits and FHLB advances. This
new assessment took effect April 1, 2009. The Company expensed $1.06 million, $1.31 million and $1.26 million for this assessment during 2011, 2010
and 2009, respectively.
Also on February 27, 2009, the FDIC adopted an interim rule to impose a 20 basis point emergency special assessment payable September 30, 2009
based on the second quarter 2009 assessment base, to help shore up the Deposit Insurance Fund (DIF). This assessment equates to a one-time cost
of $200,000 per $100 million in assessment base. The interim rule also allows the Board to impose possible additional special assessments of up to 10
basis points thereafter to maintain public confidence in the DIF. Subsequently, the FDIC’s Treasury borrowing authority increased from $30 billion to
$100 billion, allowing the agency to cut the planned special assessment from 20 to 10 basis points. On May 22, 2009, the FDIC adopted a final rule
which established a special assessment of five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of
September 30, 2009. The assessment was capped at 10 basis points of an institution’s domestic deposits so that no institution would pay an amount
higher than it would have under the interim rule. The Company expensed $522,000 in 2009 for this special assessment. There were no special
assessments during 2011 or 2010.
In addition to its insurance assessment, each insured bank was subject to quarterly debt service assessments in connection with bonds issued by a
government corporation that financed the federal savings and loan bailout. The Company expensed $103,000, $99,000 and $112,000 during 2011,
2010 and 2009, respectively, for this assessment.
On September 29, 2009, the FDIC Board proposed a DIF restoration plan that required banks to prepay, on December 30, 2009, their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Under the plan—which applies to all banks except
those with liquidity problems—banks were assessed through 2010 according to the risk-based premium schedule adopted in 2009. Beginning January
1, 2011, the base rate increases by 3 basis points. The Company recorded a prepaid expense asset of $4,855,000 as of December 31, 2009 as a result
of this plan. This asset is being amortized to non-interest expense over three years. The balance of this asset was $2,183,000 as of December 31,
2011.
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OCC Assessments. All national banks are required to pay supervisory fees to the OCC to fund the operations of the OCC. The amount of such
supervisory fees is based upon each institution’s total assets, including consolidated subsidiaries, as reported to the OCC. During the year ended
December 31, 2011, First Mid Bank paid supervisory fees to the OCC totaling $309,000.
Capital Requirements. The OCC has established the following minimum capital standards for national banks, such as First Mid Bank: a leverage
requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of at least
4% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half
of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consists of substantially the same components
as Tier 1 capital and total capital under the Federal Reserve Board’s capital guidelines for bank holding companies (See “The Company—Capital
Requirements”).
The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances
or risk profiles of individual institutions. For example, the regulations of the OCC provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
During the year ended December 31, 2011, First Mid Bank was not required by the OCC to increase its capital to an amount in excess of the minimum
regulatory requirements, and its capital ratios exceeded those required for categorization as well-capitalized under the capital adequacy guidelines
established by bank regulatory agencies with a total risk-based capital ratio of 12.83%, a Tier 1 risk-based ratio of 11.71% and a leverage ratio of
7.85%.
Prompt Corrective Action. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the
problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well-capitalized,”
“adequately-capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Depending upon the capital category to which
an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth
and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting
transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and in the most severe cases, appointing a
conservator or receiver for the institution.
Dividends. The National Bank Act imposes limitations on the amount of dividends that may be paid by a national bank, such as First Mid Bank.
Generally, a national bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank’s board of directors deems
prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank’s
year-to-date net income plus the bank’s adjusted retained net income for the two preceding years.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described above, First Mid Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 2011. As of December 31, 2011, approximately $24.3 million was available to be paid as dividends to the Company by
First Mid Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends by First Mid Bank if
the OCC determines that such payment would constitute an unsafe or unsound practice.
Affiliate and Insider Transactions. First Mid Bank is subject to certain restrictions under federal law, including Regulation W of the Federal Reserve
Board, on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries
and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting
requirements are also placed on extensions of credit by First Mid Bank to its directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company, and to “related interests” of such directors, officers and principal stockholders.
First Mid Bank is subject to restrictions under federal law that limits certain transactions with the Company, including loans, other extensions of credit,
investments or asset purchases. Such transactions by a banking subsidiary with any one affiliate are limited in amount to 10% of the bank’s capital and
surplus and, with all affiliates together, to an aggregate of 20% of the bank’s capital and surplus. Furthermore, such loans and extensions of credit, as
well as certain other transactions, are required to be secured in specified amounts. These and certain other transactions, including any payment of
money to the Company, must be on terms and conditions that are or in good faith would be offered to nonaffiliated companies.
In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its
subsidiaries or a principal stockholder of the Company may obtain credit from banks with which First Mid Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information
systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset
quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary
federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the
agencies expect to require a compliance plan from an institution whose failure to meet one or more of the guidelines are of such severity that it could
threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the
appropriate federal regulator, would constitute grounds for further enforcement action.
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Community Reinvestment Act. First Mid Bank is subject to the Community Reinvestment Act (CRA). The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their service areas, including low and moderate income neighborhoods, consistent
with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of
its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the
liabilities of another bank. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 requires federal banking agencies to make public
a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of its bank subsidiaries is
reviewed by federal banking agencies in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or thrift
or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. First Mid Bank received a
satisfactory CRA rating from its regulator in its most recent CRA examination.
Consumer Laws and Regulations. In addition to the laws and regulations discussed above, First Mid Bank is also subject to certain consumer laws
and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and
regulations include the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting
Act, the Fair and Accurate Credit Transactions Act and the Real Estate Settlement Procedures Act, among others. These laws and regulations
mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making
loans to or marketing to or engaging in other types of transactions with such customers. Failure to comply with these laws and regulations could lead to
substantial penalties, operating restrictions and reputational damage to the financial institution.
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Supplemental Item – Executive Officers of the Registrant
The executive officers of the Company are elected annually by the Company’s board of directors and are identified below.
Name (Age)
Position With Company
William S. Rowland (64)
Chairman of the Board of Directors, President and Chief Executive Officer
Joseph R. Dively (52)
Senior Executive Vice President
Michael L. Taylor (43)
Executive Vice President and Chief Financial Officer
John W. Hedges (63)
Executive Vice President
Laurel G. Allenbaugh (51)
Executive Vice President
Eric S. McRae (46)
Executive Vice President
Charles A. LeFebvre (42)
Executive Vice President
Kelly A. Downs (44)
Senior Vice President
Christopher L. Slabach (49)
Senior Vice President
William S. Rowland, age 64, has been Chairman of the Board of Directors, President and Chief Executive Officer of the Company since May 1999. He
served as Executive Vice President of the Company from 1997 to 1999 and as Treasurer and Chief Financial Officer from 1989 to 1999. He also serves
as Chairman of the Board of Directors and Chief Executive Officer of First Mid Bank.
Joseph R. Dively, age 52, has been the Senior Executive Vice President of the Company and the President of First Mid Bank since May 2011. He was
with Consolidated Communications Holdings, Inc. in Mattoon, Illinois from 2003 to May 2011.
Michael L. Taylor, age 43, has been the Executive Vice President and Chief Financial Officer of the Company since May 2007. He served as Vice
President and Chief Financial Officer from May 2000 to May 2007. He was with AMCORE Bank in Rockford, Illinois from 1996 to 2000.
John W. Hedges, age 64, has been Executive Vice President of the Company since September 1999 and Senior Executive Vice President and Chief
Credit Officer of First Mid Bank since May 2011. He served as President of First Mid Bank from September 1999 to May 2011. He was with National
City Bank in Decatur, Illinois from 1976 to 1999.
Laurel G. Allenbaugh, age 51, has been Executive Vice President of Operations since April 2008. She served as Vice President of Operations from
February 2000 to April 2008. She served as Controller of the Company and First Mid Bank from 1990 to February 2000 and has been President of
MIDS since 1998.
Eric S. McRae, age 46, has been Executive Vice President of the Company and Executive Vice President, Senior Lender of First Mid Bank since
December 2008. He served as President of the Decatur region from 2001 to December 2008.
Charles A. LeFebvre, age 42, has been Executive Vice President of the Company since 2008 and Executive Vice President of the Trust and Wealth
Management Division of First Mid Bank since 2007. He was an attorney with the law firm of Thomas, Mamer & Haughey from 2001 to 2007.
Kelly A. Downs, age 44, has been Senior Vice President of the Company since April 2008 and Senior Vice President, Retail Banking Services since
2011. She served as Senior Vice President of Human Resources from 2008 to 2011, and has been with the Company since 1991.
Christopher L. Slabach, age 49, has been Senior Vice President of the Company since 2007 and Senior Vice President, Risk Management of First Mid
Bank since 2008. He served as Vice President, Audit of the Company from 1998 to 2007.
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ITEM 1A. RISK FACTORS
Various risks and uncertainties, some of which are difficult to predict and beyond the Company’s control, could negatively impact the Company. As a
financial institution, the Company is exposed to interest rate risk, liquidity risk, credit risk, operational risk, risks from economic or market conditions, and
general business risks among others. Adverse experience with these or other risks could have a material impact on the Company’s financial condition
and results of operations, as well as the value of its common stock.
Difficult economic conditions and market disruption have adversely impacted the banking industry and financial markets generally and may
continue to significantly affect the business, financial condition, or results of operations of the Company. The Company’s success depends, to
a certain extent, upon economic and political conditions, local and national, as well as governmental monetary policies. Conditions such as inflation,
recession, unemployment, changes in interest rates, money supply and other factors beyond the Company’s control may adversely affect its asset
quality, deposit levels and loan demand and, therefore, its earnings.
Dramatic declines in the housing market beginning in the latter half of 2007, with falling home prices and increasing foreclosures, unemployment and
underemployment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by some
financial institutions. The resulting write-downs to assets of financial institutions have caused many financial institutions to merge with other institutions
and, in some cases, to seek government assistance or bankruptcy protection.
The capital and credit markets, including the fixed income markets, have been experiencing volatility and disruption for over two years. In some cases,
the markets have produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ financial strength.
Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including to other financial
institutions because of concern about the stability of the financial markets and the strength of counterparties. It is difficult to predict how long these
economic conditions will exist, and which of our markets, products or other businesses will ultimately be affected. Accordingly, the resulting lack of
available credit, lack of confidence in the financial sector, decreased consumer confidence, increased volatility in the financial markets and reduced
business activity could materially and adversely affect the Company’s business, financial condition and results of operations.
As a result of the challenges presented by economic conditions, the Company has faced the following risks in connection with these events:
•
Inability of borrowers to make timely repayments of their loans, or decreases in value of real estate collateral securing the payment of such
loans resulting in significant credit losses, which results in increased delinquencies, foreclosures and customer bankruptcies, any of which
could have a material adverse effect on the Company’s operating results.
•
Increased regulation of the banking industry, including heightened legal standards and regulatory requirements. Compliance with such
regulation increases costs and may limit the Company’s ability to pursue business opportunities.
• Further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, may
result in an inability to borrow on favorable terms or at all from other financial institutions.
The Company’s profitability depends significantly on economic conditions in the geographic region in which it operates. A large percentage of
the Company’s loans are to individuals and businesses in Illinois, consequently, any decline in the economy of this market area could have a materially
adverse effect on the Company’s financial condition and results of operations.
Decline in the strength and stability of other financial institutions may adversely affect the Company’s business. The actions and commercial
soundness of other financial institutions could affect the Company’s ability to engage in routine funding transactions. Financial services institutions are
interrelated as a result of clearing, counterparty or other relationships. The Company has exposure to different counterparties, and executes
transactions with various counterparties in the financial industry. Recent defaults by financial services institutions, and even rumors or questions about
one or more financial services institutions or the financial services industry in general, have led to market-wide liquidity problems and could lead to
losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its
counterparty or client. Any such losses could materially and adversely affect the Company’s results of operations.
Changes in interest rates may negatively affect our earnings. Changes in market interest rates and prices may adversely affect the Company’s
financial condition or results of operations. The Company’s net interest income, its largest source of revenue, is highly dependent on achieving a
positive spread between the interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in interest rates could
negatively impact the Company’s ability to attract deposits, make loans, and achieve a positive spread resulting in compression of the net interest
margin.
The Company may not have sufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans
and deposit withdrawals, funding operating costs, payment of preferred stock dividends and for other corporate purposes. This type of
liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. The Company’s liquidity can be affected by a
variety of factors, including general economic conditions, market disruption, operational problems affecting third parties or the Company, unfavorable
pricing, competition, the Company’s credit rating and regulatory restrictions. (See “Liquidity” herein for management’s actions to mitigate this risk.)
12
If the Company were unable to borrow funds through access to capital markets, it may not be able to meet the cash flow requirements of its
depositors, creditors, and borrowers, or the operating cash needed to fund corporate expansion and other corporate activities. Starting in the
middle of 2007, there has been significant turmoil and volatility in worldwide financial markets which, although there has been some improvement, is still
ongoing. These conditions have resulted in a disruption in the liquidity of financial markets, and could directly impact the Company to the extent it needs
to access capital markets to raise funds to support its business and overall liquidity position. This situation could affect the cost of such funds or the
Company’s ability to raise such funds. If the Company were unable to access any of these funding sources when needed, it might be unable to meet
customers’ needs, which could adversely impact its financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. For
further discussion, see the “Liquidity” section.
Loan customers or other counter-parties may not be able to perform their contractual obligations resulting in a negative impact on the
Company’s earnings. Overall economic conditions affecting businesses and consumers, including the current difficult economic conditions and market
disruptions, could impact the Company’s credit losses. In addition, real estate valuations could also impact the Company’s credit losses as the
Company maintains $619 million in loans secured by commercial, agricultural, and residential real estate. A significant decline in real estate values
could have a negative effect on the Company’s financial condition and results of operations. In addition, the Company’s total loan balances by industry
exceeded 25% of total risk-based capital for each of four industries as of December 31, 2011. A listing of these industries is contained in under “Item 6.
Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Loans” herein. A significant change in one of these
industries such as a significant decline in agricultural crop prices, could adversely impact the Company’s credit losses.
Continued deterioration in the real estate market could lead to additional losses, which could have a material adverse effect on the business,
financial condition and results of operations or the Company. Commercial and commercial real estate loans generally involve higher credit risks
than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent
upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in
the market or the economy. Continued increases in commercial and consumer delinquency levels or continued declines in real estate market values
would require increased net charge-offs and increases in the allowance for loan and lease losses, which could have a material adverse effect on our
business, financial condition and results of operations and prospects.
The allowance for loan losses may prove inadequate or be negatively affected by credit risk exposures. The Company’s business depends on
the creditworthiness of its customers. Management periodically reviews the allowance for loan and lease losses for adequacy considering economic
conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and
nonperforming assets. There is no certainty that the allowance for loan losses will be adequate over time to cover credit losses in the portfolio because
of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets. If the credit
quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance
for loan losses is not adequate, the Company’s business, financial condition, liquidity, capital, and results of operations could be materially adversely
affected.
Declines in the value of securities held in the investment portfolio may negatively affect the Company’s earnings. The value of an investment in
the portfolio could decrease due to changes in market factors. The market value of certain investment securities is volatile and future declines or other-
than-temporary impairments could materially adversely affect the Company’s future earnings and regulatory capital. Continued volatility in the market
value of certain of the investment securities, whether caused by changes in market perceptions of credit risk, as reflected in the expected market yield of
the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities. This could have a material adverse
impact on the Company’s accumulated other comprehensive loss and shareholders’ equity depending upon the direction of the fluctuations.
Furthermore, future downgrades or defaults in these securities could result in future classifications as other-than-temporarily impaired. The Company
has invested in trust preferred securities issued by financial institutions and insurance companies, corporate securities of financial institutions, and stock
in the Federal Home Loan Bank of Chicago and Federal Reserve Bank of Chicago. Deterioration of the financial stability of the underlying financial
institutions for these investments could result in other-than-temporary impairment charges to the Company and could have a material impact on future
earnings. For further discussion of the Company’s investments, see Note 4 – “Investment Securities.”
If the Company’s stock price declines from levels at December 31, 2011, management will evaluate the goodwill balances for impairment, and
if the values of the businesses have declined, the Company could recognize an impairment charge for its goodwill. Management performed an
annual goodwill impairment assessment as of September 30, 2011. Based on these analyses, management concluded that the fair value of the
Company’s reporting units exceeded the fair value of its assets and liabilities and, therefore, goodwill was not considered impaired. It is possible that
management’s assumptions and conclusions regarding the valuation of the Company’s lines of business could change adversely, which could result in
the recognition of impairment for goodwill, which could have a material effect on the Company’s financial position and future results of operations.
The Series B Preferred Stock and Series C Preferred Stock impacts net income available to common stockholders and earnings per share.
As long as shares of the Series B Preferred Stock and Series C Preferred Stock are outstanding, no dividends may be paid on the Company’s common
stock unless all dividends on the Series B and Series C Preferred Stock have been paid in full. The dividends declared on the Series B Preferred Stock
and Series C Preferred Stock reduce the net income available to common stockholders and earnings per share.
Holders of the Series B Preferred Stock and Series C Preferred Stock have rights that are senior to those of common stockholders. The Series
B Preferred Stock and Series C Preferred Stock is senior to the shares of common stock and holders of the Series B Preferred Stock and Series C
Preferred Stock have certain rights and preferences that are senior to holders of common stock. The Series B Preferred Stock and Series C Preferred
Stock will rank senior to the common stock and all other equity securities designated as ranking junior to the Series B Preferred Stock and Series C
Preferred Stock. So long as any shares of the Series B Preferred Stock and Series C Preferred Stock remain outstanding, unless all accrued and
13
unpaid dividends for all prior dividend periods have been paid or are contemporaneously declared and paid in full, no dividend shall be paid or declared
on common stock or other junior stock, other than a dividend payable solely in common stock.
The Company also may not purchase, redeem or otherwise acquire for consideration any shares of its common stock or other junior stock unless it has
paid in full all accrued dividends on the Series B Preferred Stock and Series C Preferred Stock for all prior dividend periods. The Series B Preferred
Stock and Series C Preferred Stock are entitled to a liquidation preference over shares of common stock in the event of the Company’s liquidation,
dissolution or winding up.
The Company may issue additional common stock or other equity securities in the future which could dilute the ownership interest of
existing stockholders. In order to maintain capital at desired or regulatory-required levels or to replace existing capital, the Company may be required
to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock.
The Company may sell these shares at prices below the current market price of shares, and the sale of these shares may significantly dilute stockholder
ownership. The Company could also issue additional shares in connection with acquisitions of other financial institutions.
Human error, inadequate or failed internal processes and systems, and external events may have adverse effects on the Company.
Operational risk includes compliance or legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed
practices, or ethical standards. Operational risk also encompasses transaction risk, which includes losses from fraud, error, the inability to deliver
products or services, and loss or theft of information. Losses resulting from operational risk could take the form of explicit charges, increased operational
costs, harm to the Company’s reputation or forgone opportunities. Any of these could potentially have a material adverse effect on the Company’s
financial condition and results of operations.
The Company is exposed to various business risks that could have a negative effect on the financial performance of the Company. These
risks include: changes in customer behavior, changes in competition, new litigation or changes to existing litigation, claims and assessments,
environmental liabilities, real or threatened acts of war or terrorist activity, adverse weather, changes in accounting standards, legislative or regulatory
changes, taxing authority interpretations, and an inability on the Company’s part to retain and attract skilled employees.
In addition to these risks identified by the Company, investments in the Company’s common stock involve risk. The market price of the Company’s
common stock may fluctuate significantly in response to a number of factors including: volatility of stock market prices and volumes, rumors or
erroneous information, changes in market valuations of similar companies, changes in securities analysts’ estimates of financial performance, and
variations in quarterly or annual operating results.
If the Company is unable to make favorable acquisitions or successfully integrate our acquisitions, the Company’s growth could be
impacted. In the past several years, the Company has completed acquisitions of banks and bank branches from other institutions. We may continue to
make such acquisitions in the future. When the Company evaluates acquisition opportunities, the Company evaluates whether the target institution has
a culture similar to the Company, experienced management and the potential to improve the financial performance of the Company. If the Company
fails to successfully identify, complete and integrate favorable acquisitions, the Company could experience slower growth. Acquiring other banks or
bank branches involves various risks commonly associated with acquisitions, including, among other things: potential exposure to unknown or
contingent liabilities or asset quality issues of the target institution, difficulty and expense of integrating the operations and personnel of the target
institution, potential disruption to the Company (including diversion of management’s time and attention), difficulty in estimating the value of the target
institution, and potential changes in banking or tax laws or regulations that may affect the target institution.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
During 2011, the Company purchased a building located at 1421 Charleston Avenue, Mattoon Illinois and moved its headquarters to this location. This
location is also used by the loan and deposit operations departments of First Mid Bank. In addition, the Company owns a facility located at 1500
Wabash Avenue, Mattoon, Illinois, which it is currently leasing to a non-affiliated third party.
The main office of First Mid Bank is located at 1515 Charleston Avenue, Mattoon, Illinois and is owned by First Mid Bank. First Mid Bank also owns a
building located at 1520 Charleston Avenue, which is used by MIDS for its data processing and by the Company and First Mid Bank for back room
operations. First Mid Bank also conducts business through numerous facilities, owned and leased, located in seventeen counties throughout Illinois. Of
the thirty-six other banking offices operated by First Mid Bank, twenty-three are owned and thirteen are leased from non-affiliated third parties.
First Mid Insurance leases a facility located at 100 Lerna Road South, Mattoon, Illinois.
None of the properties owned by the Corporation are subject to any major encumbrances. The Company believes these facilities are suitable and
adequate to operate its banking and related business. The net investment of the Company and subsidiaries in real estate and equipment at December
31, 2011 was $30,717,000.
14
ITEM 3. LEGAL PROCEEDINGS
Deanna Williamson, on behalf of herself and all others similarly situated v. First Mid-Illinois Bancshares, Inc. and First Mid Bank & Trust, N.A.
(Circuit Court, Third Judicial Circuit, Madison County, Illinois, No. 11-L-1079): On October 20, 2011, a lawsuit was filed against the Company and
First Mid Bank in the Circuit Court of Madison County, Illinois. The lawsuit is styled as a class action lawsuit. The suit alleges that the Company and
First Mid Bank unfairly assessed and collected overdraft fees and sought restitution of the overdraft fees, an unspecified amount of compensatory and
punitive damages, prejudgment interest and additional relief. This case was dismissed by agreement of the parties on February 17, 2012.
Since First Mid Bank acts as a depository of funds, it is named from time to time as a defendant in lawsuits (such as garnishment proceedings) involving
claims as to the ownership of funds in particular accounts. Management believes that all such litigation as well as other pending legal proceedings in
which the Company is involved constitute ordinary, routine litigation incidental to the business of the Company and that such litigation will not materially
adversely affect the Company's consolidated financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
15
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER OF PURCHASES OF EQUITY
SECURITIES
The Company’s common stock was held by approximately 588 shareholders of record as of December 31, 2011 and is included for quotation on the
over-the-counter electronic bulletin board.
The following table shows the high and low bid prices per share of the Company’s common stock for the indicated periods. These quotations
represent inter-dealer prices without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
Quarter
High
Low
2011
2010
4th
3rd
2nd
1st
4th
3rd
2nd
1st
$20.00
$18.95
$19.00
$19.00
$18.50
$19.00
$19.90
$17.50
$18.00
$18.00
$17.80
$16.85
$16.85
$17.50
$16.50
$16.50
The following table sets forth the cash dividends per share on the Company’s common stock for the last two years.
Date Declared
12-13-2011
4-27-2011
12-21-2010
4-28-2010
Date Paid
1-09-2012
6-07-2011
1-06-2011
6-07-2010
Dividend
Per Share
$.210
$.190
$.190
$.190
The Company’s shareholders are entitled to receive such dividends as are declared by the Board of Directors, which considers payment of dividends
semi-annually. The ability of the Company to pay dividends, as well as fund its operations, is dependent upon receipt of dividends from First Mid
Bank. Regulatory authorities limit the amount of dividends that can be paid by First Mid Bank without prior approval from such authorities. For further
discussion of First Mid Bank’s dividend restrictions, see Item1 – “Business” – “First Mid Bank” – “Dividends” and Note 16 – “Dividend Restrictions”
herein. The Board of Directors of the Company declared cash dividends semi-annually during the two years ended December 31, 2011.
16
The following table summarizes share repurchase activity for the fourth quarter of 2011:
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
per Share
(c) Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
(d) Approximate Dollar
Value of Shares that May
Yet Be Purchased Under
the Plans or Programs at
End of Period
Period
October 1, 2011 – October 31, 2011
0
November 1, 2011 – November 30, 2011
14,570
December 1, 2011 – December 31, 2011
5,297
$0.00
$18.47
$19.15
Total
19,867
$18.65
0
14,570
5,297
19,867
$3,903,000
$3,634,000
$3,352,000
$3,352,000
Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of
approximately $56.7 million of the Company’s common stock. The repurchase programs approved by the Board of Directors are as follows:
•
•
•
•
•
•
•
•
•
•
•
•
•
On August 5, 1998, repurchases of up to 3%, or $2 million, of the Company’s common stock.
In March 2000, repurchases up to an additional 5%, or $4.2 million of the Company’s common stock.
In September 2001, repurchases of $3 million of additional shares of the Company’s common stock.
In August 2002, repurchases of $5 million of additional shares of the Company’s common stock.
In September 2003, repurchases of $10 million of additional shares of the Company’s common stock.
On April 27, 2004, repurchases of $5 million of additional shares of the Company’s common stock.
On August 23, 2005, repurchases of $5 million of additional shares of the Company’s common stock.
On August 22, 2006, repurchases of $5 million of additional shares of the Company’s common stock.
On February 27, 2007, repurchases of $5 million of additional shares of the Company’s common stock.
On November 13, 2007, repurchases of $5 million of additional shares of the Company’s common stock.
On December 16, 2008, repurchases of $2.5 million of additional shares of the Company’s common stock.
On May 26, 2009, repurchases of $5 million of additional shares of the Company’s common stock.
On February 22, 2011, repurchases of $5 million of additional shares of the Company’s common stock.
17
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a five-year comparison of selected financial data (dollars in thousands, except per share data).
Summary of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Other income
Other expense
Income before income taxes
Income tax expense
Net income
Dividends on preferred shares
Net income available to common stockholders
Per Common Share Data (1)
Basic earnings per share
Diluted earnings per share
Dividends per share
Book value per common share
Capital Ratios
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average assets
Financial Ratios
Net interest margin
Return on average assets
Return on average common equity
2011
2010
2009
2008
2007
$56,772
$50,883
$51,409
$57,066
$59,931
8,504
48,268
3,101
15,787
43,053
17,901
6,529
11,372
3,576
$7,796
$ 1.29
1.29
.40
16.18
14.48%
13.37%
8.99%
3.45%
.76%
8.36%
10,756
40,127
3,737
13,820
36,927
13,283
4,522
8,761
2,240
15,837
35,572
3,594
13,455
33,212
12,221
4,007
8,214
1,821
21,344
35,722
3,559
15,264
31,460
15,967
5,443
10,524
-
28,429
31,502
862
14,661
30,055
15,246
5,087
10,159
-
$6,521
$6,393
$10,524
$10,159
$ 1.07
1.07
.38
14.46
12.84%
11.71%
7.42%
3.51%
.72%
7.20%
$ 1.04
1.04
.38
14.23
15.76%
14.57%
10.63%
3.40%
.74%
9.56%
$ 1.69
1.67
.38
13.50
11.99%
11.02%
8.41%
3.73%
1.03%
12.87%
22.49%
8.00%
1.02%
$ 1.60
1.57
.38
12.82
11.13%
10.32%
7.89%
3.43%
1.03%
13.06%
23.75%
7.90%
0.82%
Dividend on common shares payout ratio
31.01%
35.51%
36.54%
Average equity to average assets
Allowance for loan losses as a percent of total loans
8.88%
1.29%
9.44%
1.29%
9.59%
1.35%
Year End Balances
Total assets
Net loans, including loans held for sale
Total deposits
Total equity
Average Balances
Total assets
Net loans, including loans held for sale
Total deposits
Total equity
$1,500,956
$1,468,245
$1,095,155
$1,049,700
$1,016,338
848,954
794,188
1,170,734
1,212,710
140,967
112,265
691,288
840,410
111,221
734,351
806,354
82,778
742,043
770,583
80,452
$1,502,794
$1,219,353
$1,108,669
$1,022,734
$985,230
796,520
1,212,206
133,444
708,367
972,811
115,151
692,961
744,043
106,295
733,681
795,786
81,793
722,672
771,561
77,787
(1) All share and per share data have been restated to reflect the 3-for-2 stock split effective June 29, 2007.
18
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of
the Company and its subsidiaries for the years ended December 31, 2011, 2010 and 2009. This discussion and analysis should be read in conjunction
with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report.
Forward-Looking Statements
This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity,
new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1955. Forward-looking statements,
which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words “believe,”
”expect,” ”intend,” ”anticipate,” ”estimate,” ”project,” or similar expressions. Actual results could differ materially from the results indicated by these statements
because the realization of those results is subject to many risks and uncertainties, including those described in Item 1A-“Risk Factors” and other sections of
the Company’s Annual Report on Form 10-K and the Company’s other filings with the SEC, and changes in interest rates, general economic conditions and
those in the Company’s market area, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios and the valuation of the investment portfolio, the
Company’s success in raising capital, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and
accounting principles, policies and guidelines. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under
the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information,
whether as a result of new information, future events or otherwise.
For the Years Ended December 31, 2011, 2010 and 2009
Overview
This overview of management’s discussion and analysis highlights selected information in this document and may not contain all of the information that
is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical
accounting estimates, you should carefully read this entire document. These have an impact on the Company’s financial condition and results of
operations.
Net income was $11.37 million, $8.76 million, and $8.21 million and diluted earnings per share were $1.29, $1.07, and $1.04 for the years ended
December 31, 2011, 2010, and 2009, respectively. The increases in net income and earnings per share in 2011 was primarily the result of an increase
in net interest income due to an increase in the size of the balance sheet and lower interest rates on deposit balances resulting in less interest expense
for the year. The following table shows the Company’s annualized performance ratios for the years ended December 31, 2011, 2010 and 2009:
Return on average assets
Return on average common equity
Average common equity to average assets
2011
2010
2009
.76%
8.36%
8.88%
.72%
7.20%
9.44%
.74%
9.56%
9.59%
Total assets at December 31, 2011, 2010, and 2009 were $1.50 billion, $1.47 billion, and $1.10 billion, respectively. The increase in net assets during
2010 was due to the acquisition of the Branches completed during the third quarter of 2010. Net loan balances increased to $847.9 million at December
31, 2011, from $794.1 million at December 31, 2010 and compared to $691.3 million at December 31, 2009. Of the increase in 2011, $53.8 million or
6.8% was due to increases in loans secured by real estate and commercial and industrial loans. Of the increase in 2010, $103 million or 14.9% was
due to $133 million of loan balances acquired in the acquisition offset by a decline in the balances of loans secured by real estate.
Total deposit balances decreased to $1,170.7 million at December 31, 2011 from $1,212.7 million at December 31, 2010 and from $840.4 million at
December 31, 2009. The decrease in 2011 was due to a decline in money market balances and higher rate CDs that matured and were not replaced.
The increase in 2010 was primarily due to balances acquired in the acquisition of $337 million, as well as increases in interest bearing transaction
accounts and money market accounts offset by declines in consumer time deposits.
Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.45% for 2011, 3.51% for 2010 and 3.40% for
2009. The decrease during 2011 was primarily the result of the impact of the increase in liquidity resulting from the acquisition of the Branches as the
difference between loans ($135 million) and deposits ($337 million) was initially held as Federal Funds sold and interest bearing balances until
deployed. The increase in interest margin during 2010 was due to a greater decline in interest-earning liabilities rates compared to the decline in rates
on interest-earning assets.
Net interest income increased to $48.3 million in 2011 from $40.1 million in 2010 and $35.6 million in 2009. The ability of the Company to continue to
grow net interest income is largely dependent on management’s ability to succeed in its overall business development efforts. Management expects
these efforts to continue but does not intend to compromise credit quality and prudent management of the maturities of interest-earning assets and
interest-paying liabilities in order to achieve growth.
19
Non-interest income increased to $15.8 million in 2011 compared to $13.8 million in 2010 and $13.5 million in 2009. The primary reasons for the
increase of $2 million or 14.2% from 2010 to 2011 were increases in ATM and debit fees, an increase in trust revenues and less other-than-temporary
impairment charges on investment securities. The primary reasons for the increase of $.3 million or 2.7% from 2009 to 2010 were increases in ATM and
debit fees, an increase in trust revenues and less other-than-temporary impairment charges on investment securities offset by no non-recurring gain
such as occurred in 2009.
Non-interest expenses increased $6.1 million, to $43.0 million in 2011 compared to $36.9 million in 2010 and $33.2 million in 2009. The increase during
2011 was primarily due to additional expenses incurred as a result of operating the acquisition of the Branches for a full year, as well as increases in
other real estate owned expenses. The primary factor for the increase during 2010 was additional expenses incurred as a result of the acquisition of the
Branches offset by the special FDIC assessment during 2009 that did not occur in 2010.
Following is a summary of the factors that contributed to the changes in net income (in thousands):
Net interest income
Provision for loan losses
Other income, including securities transactions
Other expenses
Income taxes
Increase in net income
2011 vs 2010
2010 vs 2009
$8,141
636
1,967
(6,126)
(2,007)
$2,611
$ 4,555
(143)
365
(3,715)
(515)
$ 547
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $7.4 million at December 31, 2011 compared to $10.4
million at December 31, 2010 and $12.7 million at December 31, 2009. The decrease in 2011 was primarily a result of loans that paid-off or became
current during the year and loans transferred to other real estate owned during the year as a result of continued deterioration in economic conditions
including increased unemployment, reduction in cash flow from increased vacancies in commercial properties, and declines in property values. Other
real estate owned balances totaled $4.6 million at December 31, 2011 compared to $6.1 million at December 31, 2010 and $2.9 million at December 31,
2009. The Company’s provision for loan losses was $3.1 million for 2011 compared to $3.7 million for 2010. At December 31, 2011, the composition of
the loan portfolio remained similar to 2010. Loans secured by both commercial and residential real estate comprised 72% and 73% of the loan portfolio
as of December 31, 2011 and 2010, respectively.
The Company also held investments in four trust preferred securities with a fair value of $719,000 and unrealized losses of $4.9 million at December 31,
2011 compared to a fair value of $581 million and unrealized losses of $6 million at December 31, 2010. During 2011, the Company recorded $886,000
of other-than-temporary impairment charges for the credit portion of the unrealized losses of these securities compared to $1.4 million during 2010.
These charges established a new, lower amortized cost basis for these securities and reduced non-interest income. See Note 4 – “Investment
Securities” for additional details regarding these investments.
The Company’s capital position remains strong and the Company has consistently maintained regulatory capital ratios above the “well-capitalized” standards.
The Company’s Tier 1 capital ratio to risk weighted assets ratio at December 31, 2011, 2010, and 2009 was 13.37%, 11.71%, and 14.57%, respectively. The
Company’s total capital to risk weighted assets ratio at December 31, 2011, 2010, and 2009 was 14.48%, 12.84%, and 15.76%, respectively. The increase in
2011 was primarily the result of an increase in retained earnings due to the Company’s net income and the issuance of $19,150,000 of Series C Preferred
Stock. (See “Preferred Stock” in Note 1 to consolidated financial statements for more detailed information.) The decrease in 2010 was primarily the result of
an increase in risk weighted assets that resulted from the acquisition of the Branches in the third quarter of 2010.
The Company’s liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company
maintains various sources of liquidity to fund its cash needs. See “Liquidity” herein for a full listing of its sources and anticipated significant contractual
obligations.
The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include lines of credit, letters of credit and other commitments to extend credit. The total outstanding commitments at
December 31, 2011, 2010 and 2009 were $228.6 million, $169.3 million and $132.9 million, respectively. See Note 17 – “Commitments and Contingent
Liabilities” herein for further information.
Critical Accounting Policies and Use of Significant Estimates
The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the
preparation of the Company’s financial statements. The significant accounting policies of the Company are described in the footnotes to the
consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material
impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The
judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and
assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
20
Allowance for Loan Losses. The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant
judgments and assumptions used in the preparation of its consolidated financial statements. An estimate of potential losses inherent in the loan portfolio
are determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows and
estimated collateral values. In assessing these factors, the Company use organizational history and experience with credit decisions and related
outcomes. The allowance for loan losses represents the best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The Company evaluates the
allowance for loan losses quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for
loan losses is adjusted.
The Company estimates the appropriate level of allowance for loan losses by separately evaluating impaired and nonimpaired loans. A specific
allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used
to assign an allowance to a nonimpaired loan is more subjective. Generally, the allowance assigned to nonimpaired loans is determined by applying
historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including the volume and severity of identified
classified loans, changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated
with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on any given borrower,
can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there
still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses
would be required.
Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired,
establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature
of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the
original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest
expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of
other real estate owned and foreclosed assets are netted and posted to other noninterest expense.
Investment in Debt and Equity Securities. The Company classifies its investments in debt and equity securities as either held-to-maturity or available-
for-sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” which was codified into ASC 320. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale
securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices
are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar
instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the
valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial
position, results of operations and cash flows of the Company. If the estimated value of investments is less than the cost or amortized cost, the
Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the
investment. If such an event or change has occurred and the Company determines that the impairment is other-than-temporary, a further determination
is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the
period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income.
Deferred Income Tax Assets/Liabilities. The Company’s net deferred income tax asset arises from differences in the dates that items of income and
expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an
accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of
future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If
the Company were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a
potential valuation reserve.
Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in
Income Taxes,” codified within ASC 740. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would
be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit
that is greater than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.
A significant amount of judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the
largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing
authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.
Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on
the Company’s balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated
useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances
indicate that its carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment during 2011 as part of the goodwill
impairment test and no impairment was deemed necessary.
As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the balance sheets. Goodwill is
evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is
performed more frequently than annually.
21
Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a
variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair
value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar
characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The
Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market
dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or
loss recorded.
SFAS No. 157, “Fair Value Measurements”, which was codified into ASC 820, establishes a framework for measuring the fair value of financial
instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based
on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:
•
•
•
Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or
liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the
full term of the financial instrument.
Level 3 — inputs that are unobservable and significant to the fair value measurement.
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities
may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date.
Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair
values measured at each level of the fair value hierarchy can be found in Note 11 – “Disclosures of Fair Values of Financial Instruments.”
Acquisition
On September 10, 2010, First Mid Bank completed the acquisition of certain assets and the assumption of certain liabilities with respect to 10 branches
of First Bank located in Bartonville, Bloomington, Galesburg, Knoxville, Peoria and Quincy, Illinois. Excluding the purchase accounting adjustments, the
acquisition included the assumption of approximately $336 million in deposits and the purchase of approximately $135 million of loans and $5.3 million
of premises and equipment associated with the acquired branch locations. First Mid Bank received cash of $178.3 million to assume the net liabilities
less the purchase price of $15.7 million (4.77% of core deposits assumed). The acquisition resulted in goodwill of $8.4 million. See Note 19—“Business
Combinations” in the notes to the financial statements for additional information related to the transaction.
Results of Operations
Net Interest Income
The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest
income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many
factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of
funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such
funds.
22
The Company’s average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the
following table (dollars in thousands):
Year Ended
Year Ended
Year Ended
December 31, 2011
December 31, 2010
December 31, 2009
Average
Average Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
Balance
Interest
Rate
ASSETS
Interest-bearing deposits
$ 83,877
$ 213
0.25%
$ 75,558
$ 186
0.25%
$ 55,504
$ 106
0.19%
Federal funds sold
Certificates of deposit investments
78,227
11,651
69
78
0.09%
0.67%
65,644
85
0.13%
54,630
9,473
110
1.16%
4,093
66
55
0.12%
1.34%
Investment securities
Taxable
Tax-exempt (1)
Loans (2) (3)
388,108
9,819
2.53%
249,636
7,746
3.10%
207,025
8,073
3.90%
30,971
1,194
3.86%
23,251
953
4.10%
23,384
963
4.12%
807,463
45,399
5.62%
718,669
41,803
5.82%
701,521
42,146
6.01%
Total earning assets
1,400,297
56,772
4.05% 1,142,231
50,883
4.45%
1,046,157
51,409
4.91%
Cash and due from banks
Premises and equipment
Other assets
Allowance for loan losses
Total assets
31,554
29,374
52,512
(10,943)
$1,502,794
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
21,378
19,454
45,592
(10,302)
18,634
15,333
37,105
(8,560)
$1,219,353
$1,108,669
Demand deposits, interest-bearing
$499,184
2,325
0.47%
$421,743
3,190
0.76%
$332,751
2,843
0.85%
Savings deposits
Time deposits
Securities sold under
251,268
1,481
0.59%
165,337
1,279
0.77%
106,539
938
0.88%
264,508
2,919
1.10%
243,606
4,002
1.64%
304,753
9,189
3.02%
agreements to repurchase
108,240
172
0.16%
76,758
133
0.17%
72,589
129
0.18%
FHLB advances
Federal funds purchased
Subordinated debentures
Other debt
20,238
765
3.78%
26,092
1,090
4.18%
36,175
1,612
4.46%
14
-
.55%
8
-
.79%
3
-
.47%
20,620
927
770
72
3.73%
8.00%
20,620
1,053
5.11%
20,620
1,104
5.36%
642
9
1.46%
1,498
22
1.48%
Total interest-bearing liabilities
1,164,999
8,504
0.73%
954,806
10,756
1.13%
874,928
15,837
1.81%
Demand deposits
Other liabilities
Stockholders’ equity
Total liabilities & equity
Net interest income
Net interest spread
Impact of non-interest bearing funds
Net yield on interest-earning assets
197,246
7,105
133,444
142,125
7,271
115,151
119,537
7,909
106,295
$1,502,794
$1,219,353
$1,108,669
$48,268
$40,127
$35,572
3.32%
.13%
3.45%
3.32%
.19%
3.51%
3.10%
.30%
3.40%
(1) The tax-exempt income is not recorded on a tax equivalent basis.
(2) Nonaccrual loans have been included in the average balances.
(3) Includes loans held for sale.
23
Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The
following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for
the past two years (in thousands):
2011 Compared to 2010
Increase – (Decrease)
2010 Compared to 2009
Increase – (Decrease)
Total
Total
Change Volume (1) Rate (1) Change Volume (1) Rate (1)
$ 27
(16)
(32)
2,073
241
3,596
5,889
(865)
202
(1,083)
39
(325)
-
(283)
63
(2,252)
$8,141
$ 27
14
21
$ -
(30)
(53)
$ 80
19
55
$ 264
238
63
$ (526)
(508)
(8)
3,694
301
5,062
9,119
(1,621)
(60)
(1,466)
(3,230)
(327)
(10)
(343)
(526)
1,495
(5)
1,013
2,623
(1,822)
(5)
(1,356)
(3,149)
514
550
320
(1,379)
(348)
(1,403)
347
341
(5,187)
677
469
(1,583)
48
(228)
-
-
(5)
1,209
$7,910
(9)
(97)
-
(283)
58
(3,461)
$ 231
4
(522)
-
(51)
(13)
(5,081)
$ 4,555
10
(426)
-
-
(13)
(866)
$3,489
(330)
(128)
(3,604)
(6)
(96)
-
(51)
-
(4,215)
$1,066
Earning Assets:
Interest-bearing deposits
Federal funds sold
Certificates of deposit investments
Investment securities:
Taxable
Tax-exempt (2)
Loans (3)
Total interest income
Interest-Bearing Liabilities:
Deposits:
Demand deposits, interest-bearing
Savings deposits
Time deposits
Securities sold under
agreements to repurchase
FHLB advances
Federal funds purchased
Subordinated debentures
Other debt
Total interest expense
Net interest income
(1) Changes attributable to the combined impact of volume and rate have been allocated
proportionately to the change due to volume and the change due to rate.
(2) The tax-exempt income is not recorded on a tax equivalent basis.
(3) Nonaccrual loans are not material and have been included in the average balances.
Net interest income increased $8.1 million or 20.3% in 2011 compared to an increase of $4.6 million or 12.8% in 2010. The increase in net interest
income in 2011 was primarily due to an increase in earning assets. The increase in net interest income in 2010 was primarily due to a greater decline in
rates on interest-bearing liabilities than the decline in rates on interest-bearing assets.
In 2011, average earning assets increased by $258.1 million or 22.6% and average interest-bearing liabilities increased $210.2 million or 22.0%
compared with 2010. In 2010, average earning assets increased by $96.1 million, or 9.2%, and average interest-bearing liabilities increased $79.9
million or 9.1% compared with 2009. Changes in average balances are shown below:
•
•
•
•
Average interest-bearing deposits held by the Company increased $8.3 million or 11.0% in 2011 compared to 2010. In 2010, average
interest-bearing deposits held by the Company increased $20.1 million or 36.2% compared to 2009.
Average federal funds sold increased $12.6 million or 19.2% in 2011 compared to 2010. In 2010, average federal funds sold increased $11.0
million or 20.1% compared to 2010.
Average certificates of deposit investments increased $2.2 million or 23.2% in 2011 compared to 2010. In 2010, average certificates of
deposit investments increased $5.4 million or 131.9% compared to 2009.
Average loans increased by $88.8 million or 12.4% in 2011 compared to 2010. In 2010, average loans increased by $17.1 million or 2.4%
compared to 2009.
24
•
•
•
•
•
•
Average securities increased by $146.2 million or 53.6% in 2011 compared to 2010. In 2010, average securities increased by $42.5 million
or 18.4% compared to 2009.
Average deposits increased by $184.3 million or 22.2% in 2011 compared to 2010. In 2010, average deposits increased by $86.6 million or
11.6% compared to 2009.
Average securities sold under agreements to repurchase increased by $31.5 million or 41.0% in 2011 compared to 2010. In 2010, average
securities sold under agreements to repurchase increased by $4.2 million or 5.8% compared to 2009.
Average borrowings and other debt decreased by $5.6 million or 11.8% in 2011 compared to 2010. In 2010, average borrowings and other
debt decreased by $10.9 million or 18.7% compared to 2009.
The federal funds rate remained at a range of 0% to .25% at December 31, 2011, 2010 and 2009.
Net interest margin decreased to 3.45% compared to 3.51% in 2010 and 3.40% in 2009. Asset yields decreased by 40 basis points in 2010,
and interest-bearing liabilities decreased by 40 basis points.
To compare the tax-exempt yields on interest-earning assets to taxable yields, the Company also computes non-GAAP net interest income on a tax
equivalent basis where the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes,
assuming a federal tax rate of 34% (referred to as the tax equivalent adjustment). The tax equivalent basis adjustments to net interest income for 2011,
2010 and 2009 were $615,000, $491,000 and $497,000, respectively. The net yield on interest-earning assets on a tax equivalent basis was 3.51% in
2011, 3.57% in 2010 and 3.46% in 2009.
Provision for Loan Losses
The provision for loan losses in 2011 was $3,101,000 compared to $3,737,000 in 2010 and $3,594,000 in 2009. Nonperforming loans decreased to
$7,440,000 at December 31, 2011 from $10,434,000 at December 31, 2010 and compared to $12,720,000 at December 31, 2009. The decrease in
2011 and 2010 was primarily due to loans that paid-off or became current during the year and loans transferred to other real estate owned during the
year. Net charge-offs were $2,374,000 during 2011, $2,806,000 during 2010, and $1,719,000 during 2009. For information on loan loss experience and
nonperforming loans, see “Nonperforming Loans and Repossessed Assets” and “Loan Quality and Allowance for Loan Losses” herein.
Other Income
An important source of the Company’s revenue is derived from other income. The following table sets forth the major components of other income for
the last three years (in thousands):
2011
2010
2009
2011
2010
$ Change From Prior Year
Trust
Brokerage
Insurance commissions
Service charges
Securities gains
Impairment losses on securities
Gain on sale of merchant banking portfolio
Mortgage banking
ATM / debit card revenue
Other
Total other income
$3,030
650
1,786
4,817
486
(886)
-
788
3,483
1,633
$15,787
$2,601
536
1,779
4,662
543
(1,418)
-
776
2,869
1,472
$13,820
$2,229
424
1,912
4,952
637
(1,812)
1,000
664
2,333
1,116
$13,455
$ 429
114
7
155
(57)
532
-
12
614
161
$1,967
$ 372
112
(133)
(290)
(94)
394
(1,000)
112
536
356
$ 365
Total non-interest income increased to $15,787,000 in 2011 compared to $13,820,000 in 2010 and $13,455,000 in 2009. The primary reasons for the
more significant year-to-year changes in other income components are as follows:
• Trust revenues increased $429,000 or 16.5% to $3,030,000 in 2011 from $2,601,000 in 2010, compared to $2,229,000 in 2009. The increase
from 2010 to 2011 in trust revenues was due to an increase in revenues from Investment Management & Advisory Agency accounts and
increases in market value related fees during the year. Trust assets were $546.7 million at December 31, 2011 compared to $507.5 million
and $459.1 million at December 31, 2010 and 2009, respectively.
25
• Revenue from brokerage annuity sales increased $114,000 or 21.3% to $650,000 in 2011 from $536,000 in 2010, compared to $424,000 in
2009. The increase from 2010 to 2011 was due an increase in commissions received from the sale of annuities.
•
•
Insurance commissions increased $7,000 or 0.4% to $1,786,000 in 2011 from $1,779,000 in 2010, compared to $1,912,000 in 2009. The
increase from 2010 to 2011 was due to an increase in property and casualty insurance commissions during 2011 compared to the same
period in 2010.
Fees from service charges increased $155,000 or 3.3% to $4,817,000 in 2011 from $4,662,000 in 2010, compared to $4,952,000 in 2010.
This increase from 2010 to 2011 was primarily due to an increase in the number of accounts resulting from the Branches acquired during the
third quarter of 2010.
• Net securities gains in 2011 were $486,000 compared to net securities gains of $543,000 in 2010, and $637,000 in 2009. Several securities
in the investment portfolio were sold to improve the overall portfolio mix and the margin in 2011, 2010 and 2009.
• During 2011, the Company recorded other-than-temporary impairment charges amounting to $886,000 for its investments in four trust
preferred securities compared to $1,418,000 during 2010 and $1,812,000 during 2009. See Note 4 - “Investment Securities” for a more
detailed description of these charges.
•
During the first quarter of 2009, the Company had a $1 million gain on the sale of First Mid Bank’s merchant card servicing portfolio. There
were no gains on sales of other assets during 2011 or 2010.
• Mortgage banking income increased $12,000 or 1.5% to $788,000 in 2011 from $776,000 in 2010, compared to $664,000 in 2009. This
increase from 2010 to 2011 was due to an increase in origination fees for loans originated and sold by First Mid Bank from a greater spread
obtained on various loan types. Loans sold balances are as follows:
•
•
•
$60 million (representing 500 loans) in 2011
$64 million (representing 570 loans) in 2010
$63 million (representing 552 loans) in 2009
•
•
Revenue from ATMs and debit cards increased $614,000 or 21.4% to $3,483,000 in 2011 from $2,869,000 in 2010, compared to $2,333,000
in 2009. This increase from 2010 to 2009 was due to increased usage primarily as a result of the increase in customers after the Branches
acquired during the third quarter of 2010.
Other income increased $161,000 or 10.9% to $1,633,000 in 2011 from $1,472,000 in 2010, compared to $1,116,000 in 2009. This increase
from 2011 to 2010 and 2009 was primarily due to an increase in rental income from buildings acquired in the Branches acquired during the
third quarter of 2010 offset by a decrease in rental income in 2010 from a repossessed property sold during 2011.
Other Expense
The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses
associated with day-to-day operations. The following table sets forth the major components of other expense for the last three years (in thousands):
Salaries and benefits
Occupancy and equipment
Other real estate owned, net
FDIC insurance assessment expense
Amortization of other intangibles
Stationery and supplies
Legal and professional fees
Marketing and promotion
Other
Total other expense
2011
$22,247
7,960
1,471
1,167
1,134
581
2,070
1,050
5,373
$43,053
2010
$18,649
5,851
1,076
1,508
814
610
2,361
940
5,118
$36,927
2009
$16,830
4,989
470
1,943
730
563
2,021
963
4,703
$33,212
$ Change From Prior Year
2011
2010
$3,598
2,109
395
(341)
320
(29)
(291)
110
255
$6,126
$1,819
862
606
(435)
84
47
340
(23)
415
$3,715
Total non-interest expense increased to $43,053,000 in 2011 from $36,927,000 in 2010 and $33,212,000 in 2009. The primary reasons for the more
significant year-to-year changes in other expense components are as follows:
26
• Salaries and employee benefits, the largest component of other expense, increased $3,598,000 or 19.3% to $22,247,000 in 2011 from
$18,649,000 in 2010, compared to $16,830,000 in 2009. The increase in 2011 was as primarily due to the addition of 76 full-time equivalent
employees resulting from the Branches acquired at the end of the third quarter of 2010, an increase in incentive compensation expense as a
result of achieving desired objectives in 2011 compared to during the year 2010 and merit raises for continuing employees during 2011.
There were 402 full-time equivalent employees at December 31, 2011 compared to 419 at December 31, 2010 and 347 at December 31,
2009.
• Occupancy and equipment expense increased $2,109,000 or 36.0% to $7,960,000 in 2011 from $5,851,000 in 2010, compared to
$4,989,000 in 2009. The increase in 2011 was primarily due to increases in building rent and expenses for computer software and software
maintenance for existing and newly acquired Branches and expenses associated with the Company’s purchase of a building in Mattoon,
Illinois in 2011.
•
•
•
•
•
Net other real estate owned expense increased $395,000 or 36.7% to $1,471,000 in 2011 from $1,076,000 in 2010, compared to $470,000 in
2009. The increase in 2011 was due to more write downs on properties held and an increase in repairs and real estate tax expenses on
properties held during 2011 compared to the same period in 2010.
FDIC insurance expense decreased $341,000 or 22.6% to $1,167,000 in 2011 from $1,508,000 in 2010, compared to $1,943,000 in 2009.
The decrease in 2011 was due to a decrease in expense resulting from a change in the calculation of the insurance assessment.
Amortization of other intangibles expense increased $320,000 or 39.3% to $1,134,000 in 2010, compared to $814,000 in 2010 and
compared to $730,000 in 2009. The increase in 2011 was due to amortization of the additional core deposit intangible asset resulting from
the Branches acquired in the third quarter of 2010.
Other operating expenses increased $255,000 or 5.0% to $5,373,000 in 2011 from $5,118,000 in 2010, compared to $4,703,000 in 2009. In
2011, this increase was primarily due to additional expenses incurred following the acquisition of the Branches.
On a net basis, all other categories of operating expenses decreased $210,000 or 5.4% to $3,701,000 in 2011 from $3,911,000 in 2010,
compared to $3,547,000 in 2009. The decrease was primarily due to a decrease in legal expenses associated with the acquisition of the
Branches during 2010 partially offset by increased legal and other professional expenses associated with the Company’s issuance of Series
C Preferred Stock during 2011.
Income Taxes
Income tax expense amounted to $6,529,000 in 2011 compared to $4,522,000 in 2010 and $4,007,000 in 2009. Effective tax rates were 36.5%, 34.0%
and 32.8%, respectively, for 2011, 2010 and 2009. Beginning January 1, 2011, the State of Illinois increased the corporate income tax rate to 9.5%
compared to 7.3% previously. This was the primary cause of the increase in the Company’s effective tax rate in 2011.
The Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” which was codified within ASC
740, on January 1, 2007. The implementation of FIN 48 did not impact the Company’s financial statements. The Company files U.S. federal and state of
Illinois income tax returns. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2008.
27
Analysis of Balance Sheets
Securities
The Company’s overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital
against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of
securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions.
The following table sets forth the year-end amortized cost of the Company’s securities for the last three years (dollars in thousands):
2011
December 31,
2010
2009
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
$164,812
1.99%
$152,086
1.90%
$ 89,640
3.27%
38,879
3.92%
26,599
4.05%
23,530
4.13%
254,930
3.17%
158,936
3.72%
111,301
4.36%
5,625
9,561
4.05%
1.92%
6,595
2,035
3.74%
2.48%
7,758
6,166
$473,807
2.81%
$346,251
2.94%
$238,395
4.22%
4.56%
3.93%
U.S. Treasury securities and obligations of
U.S. government corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total securities
At December 31, 2011, the Company’s investment portfolio showed an increase of $127.6 million from December 31, 2010 primarily due to the purchase of
mortgage-backed securities. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the
adequacy of expected returns relative to the risks assumed.
The table below presents the credit ratings as of December 31, 2011, for all investment securities:
Amortized Estimated Average Credit Rating of Fair Value at December 31, 2011 (1)
Cost
Fair Value
AAA
AA +/-
A +/-
BBB +/-
< BBB - Not rated
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$164,812
$166,066 $156,037 $10,029
$ -
$ -
$ -
$ -
Obligations of state and political subdivisions
38,879
41,253
3,165
30,246
3,093
1,377
Mortgage-backed securities: GSE residential (2)
254,930
261,833
5,625
9,561
719
9,096
-
-
-
-
-
-
-
3,884
5,182
-
-
-
-
-
3,372
261,833
719
-
-
30
Trust preferred securities
Other securities
Total investments
$473,807
$478,967 $159,202 $44,160
$8,275
$1,377
$719 $265,234
(1) Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.
(2) Mortgage-backed securities include mortgage-backed securities (MBS) and collateralized mortgage obligation (CMO) issues from the following government sponsored
enterprises: FHLMC, FNMA, GNMA and FHLB. While MBS and CMOs are no longer explicitly rated by credit rating agencies, the industry recognizes that they are backed
by agencies which have an implied government guarantee.
28
The trust preferred securities are four trust preferred pooled securities issued by FTN Financial Securities Corp. (“FTN”). The following table contains
information regarding these securities as of December 31, 2011:
Deal name
Class
Book value
Fair value
PreTSL I
PreTSL II
PreTSL VI
PreTSL XXVIII
Mezzanine
Mezzanine
Mezzanine
$746,900
$314,400
$1,026,800
$184,800
$199,500
$91,700
C-1
$3,652,100
$127,900
Unrealized gains/(losses)
$(432,500)
$(842,000)
$(107,800)
$(3,524,200)
Other-than-temporary impairment recorded in earnings
$691,000
$2,186,531
$127,146
$1,111,303
Lowest credit rating assigned
Number of performing banks
Number of issuers in default
Number of issuers in deferral
Ca
17
4
3
Ca
16
6
6
Ca
3
-
2
C
28
9
8
Original collateral
$303,112,000
$334,170,000
$519,250,000
$360,850,000
Actual defaults & deferrals as a % of original collateral
27.9%
34.3%
5.4%
24.2%
Remaining collateral
$228,500,000
$246,600,000
$40,750,000
$360,850,000
Actual defaults & deferrals as a % of remaining collateral
Expected defaults & deferrals as a % of remaining collateral
38.1%
42.1%
48.3%
52.1%
73.6%
75.5%
24.9%
36.0%
Performing collateral
$141,500,000
$127,600,000
$16,673,685
$271,840,463
Current balance of class
Subordination
Excess subordination
$95,375,156
$117,426,972
$26,723,143
$36,596,520
$187,463,319
$216,842,414
$26,723,143
$303,754,643
$(45,963,319)
$(89,242,414)
$(10,049,458)
$(31,914,180)
Excess subordination as a % of performing collateral
-32.5%
-69.9%
-60.3%
-11.7%
Cash Flow Analysis Assumptions:
Discount margin (1)
9.74%
9.68%
2.439% – 5.098%
1.928% – 4.587%
Expected defaults & deferrals as a % of remaining collateral (2)
2% / .36%
2% / .36%
2% / .36%
2% / .36%
Recovery assumption (3)
Prepayment assumption (4)
10%
5%
10%
5%
10%
5%
10%
5%
(1) The discount rate for floating rate bonds is a compound interest formula based on the LIBOR forward curve for each payment date
(2) 2% annually for 2 years and 36 basis points annually thereafter
(3) With 2 year lag
(4) Every 5 years beginning after 2013
The trust preferred pooled securities are Collateralized Debt Obligations backed by a pool of debt securities issued by financial institutions. The collateral
consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies and insurance companies. Performing
collateral is the amount of remaining collateral less the balances of collateral in deferral or default. Subordination is the amount of performing collateral in
excess of the current balance of a specified class of notes and all classes senior to the specified class. Excess subordination is the amount that the
performing collateral balance exceeds the outstanding bonds in the current class, plus all senior classes. It is a static measure of credit enhancement, but
does not incorporate all of the structural elements of the security deal. This amount can also be impacted by future defaults and deferrals, deferring balances
that cure or redemptions of securities by issuers. A negative excess subordination indicates that the current performing collateral of the security would be
insufficient to pay the current principal balance of the class notes after all of the senior classes notes were paid. However, the performing collateral balance
excludes the collateral of issuers currently deferring their interest payments. Because these issuers are expected to resume payment in the future (within five
years of the first deferred interest period), a negative excess subordination does not necessarily mean a class note holder will not receive a greater than
projected or even full payment of cash flow at maturity.
29
At December 31, 2011 and 2010 the Company was receiving “payment in kind” (“PIK”), in lieu of cash interest on all of its trust preferred securities
investments. The Company’s use of “PIK” does not indicate that additional securities have been issued in satisfaction of any outstanding obligation;
rather, it indicates that a coverage test of a class or tranche directly senior to the class in question has failed and interest received on the PIK note is
being capitalized, which means the principal balance is being increased. Once the coverage test is met, the capitalized interest will be paid in cash and
current cash interest payments will resume.
The Company’s trust preferred securities investments all allow, under the terms of the issue, for issuers to defer interest for up to five consecutive years.
After five years, if not cured, the securities are considered to be in default and the trustee may demand payment in full of principal and accrued interest.
Issuers are also considered to be in default in the event of the failure of the issuer or a subsidiary. The structuring of these trust preferred securities
provides for a waterfall approach to absorbing losses whereby lower classes or tranches are initially impacted and more senior tranches are only
impacted after lower tranches can no longer absorb losses. Likewise, the waterfall approach also applies to principal and interest payments received, as
senior tranches have priority over lower tranches in the receipt of payments. Both deferred and defaulted issuers are considered non-performing, and
the trustee calculates, on a quarterly or semi-annual basis, certain coverage tests prior to the payment of cash interest to owners of the various tranches
of the securities. The coverage tests are compared to an over-collateralization target that states the balance of performing collateral as a percentage of
the tranche balance plus the balance of all senior tranches. The tests must show that performing collateral is sufficient to meet requirements for the
senior tranches, both in terms of cash flow and collateral value, before cash interest can be paid to subordinate tranches. As a result of the cash flow
waterfall provisions within the structure of these securities, when a senior tranche fails its coverage test, all of the cash flows that would have been paid
to lower tranches are paid to the senior tranche and recorded as a reduction of the senior tranches’ principal. This principal reduction in the senior
tranche continues until the coverage test of the senior tranche is passed or the principal of the tranche is paid in full. For so long as the cash flows are
being diverted to the senior tranches, the amount of interest due and payable to the subordinate tranches is capitalized and recorded as an increase in
the principal value of the tranche. The Company’s trust preferred securities investments are in the mezzanine tranches or classes which are subordinate
to one of more senior tranches of their respective issues. The Company is receiving PIK for these securities due to failure of the required senior tranche
coverage tests described. These securities are projected to remain in full or partial PIK status for a period of one to eleven years.
The impact of payment of PIK to subordinate tranches is to strengthen the position of the senior tranches by reducing the senior tranches’ principal
balances relative to available collateral and cash flow. The impact to the subordinate tranches is to increase principal balances, decrease cash flow,
and increase credit risk to the tranches receiving the PIK. The risk to holders of a security of a tranche in PIK status is that the total cash flow will not be
sufficient to repay all principal and capitalized interest related to the investment.
During the fourth quarter of 2010, after analysis of the expected future cash flows and the timing of resumed interest payments, the Company
determined that placing all four of the trust preferred securities on non-accrual status was the most prudent course of action. The Company stopped all
accrual of interest and ceased to capitalize any PIK interest payments to the principal balance of the securities. The Company intends to keep these
securities on non-accrual status until the scheduled interest payments resume on a regular basis and any previously recorded PIK has been paid. The
PIK status of these securities, among other factors, indicates potential other-than-temporary impairment (“OTTI”) and accordingly, the Company
performed further detailed analysis of the investments’ cash flows and the credit conditions of the underlying issuers. This analysis incorporates, among
other things, the waterfall provisions and any resulting PIK status of these securities to determine if cash flow will be sufficient to pay all principal and
interest due to the investment tranche held by the Company. See discussion below and Note 4 – Investment Securities in the notes to the financial
statements for more detail regarding this analysis. Based on this analysis, the Company believes the amortized costs recorded for its trust preferred
securities investments accurately reflects the position of these securities at December 31, 2011 and 2010.
Other-than-temporary Impairment of Securities
Declines in the fair value, or unrealized losses, of all available for sale investment securities, are reviewed to determine whether the losses are either a
temporary impairment or OTTI. Temporary adjustments are recorded when the fair value of a security fluctuates from its historical cost. Temporary
adjustments are recorded in accumulated other comprehensive income, and impact the Company’s equity position. Temporary adjustments do not
impact net income. A recovery of available for sale security prices also is recorded as an adjustment to other comprehensive income for securities that
are temporarily impaired, and results in a positive impact to the Company’s equity position.
OTTI is recorded when the fair value of an available for sale security is less than historical cost, and it is probable that all contractual cash flows will not
be collected. Investment securities are evaluated for OTTI on at least a quarterly basis. In conducting this assessment, the Company evaluates a
number of factors including, but not limited to:
•
•
•
•
•
•
•
•
how much fair value has declined below amortized cost;
how long the decline in fair value has existed;
the financial condition of the issuers;
contractual or estimated cash flows of the security;
underlying supporting collateral;
past events, current conditions and forecasts;
significant rating agency changes on the issuer; and
the Company’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
30
If the Company intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery of its amortized
cost basis, the entire amount of OTTI is recorded to noninterest income, and therefore, results in a negative impact to net income. Because the
available for sale securities portfolio is recorded at fair value, the conclusion as to whether an investment decline is other-than-temporarily impaired,
does not significantly impact the Company’s equity position, as the amount of the temporary adjustment has already been reflected in accumulated
other comprehensive income/loss.
If the Company does not intend to sell the security and it is not more-likely-than-not it will be required to sell the security before recovery of its amortized
cost basis only the amount related to credit loss is recognized in earnings. In determining the portion of OTTI that is related to credit loss, the Company
compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. The remaining portion
of impairment, related to other factors, is recognized in other comprehensive earnings, net of applicable taxes. The Company recognized $886,000,
$1.4 million and $1.8 million of OTTI in earnings during 2011, 2010 and 2009, respectively.
The term OTTI is not intended to indicate that the decline is permanent but instead indicates that the prospects for a near-term recovery of value are not
necessarily favorable or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the
investment. See Note 4 -- “Investment Securities” to the Financial Statements for a discussion of the Company’s evaluation and subsequent charges for
OTTI.
Loans
The loan portfolio (net of unearned discount) is the largest category of the Company’s earning assets. The following table summarizes the composition
of the loan portfolio for the last five years (in thousands):
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
% Outstanding
Loans
2011
2010
2009
2008
2007
$23,136
72,585
181,849
19,846
321,001
618,417
63,257
150,716
16,271
11,413
2.7%
8.4%
21.1%
2.3%
37.3%
71.9%
7.4%
17.5%
1.9%
1.3%
$20,379
64,992
179,527
22,146
300,825
587,869
58,307
126,319
19,655
12,431
$28,041
62,330
180,415
19,467
226,400
516,653
54,144
105,351
20,815
3,787
$40,362
65,647
200,204
23,833
217,307
547,353
54,098
109,324
25,806
5,357
$55,581
61,898
193,065
30,795
203,282
544,621
51,793
116,176
29,903
5,668
$860,074
100.0%
$804,581
$700,750
$741,938
$748,161
Loan balances increased by $55.5 million or 6.9% from December 31, 2010 to December 31, 2011 primarily due to originations of loans secured by real
estate and commercial and industrial loans. Loan balances increased by $103.8 million or 14.8% from December 31, 2009 to December 31, 2010
primarily due to approximately $133 million of loans (recorded at fair value) acquired in the acquisition of the Branches offset by decreases in loans
secured by real estate due to a lack of demand from quality borrowers and First Mid Bank’s enhanced underwriting standards as a result of economic
conditions. The balances of loans sold into the secondary market were $60 million in 2011, compared to $64 million in 2010. The balance of real estate
loans held for sale, included in the balances shown above, amounted to $1,046,000 and $114,000 as of December 31, 2011 and 2010, respectively.
All of the loans acquired in the acquisition of the Branches were performing loans. The fair value of the loans acquired was determined using a
discounted cash flow analysis. The difference between the fair value and acquired value of the purchased loans of $2.1 million (a discount of
approximately 1.6% of the total loans acquired) is being accreted to interest income over the remaining term of the loans. The unaccreted balance of
this discount at December 31, 2011 is $906,000.
Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments
on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying
assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. The Company does not have any sub-
prime mortgages or credit card loans outstanding which are also generally considered to be higher credit risk.
31
The following table summarizes the loan portfolio geographically by branch region as of December 31, 2011 and 2010 (dollars in thousands):
Mattoon region
Charleston region
Sullivan region
Effingham region
Decatur region
Peoria region
Highland region
Total all regions
2011
2010
Principal
balance
% Outstanding
loans
Principal
balance
% Outstanding
loans
$163,446
48,716
120,369
75,750
197,063
143,955
110,775
$860,074
19.0%
5.7%
14.0%
8.8%
22.9%
16.7%
12.9%
100.0%
$148,682
54,649
68,300
86,542
201,246
133,736
111,426
$804,581
18.4%
6.8%
14.1%
10.8%
20.6%
15.5%
13.8%
100.0%
Loans are geographically dispersed among these regions located in central and southwestern Illinois. During 2011, certain branch facilities were moved
from the Decatur region to the Sullivan region for internal classification purposes which primarily accounts for the increase in 2011 for the Sullivan
region. While these regions have experienced some economic stress during 2011 and 2010, the Company does not consider these locations high risk
areas since these regions have not experienced the significant declines in real estate values seen in other areas in the United States.
The Company does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real
estate loans as a percentage of total risk-based capital for the periods shown above. At December 31, 2011 and 2010, the Company did have industry
loan concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):
Other grain farming
Lessors of non-residential buildings
Lessors of residential buildings & dwellings
Hotels and motels
2011
2010
Principal
balance
% Outstanding
loans
Principal
balance
% Outstanding
Loans
$120,061
82,557
44,009
46,842
13.17%
9.50%
5.06%
5.64%
$108,149
87,236
49,484
49,679
13.44%
10.84%
6.15%
6.17%
The Company had no further industry loan concentrations in excess of 25% of total risk-based capital.
The following table presents the balance of loans outstanding as of December 31, 2011, by contractual maturities (in thousands):
One year
or less(2)
$12,286
6,798
22,326
2,678
39,671
83,759
44,064
98,091
4,028
2,577
$232,519
Maturity (1)
Over 1
through 5 years
$ 10,724
44,974
90,552
13,408
197,203
356,861
18,679
43,825
11,982
2,218
$433,565
Over
5 years
$ 126
20,813
68,971
3,760
84,127
177,797
514
8,800
261
6,618
$193,990
Total
$ 23,136
72,585
181,849
19,846
321,001
618,417
63,257
150,716
16,271
11,413
$860,074
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
(1) Based upon remaining contractual maturity.
(2) Includes demand loans, past due loans and overdrafts.
32
As of December 31, 2011, loans with maturities over one year consisted of $566.4 million in fixed rate loans and $61.2 million in variable rate loans.
The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding
renewals and borrower requests, which are handled on a case-by-case basis.
Nonperforming Loans and Repossessed Assets
Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest
or principal payments; and (c) loans not included in (a) and (b) above which are defined as “restructured loans”. Repossessed assets include primarily
repossessed real estate and automobiles.
The Company’s policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due. The accrual of
interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once
interest accruals are discontinued, accrued but uncollected interest is charged to current year income. Subsequent receipts on non-accrual loans are
recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned
to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the
timely collection of interest or principal.
Restructured loans are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the
borrower or either principal or interest has been forgiven.
Repossessed assets represent property acquired as the result of borrower defaults on loans. These assets are recorded at estimated fair value, less
estimated selling costs, at the time of foreclosure or repossession. Write-downs occurring at foreclosure are charged against the allowance for loan
losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs for subsequent
declines in value are recorded in non-interest expense in other real estate owned along with other expenses related to maintaining the properties.
The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets (in thousands):
Nonaccrual loans
Restructured loans which are performing in accordance
with revised terms
Total nonperforming loans
Repossessed assets
Total nonperforming loans and repossessed assets
Nonperforming loans to loans, before allowance for loan losses
Nonperforming loans and repossessed assets to loans,
before allowance for loan losses
2011
2010
December 31,
2009
2008
2007
$ 6,723
$ 9,332
$12,720
$7,285
$7,460
717
7,440
4,606
$12,046
0.87%
1,102
10,434
6,199
$16,633
1.30%
-
12,720
2,896
$15,616
1.82%
-
7,285
2,400
$9,685
.98%
21
7,481
524
$8,005
1.00%
1.40%
2.07%
2.23%
1.31%
1.07%
The $2,609,000 decrease in nonaccrual loans during 2011 resulted from the net of $3,740,000 of loans put on nonaccrual status, offset by $1,627,000
of loans transferred to other real estate owned, $1,603,000 of loans charged off and $3,119,000 of loans becoming current or paid-off. The following
table summarizes the composition of nonaccrual loans (in thousands):
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Total nonaccrual loans
December 31, 2011
Balance
$ 833
532
1,712
-
2,245
5,322
673
720
8
$6,723
% of Total
12.4%
7.9%
25.5%
-%
33.4%
79.2%
10.0%
10.7%
0.1%
100.0%
December 31, 2010
Balance % of Total
20.9%
5.8%
27.5%
6.1%
23.0%
83.3%
8.9%
7.6%
0.2%
100.0%
$ 1,955
540
2,565
573
2,149
7,782
828
708
14
$9,332
33
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $239,000, $428,000 and $672,000 for
the years ended December 31, 2011, 2010 and 2009, respectively.
The $1,593,000 decrease in repossessed assets during 2011 resulted from the net of $2,646,000 of additional assets repossessed, $1,207,000 of
further write-downs of repossessed assets to current market value and $3,032,000 of repossessed assets sold. The following table summarizes the
composition of repossessed assets (in thousands):
Construction and land development
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Total real estate
Other collateral
Total repossessed collateral
December 31, 2011
December 31, 2010
Balance
$ 694
571
43
3,298
4,606
-
$4,606
% of Total
15.1%
12.4%
0.9%
71.6%
100.0%
-%
100.0%
Balance
$1,234
514
170
4,209
6,127
72
$6,199
% of Total
19.9%
8.3%
2.7%
67.9%
98.8%
1.2%
100.0%
Repossessed assets sold during 2011 resulted in net gains of $173,000, of which a net gain of $174,000 was related to real estate asset sales and a
net loss of $1,000 was related to other repossessed asset sales. Repossessed assets sold during 2010 resulted in net gains of $15,000, of which
$12,000 was related to real estate asset sales and $3,000 was related to other repossessed asset sales.
Loan Quality and Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of the reserve necessary to adequately account for the estimate of potential losses
inherent in the current portfolio. The provision for loan losses is the charge against current earnings that is determined by management as the amount
needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to
be charged to current earnings, management relies predominantly on a disciplined credit review and approval process that extends to the full range of
the Company’s credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage,
borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific
allocations of the allowance for loan losses. Management considers collateral values and guarantees in the determination of such specific allocations.
Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and
composition of nonaccrual, past due and renegotiated loans, trends in volumes and terms of loans, effects of changes in risk selection and underwriting
standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region
where the Company operates.
Given the state of the economy, management did assess the impact of the recent recession on each category of loans and adjusted historical loss
factors for more recent economic trends. Management utilizes a five-year loss history as one component in assessing the probability of inherent future
losses. Given the decline in economic conditions, management also increased its allocation to various loan categories for economic factors during 2010
and 2009. Some of the economic factors include 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 reserve. Management considers the allowance for
loan losses a critical accounting policy.
Management recognizes there are risk factors that are inherent in the Company’s loan portfolio. All financial institutions face risk factors in their loan
portfolios because risk exposure is a function of the business. The Company’s operations (and therefore its loans) are concentrated in east central
Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are
critical to the Company’s success. At December 31, 2011, the Company’s loan portfolio included $135.8 million of loans to borrowers whose
businesses are directly related to agriculture. Of this amount, $120.1 million was concentrated in other grain farming. Total loans to borrowers whose
businesses are directly related to agriculture increased $12.5 million from $123.3 million at December 31, 2010 while loans concentrated in other grain
farming increased $12.0 million from $108.1 million at December 31, 2010. While the Company adheres to sound underwriting practices, including
collateralization of loans, any extended period of low commodity prices, 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 $46.8 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 $82.6 million of loans to lessors of non-residential buildings and $44.0 million of loans to lessors of residential buildings and
dwellings.
34
Analysis of the allowance for loan losses for the past five years and of changes in the allowance for these periods is summarized as follows (dollars in
thousands):
Average loans outstanding, net of unearned income
$807,463 $718,669 $701,521 $740,083 $728,790
2011
2010
2009
2008
2007
Allowance-beginning of year
Charge-offs:
Real estate-mortgage
Commercial, financial and agricultural
Installment
Other
Total charge-offs
Recoveries:
Real estate-mortgage
Commercial, financial and agricultural
Installment
Other
Total recoveries
Net charge-offs
Provision for loan losses
Allowance-end of year
$10,393
$ 9,462
$ 7,587
$ 6,118
$ 5,876
2,625
2,551
1,240
1,640
881
92
162
287
103
181
287
176
176
479
119
184
3,760
3,122
1,879
2,422
1,171
97
28
90
1,386
2,374
3,101
146
35
29
106
316
2,806
3,737
6
27
31
96
160
1,719
3,594
75
98
38
121
332
2,090
3,559
368
180
100
215
863
9
48
33
153
243
620
862
$11,120
$10,393
$ 9,462
$ 7,587
$ 6,118
Ratio of net charge-offs to average loans
.29%
.39%
.25%
.28%
.09%
Ratio of allowance for loan losses to loans outstanding (at end of year)
1.29%
1.29%
1.35%
1.02%
.82%
Ratio of allowance for loan losses to nonperforming loans
149.5%
99.6%
74.4%
104.1%
81.8%
The ratio of the allowance for loan losses to nonperforming loans is 149.5% as of December 31, 2011 compared to 99.6% as of December 31, 2010.
As of December 31, 2011, the balance of non-performing loans decreased from December 31, 2010. Also, increases in the size of the loan portfolio and
the estimated potential losses in the portfolio resulted in an increase in the allowance for loan losses as of December 31, 2011. The combination of
these components resulted in the increase in the ratio of the allowance for loan losses to nonperforming loans.
The Company minimizes credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually, and the
Board of Directors approves all changes. Senior management is actively involved in business development efforts and the maintenance and monitoring
of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an
accurate and timely manner. At least quarterly, the Board of Directors reviews the status of problem loans. In addition to internal policies and controls,
regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses.
During 2011, the Company had net charge-offs of $2,374,000 compared to $2,806,000 in 2010 and $1,719,000 in 2009. During 2011, the Company’s
significant charge-offs included $378,000 on commercial loans of two borrowers and $1,746,000 of commercial real estate mortgage loans of six
borrowers. The Company also had a significant recovery of $1,050,000 on a commercial real estate loan of one borrower that was charged off in a prior
year. During 2010, the Company’s significant charge-offs included $2,076,000 of commercial real estate mortgage loans of four borrowers. During
2009, the Company’s significant charge-offs included $173,000 on commercial loans of two borrowers, $107,000 of real estate mortgage loans of one
borrower and $902,000 of commercial real estate mortgage loans of four borrowers.
At December 31, 2011, the allowance for loan losses amounted to $11,120,000, or 1.29% of total loans, and 149.5% of nonperforming loans. At
December 31, 2010, the allowance for loan losses amounted to $10,393,000, or 1.29% of total loans, and 99.6% of nonperforming loans.
35
The allowance is allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based
on historical losses and other factors. The allowance for loan losses, in management’s judgment, is allocated as follows to cover probable loan losses
(dollars in thousands):
December 31, 2011
December 31, 2010
December 31, 2009
Allowance
for
loan
losses
% of
loans
to total
Loans
Allowance
for
loan
losses
% of
loans
to total
loans
Allowance
for
loan
losses
% of
loans
to total
loans
Residential real estate
Commercial / Commercial real estate
Agricultural / Agricultural real estate
Consumer
Other
Total allocated
Unallocated
$ 636
8,791
546
239
139
10,351
769
21.5%
58.8%
15.2%
1.9%
2.6%
N/A
$ 440
8,307
404
282
110
9,543
850
25.1%
55.7%
15.3%
2.4%
1.5%
N/A
$ 488
7,428
315
312
98
8,641
821
28.5%
51.4%
16.6%
3.0%
.5%
N/A
Allowance at end of year
$11,120
100.0%
$10,393
100.0%
$9,462
100.0%
December 31, 2008
December 31, 2007
Allowance
for
loan
losses
% of
loans
to total
loans
Allowance
for
loan
losses
% of
loans
to total
loans
Residential real estate
Commercial / Commercial real estate
Agricultural / Agricultural real estate
Consumer
Other
Total allocated
Unallocated
$ 510
5,345
223
358
78
6,514
1,073
30.2%
49.5%
16.1%
3.5%
.7%
N/A
$ 214
3,828
531
404
22
4,999
1,119
29.9%
50.1%
15.2%
4.0%
.8%
N/A
Allowance at end of year
$7,587
100.0%
$6,118
100.0%
The unallocated allowance represents an estimate of the probable, inherent, but yet undetected, losses in the loan portfolio. It is based on factors that
cannot necessarily be associated with a specific credit or loan category and represents management’s estimate to ensure that the overall allowance of
loan losses appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. Fluctuations in the
unallocated portion of the allowance result from qualitative factors such as economic conditions, expansionary activities, and portfolio composition that
influence the level of risk in the portfolio but are not specifically quantified.
36
Deposits
Funding of the Company’s earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company
continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the
average deposits and weighted average rates for 2011, 2010 and 2009 (dollars in thousands):
2011
2010
2009
Weighted
Weighted
Weighted
Average
Average
Average
Average
Average
Average
Balance
Rate
Balance
Rate
Balance
Rate
Demand deposits:
Non-interest bearing
Interest bearing
Savings
Time deposits
$197,246
499,184
251,268
264,508
-
$142,125
-
$119,537
-
.47%
.59%
1.10%
421,743
165,337
243,606
.76%
.77%
1.64%
332,751
109,305
301,987
1.26%
.92%
3.91%
2.08%
Total average deposits
$1,212,206
.56%
$972,811
.87%
$863,580
(dollars in thousands)
December 31,
2011
2010
2009
High month-end balances of total deposits
$1,233,633
$1,227,528
Low month-end balances of total deposits
1,170,734
842,653
$906,853
831,157
In 2011, the average balance of deposits increased by $239,000 from 2010. The increase was primarily attributable to increases in non-interest bearing,
money market and savings account balances. Average non-interest bearing deposits increased by $55.1 million, average money market account
balances increased by $55.1 million, and average savings account balances increased by $85.9 million. In 2010, the average balance of deposits
increased by $109.2 million from 2009. The increase was primarily attributable to the addition of $337 million of deposits assumed in the acquisition of
the Branches offset by decreases in higher rate time deposits. Average non-interest bearing deposits increased by $22.6 million, average money market
account balances increased by $64.8 million, average savings account balances increased by $56 million and average NOW account balances
increased by $24.2 million offset by a decline in consumer CD balances.
The following table sets forth the maturity of time deposits of $100,000 or more (in thousands):
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
December 31,
2011
$17,095
11,037
22,126
17,596
2010
2009
$31,277
$24,951
14,430
24,906
18,315
8,622
29,852
18,267
$67,854
$88,928
$81,692
The balance of time deposits of $100,000 or more decreased $21.1 million from December 31, 2010 to December 31, 2011. The decrease in balance
was primarily attributable to higher rate time deposits that matured and were not replaced. The balance of time deposits of $100,000 or more increased
$7.2 million from December 31, 2009 to December 31, 2010. The decrease in balances was primarily attributable to time deposits acquired in the
acquisition of the Branches.
In 2011 the Company maintained account relationships with various public entities throughout its market areas. Four public entities had total balances of
$28.7 million in various checking accounts and time deposits as of December 31, 2011. These balances are subject to change depending upon the cash
flow needs of the public entity.
37
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. First Mid Bank collateralizes these obligations with certain
government securities that are direct obligations of the United States or one of its agencies. First Mid Bank offers these retail repurchase agreements
as a cash management service to its corporate customers. Other borrowings consist of Federal Home Loan Bank (“FHLB”) advances, federal funds
purchased, junior subordinated debentures and loans (short-term or long-term debt) that the Company has outstanding.
Information relating to securities sold under agreements to repurchase and other borrowings for the last three years is presented below (dollars in
thousands):
At December 31:
Securities sold under agreements to repurchase
$132,380
$94,057
$80,386
2011
2010
2009
Federal Home Loan Bank advances:
Fixed term – due in one year or less
Fixed term – due after one year
Junior subordinated debentures
Debt due in one year or less
Total
Average interest rate at year end
Maximum Outstanding at Any Month-end
Securities sold under agreements to repurchase
Federal Home Loan Bank advances:
Fixed term – due in one year or less
Fixed term – due after one year
Junior subordinated debentures
Debt due in one year or less
Debt due after one year
Averages for the Year
Federal funds purchased
Securities sold under agreements to repurchase
Federal Home Loan Bank advances:
Fixed term – due in one year or less
Fixed term – due after one year
Junior subordinated debentures
Debt due in one year or less
Debt due after one year
Total
Average interest rate during the year
14,750
5,000
20,620
8,250
3,000
19,750
20,620
-
10,000
22,750
20,620
-
$181,000
$137,427
$133,756
1.13%
1.81%
2.10%
$132,380
$ 94,530
$ 83,826
14,750
14,750
20,620
8,250
-
10,000
22,750
20,620
2,000
15,000
32,750
20,620
-
-
13,000
14
5
3
108,240
76,758
72,589
9,866
10,372
20,620
927
-
4,984
21,109
20,620
645
-
10,041
26,134
20,620
-
1,498
$150,039
$124,121
$130,885
1.19%
1.94%
2.19%
FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. The fixed term advances consist of $19.75 million as
follows:
•
•
•
•
$5 million advance at 4.82% with a 5-year maturity, due January 19, 2012, two year lockout, callable quarterly
$5 million advance at 4.69% with a 5-year maturity, due February 23, 2012, two year lockout, callable quarterly
$4.75 million advance at 1.60% with a 5-year maturity, due December 24, 2012
$5 million advance at 4.58% with a 10-year maturity, due July 14, 2016, one year lockout, callable quarterly
38
At December 31, 2011 and 2010, there was no outstanding loan balance on a revolving credit agreement with The Northern Trust Company. This loan was
renewed on April 22, 2011. The revolving credit agreement has a maximum available balance of $20 million with a term of one year from the date of closing.
The interest rate (2.375% at December 31, 2011) is floating at 2.25% over the federal funds rate. The loan is unsecured and subject to a borrowing agreement
containing requirements for the Company and First Mid Bank to maintain various operating and capital ratios. The Company and First Mid Bank were in
compliance with all the existing covenants at December 31, 2011 and 2010.
On February 11, 2011, the Company accepted from certain accredited investors, including directors, executive officers, and certain major customers
and holders of the Company’s common stock (collectively, the “Investors”), subscriptions for the purchase of $27,500,000, in the aggregate, of the
Series C Preferred Stock. As of February 11, 2011, $11,010,000 of the Series C Preferred Stock had been issued and sold by the Company to certain
Investors. On March 2, 2011, three Investors subsequently completed the required bank regulatory process and an additional $2,750,000 of Series C
Preferred Stock was issued and sold by the Company to these Investors. On May 13, 2011, four additional Investors received the required bank
regulatory approval and an additional $5,490,000 of Series C Preferred Stock was issued and sold by the Company to these Investors. The balance of
the Series C Preferred Stock will be issued to the remaining Investors upon the completion of the bank regulatory process, to which the issuance of the
Series C Preferred Stock is subject, applicable to their purchases. These remaining Investors have not yet been issued their shares of Series C
Preferred Stock because of unanticipated delays in applying for and obtaining the approval of the Federal Reserve Board. These Investors are (a)
individuals who are members of the Lumpkin family, including Benjamin I. Lumpkin, a director of the Company, and (b) entities controlled by, and trusts
created for the benefit of, individuals who are members of the Lumpkin family (collectively, the "Remaining Investors"). The Company has previously
accepted from the Remaining Investors subscriptions for $8,250,000 of the Series C Preferred Stock pursuant to their respective subscription
agreements.
Pursuant to the terms of the Series C Preferred Stock, the Series C Preferred Stock is both redeemable and mandatorily convertible at the Company's
discretion into common stock of the Company, subject to certain conditions being met, no earlier than 60 months following the date on which a majority
of the Series C Preferred Stock has been issued. The date on which a majority of the Series C Preferred Stock became issued was May 13, 2011 (the
"Majority Issuance Date"). As a result of the Remaining Investors not being issued their subscribed for shares of Series C Preferred Stock by the
Majority Issuance Date, it is possible that, if certain conditions are met, the Company could redeem or mandatorily convert the Series C Preferred Stock
into common stock of the Company prior to the Remaining Investors holding their subscribed shares of Series C Preferred Stock for 60 months, thus
resulting in the Remaining Investors receiving less than 60 months of 8% dividends on the Series C Preferred Stock subscribed for.
In November 2011, the disinterested members of the Board of Directors of the Company approved and authorized, and the Remaining Investors agreed
to, certain amendments to the Series C Preferred Stock subscription agreements resulting in the release to the Company of the funds escrowed by the
Remaining Investors for their subscribed shares of the Series C Preferred Stock and the issuance by the Company of short-term unsecured promissory
notes, which are dated November 21, 2011, to the Remaining Investors. The promissory notes (the “Notes”) collectively have an aggregate principal
amount of $8,250,000 and each have an 8% annual interest rate. Each Note also contains a prepayment provision applicable when approval from the
Federal Reserve Board is received to allow the Remaining Investors to purchase the shares of Series C Preferred Stock originally subscribed.
Additionally, if the Company experiences an Event of Default as defined in the Note, such as becoming insolvent or generally failing to pay its debts as
they become due, then a Remaining Investor may, at his, her or its option, declare the entire unpaid amount of the Note immediately due and payable,
without presentment, demand, portents or notice of any kind, and the Remaining Investor shall be entitled to recover from the Company all costs and
expenses, including reasonable attorneys' fees and disbursements and court costs, incurred in enforcing the Remaining Investor's rights under the
Note.
On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through Trust I, a statutory
business trust and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust I for the
purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the
Company’s investment in common equity of the Trust, a total of $10,310,000, was invested in junior subordinated debentures of the Company. The
underlying junior subordinated debentures issued by the Company to Trust I mature in 2034, bear interest at three-month London Interbank Offered
Rate (“LIBOR”) plus 280 basis points, reset quarterly, and are callable, at the option of the Company, at par on or after April 7, 2009. At December 31,
2011 and 2010 the rate was 3.10% and 3.15%, respectively. The Company used the proceeds of the offering for general corporate purposes.
On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through Trust II, a
statutory business trust and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II
for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the
Company’s investment in common equity of Trust II, a total of $10,310,000, was invested in junior subordinated debentures of the Company. The
underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until
June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points) after June 15, 2011 (1.95% at December 31, 2011). The net proceeds
to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield.
The trust preferred securities issued by Trust I and Trust II are included as Tier 1 capital of the Company for regulatory capital purposes. On March 1,
2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1
capital for regulatory purposes. The final rule provided a five-year transition period, ending September 30, 2010, for application of the revised
quantitative limits. On March 17, 2009, the Federal Reserve Board adopted an additional final rule that delayed the effective date of the new limits on
inclusion of trust preferred securities in the calculation of Tier 1 capital until September 30, 2011. The Company does not expect the application of the
revised quantitative limits to have a significant impact on its calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized.
The Dodd-Frank Act, signed into law July 21, 2010, removes trust preferred securities as a permitted component of a holding company’s Tier 1 capital
after a three-year phase-in period beginning January 1, 2013 for larger holding companies. For holding companies with less than $15 billion in
consolidated assets, existing issues of trust preferred securities are grandfathered and not subject to this new restriction. Therefore, the existing trust
preferred securities issued by Trust I and Trust II will continue to count as Tier 1 capital. New issuances of trust preferred securities, however would not
count as Tier 1 regulatory capital.
39
Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as
the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which
management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of assets differ significantly from the
maturity or repricing characteristics of liabilities.
The Company monitors its interest rate sensitivity position to maintain a balance between rate-sensitive assets and rate-sensitive liabilities. This
balance serves to limit the adverse effects of changes in interest rates. The Company’s asset/liability management committee (“ALCO”) oversees the
interest rate sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as
“static GAP” analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals.
By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future,
management can gain insight into the amount of interest rate risk embedded in the balance sheet.
The following table sets forth the Company’s interest rate repricing gaps for selected maturity periods at December 31, 2011 (dollars in thousands):
Interest-earning assets:
Federal funds sold
and other interest-bearing deposits
Certificates of deposit investments
Taxable investment securities
Nontaxable investment securities
Loans
Total
Interest-bearing liabilities:
1 year
1-2 years
2-3 years
3-4 years
4-5 years
Thereafter
Total
Fair Value
Rate Sensitive Within
$29,746
$ -
$ -
$ -
$ -
$ -
$ 29,746
$ 29,746
13,231
25,142
255
-
-
-
-
-
11,220
11,992
34,600
24,187
330,573
528
368
583
826
402,580
167,231
104,718
77,654
88,649
13,231
437,714
41,253
860,074
13,225
437,714
41,253
862,474
38,693
19,242
$470,954
$178,979
$117,078
$112,837
$113,662
$388,508
$1,382,018
$1,384,412
Savings and N.O.W. accounts
$ 85,081
$28,434
$29,472
$40,886
$42,048
$247,967
$473,888
$473,888
Money market accounts
Other time deposits
Short-term borrowings/debt
Long-term borrowings/debt
230,996
180,195
140,630
35,370
2,697
26,429
-
-
2,771
8,687
-
-
3,595
9,318
-
-
3,670
9,798
-
5,000
19,400
328
-
-
263,129
234,755
140,630
40,370
263,129
236,090
140,633
32,588
Total
$672,272
$57,560
$40,930
$53,799
$60,516
$267,695
$1,152,772
$1,138,078
Rate sensitive assets –
rate sensitive liabilities
$(201,318)
$121,419
$76,148
$59,038
$53,146
$120,813
$229,246
Cumulative GAP
$(201,318)
$(79,899)
$(3,751)
$55,287
$108,433
$229,246
Cumulative amounts as % of total
rate sensitive assets
Cumulative Ratio
-14.6%
-14.6%
8.8%
-5.8%
5.5%
-0.3%
4.3%
4.0%
3.8%
7.8%
8.7%
16.6%
The static GAP analysis shows that at December 31, 2011, the Company was liability sensitive, on a cumulative basis, through the twelve-month time
horizon. This indicates that future increases in interest rates, if any, could have an adverse effect on net interest income. Conversely, future decreases
in interest rates could have a positive effect on net interest income.
There are several ways the Company measures and manages the exposure to interest rate sensitivity, static GAP analysis being one. The Company’s
ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with
First Mid Bank’s historical experience and with known industry trends. ALCO meets at least monthly to review the Company’s exposure to interest rate
changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities.
Based on all information available, management does not believe that changes in interest rates which might reasonably be expected to occur in the next
twelve months will have a material, adverse effect on the Company’s net interest income.
40
Capital Resources
At December 31, 2011, stockholders’ equity increased $28.7 million or 25.6% to $140,967,000 from $112,265,000 as of December 31, 2010. During
2011 net income contributed $11,372,000 to equity before the payment of dividends to stockholders. The change in the market value of available-for-
sale investment securities increased stockholders’ equity by $5,214,000, net of tax. Additional purchases of treasury stock (128,073 shares at an
average cost of $18.63 per share) decreased stockholders’ equity by $2,385,000.
During 2009, the Company sold to certain accredited investors including directors, executive officers, and certain major customers and holders of the
Company’s common stock, $24,635,000, in the aggregate, of a newly authorized series of its preferred stock designated as Series B Preferred Stock.
Additionally, during 2011, the Company accepted from certain accredited investors including directors, executive officers, and certain major customers and
holders of the Company’s common stock, subscriptions for the purchase of $27,500,000, in the aggregate, of a newly authorized series of its preferred stock
designated as Series C Preferred Stock. As of December 31, 2011, $19,250,000 of the Series C Preferred Stock was issued and sold by the Company to
certain investors. The balance of the Series C Preferred Stock will be issued to the Remaining Investors upon the completion of the bank regulatory process
applicable to their purchases.
As a result of unanticipated delays in applying for and obtaining the approval of the Federal Reserve Board, in November 2011, the disinterested members of
the Board of Directors of the Company approved and authorized, and the Remaining Investors agreed to, certain amendments to the Series C Preferred Stock
subscription agreements resulting in the release to the Company of the funds escrowed by the Remaining Investors for their subscribed shares of the Series
C Preferred Stock and the issuance by the Company of the Notes to the Remaining Investors. Each Note contains a prepayment provision applicable when
approval from the Federal Reserve Board is received to allow the Remaining Investors to purchase the shares of Series C Preferred Stock originally
subscribed. See the description above under the caption “Repurchase Agreements and Other Borrowings” and “Preferred Stock” in Note 1 to consolidated
financial statements for more detailed information.
Stock Plans
Deferred Compensation Plan. The Company follows the provisions of the Emerging Issues Task Force Issue No. 97-14, “Accounting for Deferred
Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested” (“EITF 97-14”), which was codified into ASC 710-10, for
purposes of the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan (“DCP”). At December 31, 2010, the Company classified the cost basis
of its common stock issued and held in trust in connection with the DCP of approximately $2,928,000 as treasury stock. The Company also classified
the cost basis of its related deferred compensation obligation of approximately $2,928,000 as an equity instrument (deferred compensation).
The DCP was effective as of June 1984. The purpose of the DCP is to enable directors, advisory directors, and key employees the opportunity to defer
a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation
arrangements. The Company invests all participants’ deferrals in shares of common stock. Dividends paid on the shares are credited to participants’
DCP accounts and invested in additional shares. The Company issued, pursuant to DCP:
•
•
•
5,920 common shares during 2011,
4,766 common shares during 2010 and
9,916 common shares during 2009.
First Retirement and Savings Plan. The First Retirement and Savings Plan (“401(k) plan”) was effective beginning in 1985. Employees are eligible to
participate in the 401(k) plan after six months of service with the Company. The Company offers common stock as an investment option for participants
of the 401(k) plan. The Company issued, pursuant to the 401(k) plan:
•
•
•
9,693 common shares during 2011,
19,414 common shares during 2010 and
19,000 common shares during 2009.
Dividend Reinvestment Plan. The Dividend Reinvestment Plan (“DRIP”) was effective as of October 1994. The purpose of the DRIP is to provide
participating stockholders with a simple and convenient method of investing cash dividends paid by the Company on its common and preferred shares
into newly issued common shares of the Company. All holders of record of the Company’s common or preferred stock are eligible to voluntarily
participate in the DRIP. The DRIP is administered by Computershare Investor Services, LLC and offers a way to increase one’s investment in the
Company. Of the $2,304,000 in common stock dividends paid during 2011, $618,000 or 26.8% was reinvested into shares of common stock of the
Company through the DRIP. Of the $3,191,000 in preferred stock dividends paid during 2011, $190,000 or 5.9% was reinvested into shares of common
stock through the DRIP. Events that resulted in common shares being reinvested in the DRIP:
•
•
•
During 2011, 34,405 common shares were issued from common stock dividends and 10,116 common shares were issued from
preferred stock dividends
During 2010, 33,879 common shares were issued from common stock dividends and 4,615 common shares were issued from preferred
stock dividends
During 2009, 42,044 common shares were issued from common stock dividends and 2,617 common shares were issued from preferred
stock dividends
41
Stock Incentive Plan. At the Annual Meeting of Stockholders held May 23, 2007, the stockholders approved the First Mid-Illinois Bancshares, Inc. 2007
Stock Incentive Plan (“SI Plan”). The SI Plan was implemented to succeed the Company’s 1997 Stock Incentive Plan, which had a ten-year term that
expired October 21, 2007. 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 herein in the SI
Plan.
On September 27, 2011, the Board of Directors passed a resolution authorizing and approving the Executive Long-Term Incentive Plan (“LTIP”). The
LTIP was implemented to provide methodology for granting Stock Awards and Stock Unit Awards under the SI Plan to select senior executives of the
Company or any subsidiary.
A maximum of 300,000 shares of common stock may be issued under the SI Plan. As of December 31, 2010, the Company had awarded 59,500
shares as stock options under the SI Plan. There were no shares awarded as stock options during 2011. During the third quarter of 2011, the Company
awarded 8,161 shares as 50% Stock Awards and 50% Stock Unit Awards under the SI Plan. This SI Plan is more fully described in Note 13-“Stock
Incentive Plan.”
Stock Repurchase Program. Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may
repurchase a total of approximately $61.7 million of the Company’s common stock. The repurchase programs approved by the Board of Directors are
as follows:
•
•
•
•
•
•
•
•
•
•
•
•
•
On August 5, 1998, repurchases of up to 3%, or $2 million, of the Company’s common stock.
In March 2000, repurchases up to an additional 5%, or $4.2 million of the Company’s common stock.
In September 2001, repurchases of $3 million of additional shares of the Company’s common stock.
In August 2002, repurchases of $5 million of additional shares of the Company’s common stock.
In September 2003, repurchases of $10 million of additional shares of the Company’s common stock.
On April 27, 2004, repurchases of $5 million of additional shares of the Company’s common stock.
On August 23, 2005, repurchases of $5 million of additional shares of the Company’s common stock.
On August 22, 2006, repurchases of $5 million of additional shares of the Company’s common stock.
On February 27, 2007, repurchases of $5 million of additional shares of the Company’s common stock.
On November 13, 2007, repurchases of $5 million of additional shares of the Company’s common stock.
On December 16, 2008, repurchases of $2.5 million of additional shares of the Company’s common stock.
On May 26, 209, repurchases of $5 million of additional shares of the Company’s common stock.
On February 22, 2011, repurchases of $5 million of additional shares of the Company’s common stock.
During 2011, the Company repurchased 128,073 shares (2.1% of common shares) at a total price of $2,385,000. During 2010, the Company
repurchased 136,380 shares (2.3% of common shares) at a total price of $2,499,000. As of December 31, 2011, approximately $3.5 million remains
available for purchase under the repurchase programs. Treasury stock is further affected by activity in the DCP.
42
Capital Ratios
Minimum regulatory requirements for highly-rated banks that do not expect significant growth is 8% for the Total Capital to Risk-Weighted Assets ratio
and 3% for the Tier 1 Capital to Average Assets ratio. The Company and First Mid Bank have capital ratios above the minimum regulatory capital
requirements and, as of December 31, 2011, the Company and First Mid Bank had capital ratios above the levels required for categorization as well-
capitalized under the capital adequacy guidelines established by the bank regulatory agencies.
A tabulation of the Company and First Mid Bank’s capital ratios as of December 31, 2011 follows:
First Mid-Illinois Bancshares, Inc. (Consolidated)
First Mid-Illinois Bank & Trust, N.A.
Total
Capital Ratio
14.48%
12.83%
Tier One
Capital Ratio
13.37%
11.71%
Tier One
Leverage Ratio
(Capital to Average Assets)
8.99%
7.85%
Liquidity
Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of
the business. Financial obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing. The Company’s
liquidity management focuses on the ability to obtain funds economically through assets that may be converted into cash at minimal costs or through
other sources. The Company’s other sources for cash include overnight federal fund lines, FHLB advances, deposits of the State of Illinois, the ability to
borrow at the Federal Reserve Bank, and the Company’s operating line of credit with The Northern Trust Company.
Details for the sources include:
•
•
•
•
First Mid Bank has $35 million available in overnight federal fund lines, including $10 million from U.S. Bank, N.A., $10 million from Wells
Fargo Bank, N.A. and $15 million from The Northern Trust Company. Availability of the funds is subject to the First Mid Bank’s meeting
minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total assets. As of December 31, 2011,
First Mid Bank met these regulatory requirements.
In addition, the Company has a revolving credit agreement in the amount of $20 million with The Northern Trust Company. The Company
had an outstanding balance of $0 with $20 million in available funds as of December 31, 2011. This loan was renewed on April 22, 2011 for a
one year term. The revolving credit agreement has a maximum available balance of $20 million. The interest rate is floating at 2.25% over
the federal funds rate. The loan is unsecured and subject to a borrowing agreement containing requirements for the Company and First Mid
Bank, including requirements for operating and capital ratios. The Company and First Mid Bank were in compliance with all the existing
covenants at December 31, 2011 and 2010.
First Mid Bank can also borrow from the FHLB as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the
FHLB. Collateral that can be pledged includes 1-4 family residential real estate loans and securities. At December 31, 2011, the excess
collateral at the FHLB could support approximately $75.8 million of additional advances.
First Mid Bank is also a member of the Federal Reserve System and can borrow funds provided sufficient collateral is pledged.
Management monitors its expected liquidity requirements carefully, focusing primarily on cash flows from:
•
•
•
•
lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions;
deposit activities, including seasonal demand of private and public funds;
investing activities, including prepayments of mortgage-backed securities and call assumptions on U.S. Treasuries and agencies; and
operating activities, including scheduled debt repayments and dividends to stockholders.
43
The following table summarizes significant contractual obligations and other commitments at December 31, 2010 (in thousands):
Time deposits
Debt
Other borrowings
Operating leases
Supplemental retirement liability
Total
$234,755
28,870
150,246
4,730
918
Less than
1 year
$171,266
8,250
150,246
889
50
1-3 years
3-5 years
$39,905
$23,256
-
-
1,926
200
-
-
892
200
More than
5 years
$ 328
20,620
-
1,023
468
$419,519
$330,701
$42,031
$24,348
$22,439
For the year ended December 31, 2011, net cash of $19.0 million and $14.1 million was provided from operating activities and financing activities,
respectively and $191.5 million was used in investing activities. In total, cash and cash equivalents decreased by $158.4 million since year-end 2010.
Generally, during 2011, the decrease in cash balances was due to cash received related to the acquisition of the Branches being invested in loans and
investment securities.
For the year ended December 31, 2010, net cash of $7.5 million, $100.5 million and $33.0 million was provided from operating activities, investing
activities and financing activities, respectively. In total, cash and cash equivalents increased by $141 million since year-end 2009. Generally, during
2010, the increase in cash balances was due to cash received related to the acquisition of the Branches.
For the years ended December 31, 2011 and 2010, the Company also had issued $10 million of floating rate trust preferred securities through each of
Trust I and Trust II. See Note 9 – “Borrowings” for a more detailed description.
Effects of Inflation
Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same
direction or experience the same magnitude of changes as goods and services, since such prices are affected by inflation. In the current economic
environment, liquidity and interest rate adjustments are features of the Company’s assets and liabilities that are important to the maintenance of
acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset
these potential effects.
Adoption of New Accounting Guidance
Accounting Standards Update (“ASU”) No. 2011-02 – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt
Restructuring. In April 2011, the FASB issued ASU No. 2011-02. The provisions of ASU No. 2011-02 provide additional guidance related to
determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring
results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has
been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in
ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU No. 2010-20. The
provisions of ASU No. 2011-02 are effective for reporting periods ending on or after September 30, 2011. The adoption of ASU No. 2011-02 guidance
did not result in any additional loans being classified as TDRs and had no material impact on the Company’s financial statements.
ASU No. 2011-04 -- Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In
May 2011, the FASB issued ASU No. 2011-04. ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for
measuring fair value and for disclosing information about fair value measurements. Consequently, the amendments in this update result in common fair
value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 is effective
prospectively during interim and annual periods beginning on or after December 15, 2011. Early application by public entities is not permitted. The
adoption of ASU No. 2011-04 is not expected to have a material impact on the Company’s financial statements.
ASU No. 2011-05 – Presentation of Comprehensive Income. In June 2011, the FASB issued ASU No. 2011-05. The provisions of ASU No. 2011-05
allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is
required to present each component of net income along with total net income, each component of other comprehensive income along with a total for
other comprehensive income, and a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as
the other primary financial statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the
statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of
other comprehensive income must be reclassified to net income. The provisions of ASU No. 2011-05 are effective for the Company’s interim reporting
period beginning on or after December 15, 2011, with retrospective application required. The adoption of ASU No. 2011-05 is expected to result in
44
presentation changes to the Company’s statements of changes in stockholders’ equity and the addition of a statement of comprehensive income. The
adoption of ASU No. 2011-05 will not have a material impact on the Company’s financial statements.
ASU 2011-08 — Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. In September 2011, the FASB issued ASU 2011-
08. ASU 2011-08 amends Topic 350 to permit an entity the option to first assess qualitative factors to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill
impairment test. Under the amendments in this guidance, an entity has the option to bypass the qualitative assessment for any reporting unit in any
period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative
assessment in any subsequent period. The amendments do not change the current guidance for testing other indefinite lived intangible assets for
impairment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15,
2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s market risk arises primarily from interest rate risk inherent in its lending, investing and deposit taking activities, which are restricted to
First Mid Bank. The Company does not currently use derivatives to manage market or interest rate risks. For a discussion of how management of the
Company addresses and evaluates interest rate risk see also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Interest Rate Sensitivity.”
Based on the financial analysis performed as of December 31, 2011, which takes into account how the specific interest rate scenario would be expected
to impact each interest-earning asset and each interest-bearing liability, the Company estimates that changes in the prime interest rate would impact
First Mid Bank’s performance as follows:
December 31, 2011
Prime rate is 3.25%
Prime rate increase of:
200 basis points to 5.25%
100 basis points to 4.25%
Prime rate decrease of:
200 basis points to 2.25%
100 basis points to 1.25%
Increase (Decrease) In
Net Interest
Net Interest
Return On
Income
($000)
Income
Average Equity
(%)
2011=8.52%
$1,165
1,736
3.8 %
5.7 %
1,056
564
3.4%
1.8%
.79%
1.17%
.72%
.39%
The following table shows the same analysis performed as of December 31, 2010:
Increase (Decrease) In
Net Interest
Net Interest
Return On
Income
($000)
Income
Average Equity
(%)
2010=7.92%
December 31, 2010
Prime rate is 3.25%
Prime rate increase of:
200 basis points to 5.25%
$(591)
(1.9) %
100 basis points to 4.25%
(316)
(1.0) %
Prime rate decrease of:
200 basis points to 2.25%
100 basis points to 1.25%
(1,607)
(553)
(5.2)%
(1.8)%
(.42)%
(.23)%
(1.16)%
(.40)%
First Mid Bank’s Board of Directors has adopted an interest rate risk policy that establishes maximum decreases in the percentage change in net
interest income of 5% in a 100 basis point rate shift and 10% in a 200 basis point rate shift.
No assurance can be given that the actual net interest income would increase or decrease by such amounts in response to a 100 or 200 basis point
increase or decrease in the prime rate because it is also affected by many other factors. The results above are based on one-time “shock” moves and
do not take into account any management response or mitigating action.
Interest rate sensitivity analysis is also used to measure the Company’s interest risk by computing estimated changes in the Economic Value of Equity
(“EVE”) of First Mid Bank under various interest rate shocks. EVE is determined by calculating the net present value of each asset and liability category
by rate shock. The net differential between assets and liabilities is the EVE. EVE is an expression of the long-term interest rate risk in the balance
sheet as a whole.
46
The following table presents First Mid Bank’s projected change in EVE for the various rate shock levels at December 31, 2011 and 2010 (in thousands).
All market risk sensitive instruments presented in the tables are held-to-maturity or available-for-sale. First Mid Bank has no trading securities.
December 31, 2011
December 31, 2010
Change in
Changes In
Interest Rates
(basis points)
Economic Value of Equity
Amount of
Percent
Change ($000)
of Change
+200 bp
+100 bp
-200 bp
-100 bp
+200 bp
+100 bp
-200 bp
-100 bp
$9,354
9,297
(43,161)
(23,606)
$11,901
6,902
(41,202)
(17,266)
4.5 %
4.4 %
(20.6)%
(11.3)%
5.4 %
3.1 %
(18.7)%
(7.8)%
As indicated above, at December 31, 2011, in the event of a sudden and sustained increase in prevailing market interest rates, First Mid Bank’s EVE
would be expected to increase, and in the event of a sudden and sustained decrease in prevailing market interest rates, First Mid Bank’s EVE would be
expected to decrease. At December 31, 2011, First Mid Bank’s estimated changes in EVE were within the First Mid Bank’s policy guidelines that
normally allow for a change in capital of +/-10% from the base case scenario under a 100 basis point shock and +/- 20% from the base case scenario
under a 200 basis point shock. At December 31, 2011, First Mid Bank slightly exceeded policy guidelines for a decrease in interest rates. The general
level of interest rates are at historically low levels and the bank is monitoring its position and the likelihood of further rate decreases.
Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and declines in deposit balances, and should not be relied upon as indicative of actual results. Further, the
computations do not contemplate any actions First Mid Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the computation of EVE. Actual values may differ from those projections set
forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans,
have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate
loans in First Mid Bank’s portfolio change in future periods as market rates change. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-
rate debt may decrease in the event of an interest rate increase.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
December 31, 2011 and 2010
(In thousands, except share data)
Assets
Cash and due from banks
Non-interest bearing
Interest bearing
Federal funds sold
Cash and cash equivalents
Certificates of deposit investments
Investment securities:
Available-for-sale, at fair value
Held-to-maturity, at amortized cost (estimated fair value of
$51 and $53 at December 31, 2011 and 2010, respectively)
Loans held for sale
Loans
Less allowance for loan losses
Net loans
Interest receivable
Other real estate owned
Premises and equipment, net
Goodwill, net
Intangible assets, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing deposits
Interest bearing deposits
Total deposits
Securities sold under agreements to repurchase
Interest payable
FHLB borrowings
Other borrowings
Junior subordinated debentures
Other liabilities
Total liabilities
Stockholders’ Equity
Preferred stock, no par value, authorized 1,000,000 shares;
issued 8,777 shares in 2011 and 4,927 shares in 2010
Common stock, $4 par value; authorized 18,000,000 shares;
issued 7,553,094 shares in 2011 and 7,477,132 shares in 2010
Additional paid-in capital
Retained earnings
Deferred compensation
Accumulated other comprehensive income (loss)
Less treasury stock at cost, 1,546,529 shares in 2011 and 1,418,456 shares in 2010
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
48
2011
2010
$43,356
8,749
20,997
73,102
13,231
$ 21,008
130,485
80,000
231,493
10,000
478,916
342,816
51
1,046
859,028
(11,120)
847,908
7,052
4,606
30,717
25,753
3,934
14,640
50
114
804,467
(10,393)
794,074
6,390
6,127
28,544
25,753
5,068
17,816
$1,500,956
$1,468,245
$198,962
971,772
1,170,734
132,380
510
19,750
8,250
20,620
7,745
$183,932
1,028,778
1,212,710
94,057
701
22,750
-
20,620
5,142
1,359,989
1,355,980
43,785
24,635
30,212
29,368
71,739
2,904
3,148
(40,189)
140,967
29,909
28,223
66,356
2,929
(2,066)
(37,721)
112,265
$1,500,956
$1,468,245
Consolidated Statements of Income
For the years ended December 31, 2011, 2010 and 2009
(In thousands, except per share data)
Interest income:
Interest and fees on loans
Interest on investment securities:
Taxable
Exempt from federal income tax
Interest on certificates of deposit investments
Interest on federal funds sold
Interest on deposits with other financial institutions
Total interest income
Interest expense:
Interest on deposits
Interest on securities sold under agreements to repurchase
Interest on FHLB advances
Interest on other borrowings
Interest on subordinated debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income:
Trust revenues
Brokerage commissions
Insurance commissions
Service charges
Securities gains, net
Total other-than-temporary impairment losses on securities
Portion of loss recognized in other comprehensive loss (before taxes)
Other-than-temporary impairment losses recognized in earnings
Gain on sale of merchant banking portfolio
Mortgage banking revenue, net
ATM / debit card income
Other income
Total other income
Other expense:
Salaries and employee benefits
Net occupancy and equipment expense
Net other real estate owned expense
FDIC insurance expense
Amortization of other intangible assets
Stationery and supplies
Legal and professional
Marketing and promotion
Other expense
Total other expense
Income before income taxes
Income taxes
Net income
Dividends on preferred shares
Net income available to common stockholders
Per common share data:
Basic earnings per share
Diluted earnings per share
Cash dividends per share
2011
2010
2009
$45,399
$41,803
$42,146
9,819
1,194
78
69
213
56,772
6,725
172
765
72
770
8,504
48,268
3,101
45,167
3,030
650
1,786
4,817
486
(886)
-
(886)
-
788
3,483
1,633
15,787
22,247
7,960
1,471
1,167
1,134
581
2,070
1,050
5,373
43,053
17,901
6,529
$11,372
3,576
$7,796
$1.29
1.29
.40
8,329
370
110
85
186
50,883
8,471
133
1,090
9
1,053
10,756
40,127
3,737
36,390
2,601
536
1,779
4,662
543
(2,829)
1,411
(1,418)
-
776
2,869
1,472
13,820
18,649
5,851
1,076
1,508
814
610
2,361
940
5,118
36,927
13,283
4,522
$8,761
2,240
$6,521
$1.07
1.07
.38
8,073
963
55
66
106
51,409
12,970
129
1,612
22
1,104
15,837
35,572
3,594
31,978
2,229
424
1,912
4,952
637
(2,465)
653
(1,812)
1,000
664
2,333
1,116
13,455
16,830
4,989
470
1,943
730
563
2,021
963
4,703
33,212
12,221
4,007
$8,214
1,821
$6,393
$1.04
1.04
.38
See accompanying notes to consolidated financial statements.
49
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2011, 2010 and 2009
(In thousands, except share and per share data)
December 31, 2008
Comprehensive income:
Net income
Net unrealized change in available-for-sale investment securities
Total Comprehensive Income
Dividends on preferred stock ($370 per share)
Dividends on common stock ($.38 per share)
Issuance of 4,927 shares of preferred stock
Issuance of 44,661 common shares pursuant to the Dividend Reinvestment Plan
Issuance of 9,916 common shares pursuant to the Deferred Compensation Plan
Issuance of 19,000 common shares pursuant to the First Retirement & Savings Plan
Purchase of 160,803 treasury shares
Deferred compensation
Tax benefit related to deferred compensation distributions
Issuance of 37,266 common shares pursuant to the exercise of stock options
Tax benefit related to exercise of incentive stock options
Tax benefit related to exercise of non-qualified stock options
Vested stock options compensation expense
December 31, 2009
Comprehensive income:
Net income
Net unrealized change in available-for-sale investment securities
Total Comprehensive Income
Dividends on preferred stock ($455 per share)
Dividends on common stock ($.38 per share)
Issuance of 38,494 common shares pursuant to the Dividend Reinvestment Plan
Issuance of 4,766 common shares pursuant to the Deferred Compensation Plan
Issuance of 19,414 common shares pursuant to the First Retirement & Savings Plan
Purchase of 136,380 treasury shares
Deferred compensation
Tax benefit related to deferred compensation distributions
Issuance of 49,500 common shares pursuant to the exercise of stock options
Tax benefit related to exercise of incentive stock options
Tax benefit related to exercise of non-qualified stock options
Vested stock options compensation expense
December 31, 2010
Preferred
Common
Stock
Stock
Additional
Paid-In-
Capital
Accumulated
Other
Retained
Deferred
Comprehensive
Treasury
Earnings
Compensation
Income (Loss)
Stock
Total
$ -
$ 29,017
$25,289
$58,059
$2,787
$(416)
$(31,958)
$82,778
-
-
-
-
24,635
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
179
40
75
-
-
-
149
-
-
-
-
-
-
-
-
674
136
255
-
-
67
239
19
79
53
8,214
-
(1,821)
(2,308)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
107
-
-
-
-
-
-
880
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,122)
(107)
-
-
-
-
-
8,214
880
9,094
(1,821)
(2,308)
24,635
853
176
330
(3,122)
-
67
388
19
79
53
$ 24,635
$ 29,460
$26,811
$62,144
$2,894
$464
$(35,187)
$111,221
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
154
19
78
-
-
-
198
-
-
-
-
-
-
-
526
63
264
-
-
33
349
80
45
52
8,761
-
(2,240)
(2,309)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
35
-
-
-
-
-
-
(2,530)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,499)
(35)
-
-
-
-
-
8,761
(2,530)
6,231
(2,240)
(2,309)
680
82
342
(2,499)
-
33
547
80
45
52
$ 24,635
$ 29,909
$28,223
$66,356
$2,929
$(2,066)
$(37,721)
$112,265
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2011, 2010 and 2009
(In thousands, except share and per share data)
December 31, 2010
Comprehensive income:
Net income
Net unrealized change in available-for-sale investment securities
Total Comprehensive Income
Dividends on preferred stock ($407 per share)
Dividends on common stock ($.40 per share)
Issuance of 3,850 shares of preferred stock
Issuance of 44,521 common shares pursuant to the Dividend Reinvestment Plan
Issuance of 5,920 common shares pursuant to the Deferred Compensation Plan
Issuance of 9,693 common shares pursuant to the First Retirement & Savings Plan
Issuance of 4,436 restricted common shares pursuant to the 2007 Stock Incentive Plan
Purchase of 128,073 treasury shares
Deferred compensation
Tax benefit related to deferred compensation distributions
Grant of restricted stock units pursuant to the 2007 Stock Incentive Plan
Issuance of 11,392 common shares pursuant to the exercise of stock options
Tax benefit related to exercise of incentive stock options
Vested stock options compensation expense
December 31, 2011
Preferred
Common
Stock
Stock
Additional
Paid-In-
Capital
Accumulated
Other
Retained
Deferred
Comprehensive
Treasury
Earnings
Compensation
Income (Loss)
Stock
Total
$ 24,635
$ 29,909
$28,223
$66,356
$2,929
$(2,066)
$(37,721)
$112,265
-
-
-
-
19,150
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
178
23
39
18
-
-
-
-
45
-
-
-
-
-
-
-
629
85
138
65
-
-
19
70
76
11
52
11,372
-
(3,576)
(2,413)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(25)
-
-
-
-
-
-
5,214
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,385)
(83)
-
-
-
-
-
11,372
5,214
16,586
(3,576)
(2,413)
19,150
807
108
177
83
(2,385)
(108)
193
70
121
11
52
$ 43,785
$ 30,212
$29,368
$71,739
$2,904
$3,148
$(40,189)
$140,967
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31, 2011, 2010 and 2009
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation, amortization and accretion, net
Compensation expense for vested stock options
Compensation expense for restricted stock and restricted stock units
Gain on investment securities, net
Other-than-temporary impairment losses on securities recognized in earnings
(Gain) loss on sales of other real property owned, net
Loss on write down of fixed assets
Gain on sale of merchant banking portfolio
Gain on sales of loans held for sale, net
Deferred income taxes
(Increase) decrease in accrued interest receivable
Decrease in accrued interest payable
Origination of loans held for sale
Proceeds from sales of loans held for sale
Increase in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments
Purchase of certificates of deposits investments
Proceeds from sales of securities available-for-sale
Proceeds from maturities of securities available-for-sale
Proceeds from maturities of securities held-to-maturity
Purchases of securities available-for-sale
Net (increase) decrease in loans
Purchases of premises and equipment
Proceeds from sales of other real property owned
Cash received related to acquisition, net of cash and cash equivalents acquired
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Increase (decrease) in repurchase agreements
Repayment of long-term FHLB advances
Proceeds from short-term debt
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from issuance of common stock
Proceeds from issuance of preferred stock
Purchase of treasury stock
Dividends paid on preferred stock
Dividends paid on common stock
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
52
2011
2010
2009
$11,372
$8,761
$8,214
3,101
5,398
52
92
(486)
886
853
2
-
(782)
(670)
(662)
(191)
(61,375)
61,225
(1,900)
2,061
18,976
10,000
(13,231)
18,891
184,564
-
(333,222)
(56,935)
(4,625)
3,110
-
(191,448)
(41,976)
38,323
(3,000)
8,250
-
-
406
19,150
(2,385)
(2,990)
(1,697)
14,081
(158,391)
231,493
$ 73,102
3,737
3,938
52
-
(543)
1,418
(12)
4
-
(813)
(435)
968
(386)
3,594
3,070
53
-
(637)
1,812
353
80
(1,000)
(727)
(1,515)
290
(755)
(63,924)
(62,904)
64,772
(5,955)
(4,074)
7,508
10,605
(11,261)
10,936
107,525
995
64,019
(7,145)
1,522
8,324
1,992
(11,336)
38,275
63,321
140
(229,482)
(171,440)
26,445
(1,935)
6,634
180,074
100,536
34,745
13,671
(10,000)
-
4,000
(4,000)
971
-
(2,499)
(2,136)
(1,714)
33,038
141,082
90,411
39,081
(1,954)
1,987
-
(39,934)
34,056
(322)
(5,000)
-
-
(13,000)
894
24,635
(3,122)
(1,242)
(1,521)
35,378
3,768
86,643
$231,493
$90,411
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest
Income taxes
Supplemental disclosure of noncash investing and financing activities:
Loans transferred to real estate owned
Dividends reinvested in common shares
Net tax benefit related to option and deferred compensation plans
2011
2010
2009
$8,695
5,470
$2,622
807
31
$10,916
6,848
$16,592
4,596
$9,897
680
158
$2,847
853
165
See accompanying notes to consolidated financial statements.
53
Notes To Consolidated Financial Statements
December 31, 2011, 2010 and 2009
(Table dollar amounts in thousands, except share data)
Note 1 – Summary of Significant Accounting Policies
Basis of Accounting and Consolidation
The accompanying consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. (“Company”) and its wholly-owned
subsidiaries: Mid-Illinois Data Services, Inc. (“MIDS”), First Mid-Illinois Bank & Trust, N.A. (“First Mid Bank”) 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. Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the 2011 presentation and
there was no impact on net income or stockholders’ equity from these reclassifications. The Company operates as a one-segment entity for financial
reporting purposes. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of
America. Following is a description of the more significant of these policies.
Current Economic Conditions
The current protracted economic decline continues to present financial institutions with circumstances and challenges, which in some cases have
resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit
quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The accompanying financial statements
have been prepared using values and information currently available to the Company. Given the volatility of current economic conditions, the values of
assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for
loan losses and capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.
At December 31, 2011, the Company held $321.9 million in commercial real estate loans and $23.1 million in construction and land development loans.
Due to national, state and local economic conditions, values for commercial and development real estate have declined, and the market for these
properties is depressed. Also, at December 31, 2011, the Company held $63.2 million in agricultural production loans and $72.6 million in agricultural
real estate loans.
In addition, the Company had $46.8 million of loans in the hospitality (motels and hotels) industry. Due to national, state and local economic conditions,
values for commercial real estate and, specifically hotel properties, have declined and the market for these properties is depressed. The performance of
these loans is also dependent on borrower specific issues as well as the general level of business and personal travel within the region. The Company
also had $82.6 million of loans to lessors of non-residential buildings and $44.0 million of loans to lessors of residential buildings and dwellings. Due to
national, state and local economic conditions, values for commercial real estate have declined and the market for these properties is also depressed.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the
Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The
Company uses estimates and employs the judgments of management in determining the amount of its allowance for loan losses and income tax
accruals and deferrals, in its fair value measurements of investment securities, and in the evaluation of impairment of loans, goodwill, investment
securities, and fixed assets. As with any estimate, actual results could differ from these estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties.
Fair Value Measurements
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods.
Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial
instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if
available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods
consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected
correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
SFAS No. 157, Fair Value Measurements, which was codified into ASC 820, establishes a framework for measuring the fair value of financial
instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based
on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:
•
•
•
Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or
liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the
full term of the financial instrument.
Level 3 — inputs that are unobservable and significant to the fair value measurement.
54
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities
may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date.
Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair
values measured at each level of the fair value hierarchy can be found in Note 11 – “Disclosures of Fair Values of Financial Instruments.”
Cash and Cash Equivalents
For purposes of reporting cash flows, cash equivalents include non-interest bearing and interest bearing cash and due from banks and federal funds
sold. Generally, federal funds are sold for one-day periods.
Certificates of Deposit Investments
Certificates of deposit investments have original maturities of six to twelve months and are carried at cost.
Investment Securities
The Company classifies its investments in debt and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which was codified into ASC 320.
Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value
calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are
computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities,
fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair
values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of the
Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in
circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and
the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to
credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The
remainder of the impairment is recorded in other comprehensive income.
Loans
Loans are stated at the principal amount outstanding net of unearned discounts, unearned income and the 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 approximate the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount
outstanding.
The Company’s policy is to discontinue the accrual of interest income on any loan that becomes ninety days past due as to principal or interest or earlier
when, in the opinion of management there is reasonable doubt as to the timely collection of principal or interest. Nonaccrual loans are returned to
accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the
timely collectability of interest or principal.
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.
Allowance for Loan Losses
The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used
in the preparation of its consolidated financial statements. An estimate of potential losses inherent in the loan portfolio is determined and an allowance
for those losses is established by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing
these factors, the Company use organizational history and experience with credit decisions and related outcomes. The allowance for loan losses
represents the best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses
charged to expense and reduced by loans charged off, net of recoveries. The Company evaluates the allowance for loan losses quarterly. If the
underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted.
The Company estimates the appropriate level of allowance for loan losses by separately evaluating impaired and nonimpaired loans. A specific
allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used
to assign an allowance to a nonimpaired loan is more subjective. Generally, the allowance assigned to nonimpaired loans is determined by applying
historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including the volume and severity of identified
classified loans, changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated
with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on any given borrower,
can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there
still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses
would be required.
55
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is charged to expense and
determined principally by the straight-line method over the estimated useful lives of the assets.
The estimated useful lives for each major depreciable classification of premises and equipment are as follows:
Buildings and improvements
Leasehold improvements
Furniture and equipment
20 - 40 years
5-15 years
3-7 years
Goodwill and Intangible Assets
The Company has goodwill from business combinations, identifiable intangible assets assigned to core deposit relationships and customer lists
acquired, and intangible assets arising from the rights to service mortgage loans for others.
Identifiable intangible assets generally arise from branches acquired that the Company accounted for as purchases. Such assets consist of the excess
of the purchase price over the fair value of net assets acquired, with specific amounts assigned to core deposit relationships and customer lists primarily
related to insurance agency. Intangible assets are amortized by the straight-line method over various periods up to fifteen years. Management reviews
intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable.
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” codified into ASC 350, the Company performed testing of
goodwill for impairment as of September 30, 2011 and determined that, as of that date, goodwill was not impaired. Management also concluded that
the remaining amounts and amortization periods were appropriate for all intangible assets.
Other Real Estate Owned
Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost
basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair
value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is
determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating
costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate
owned and foreclosed assets are netted and posted to other noninterest expense.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required
investment in the common stock is based on a predetermined formula.
At December 31, 2011, the Company owned approximately $3.7 million of Federal Home Loan Bank of Chicago (“FHLB”) stock included in other assets
as of December 31, 2011 and 2010. During the third quarter of 2007, the FHLB received a Cease and Desist Order from its regulator, the Federal
Housing Finance Board. The FHLB will continue to provide liquidity and funding through advances; however, the order prohibited capital stock
repurchases until a time to be determined by the Federal Housing Finance Board and requires Federal Housing Finance Board approval for dividends.
On July 24, 2008, the Federal Housing Finance Board amended the order to allow the FHLB to repurchase or redeem any capital stock issued to
support new advances after the repayment of those new advances if certain conditions are met. The amended order, however, provides that the
Director of the Office of Supervision of the Federal Housing Finance Board may direct the FHLB to halt the repurchase of redemption of capital stock if,
in his sole discretion, the continuation of such transactions would be inconsistent with maintaining the capital adequacy of the FHLB and its safe and
sound operations. With regard to dividends, the FHLB continues to assess its dividend capacity each quarter and make appropriate request for
approval. There were no dividends paid by the FHLB during 2010 or 2009; however in 2011 the FHLB began paying dividends at an annualized rate of
10 basis points per share. The Company evaluated its cost investment in FHLB stock and deemed it was ultimately recoverable.
Subsequently the FHLB announced it would repurchase approximately $500 million in excess capital stock held by its members during the first quarter
of 2012. On February 15, 2012, the Company redeemed approximately 51.5% or $537,000 of its excess capital stock. The FHLB plans to offer
additional stock repurchase opportunities in subsequent quarters, subject to meeting its financial targets.
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax returns with each organization computing its taxes on a separate
company basis. Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts
currently payable under tax laws.
56
Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences existing between the financial
statement carrying amounts of assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry forwards. To the extent
that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an increase or
decrease in income tax expense in the period in which such change is enacted.
Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in
Income Taxes,” codified within ASC 740. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would
be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit
that is greater than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.
A significant amount of judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the
largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing
authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.
Trust Department Assets
Assets held in fiduciary or agency capacities are not included in the consolidated balance sheets since such items are not assets of the Company or its
subsidiaries. Fees from trust activities are recorded on a cash basis over the period in which the service is provided. Fees are a function of the market
value of assets managed and administered, the volume of transactions, and fees for other services rendered, as set forth in the underlying client
agreement with the Trust & Wealth Management Division of First Mid Bank. This revenue recognition involves the use of estimates and assumptions,
including components that are calculated based on asset valuations and transaction volumes. Any out of pocket expenses or services not typically
covered by the fee schedule for trust activities are charged directly to the trust account on a gross basis as trust revenue is incurred.
At December 31, 2011, the Company managed or administered 1,407 accounts with assets totaling approximately $546,658,000. At December 31,
2010, the Company managed or administered 1,131 accounts with assets totaling approximately $507,530,000.
Preferred Stock
Series B Convertible Preferred Stock. During 2009, the Company sold to certain accredited investors including directors, executive officers, and
certain major customers and holders of the Company’s common stock, $24,635,000, in the aggregate, of a newly authorized series of its preferred stock
designated as Series B 9% Non-Cumulative Perpetual Convertible Preferred Stock (the “Series B Preferred Stock”). The Series B Preferred Stock had
an issue price of $5,000 per share and no par value per share. The Series B Preferred Stock was issued in a private placement exempt from
registration pursuant to Regulation D of the Securities Act of 1933, as amended.
The Series B Preferred Stock pays non-cumulative dividends semiannually in arrears, when, as and if authorized by the Board of Directors of the Company, at
a rate of 9% per year. Holders of the Series B Preferred Stock will have no voting rights, except with respect to certain fundamental changes in the terms of
the Series B Preferred Stock and certain other matters. In addition, if dividends on the Series B Preferred Stock are not paid in full for four dividend periods,
whether consecutive or not, the holders of the Series B Preferred Stock, acting as a class with any other of the Company’s securities having similar voting
rights, will have the right to elect two directors to the Company’s Board of Directors. The terms of office of these directors will end when the Company has
paid or set aside for payment full semi-annual dividends for four consecutive dividend periods.
Each share of the Series B Preferred Stock may be converted at any time at the option of the holder into shares of the Company’s common stock. The
number of shares of common stock into which each share of the Series B Preferred Stock is convertible is the $5,000 liquidation preference per share divided
by the Conversion Price initially set at $21.94. The Conversion Price is subject to adjustment from time to time pursuant to the terms of the Certificate of
Designation (the “Series B Certificate of Designation”). If at the time of conversion, there are any authorized, declared and unpaid dividends with respect to a
converted share of Series B Preferred Stock, the holder will receive cash in lieu of the dividends, and a holder will receive cash in lieu of fractional shares of
common stock following conversion.
After November 16, 2014, the Company may, at its option but subject to the Company’s receipt of any required prior approvals from the Board of Governors of
the Federal Reserve System or any other regulatory authority, redeem the Series B Preferred Stock. Any redemption will be in exchange for cash in the
amount of $5,000 per share, plus any authorized, declared and unpaid dividends, without accumulation of any undeclared dividends.
The Company also has the right at any time on or after November 16, 2014 to require the conversion of all (but not less than all) of the Series B Preferred
Stock into shares of common stock if, on the date notice of mandatory conversion is given to holders, the book value of the Company’s common stock equals
or exceeds 115% of the book value of the Company’s common stock at September 30, 2008. “Book value of the Company’s common stock” at any date
means the result of dividing the Company’s total common stockholders’ equity at that date, determined in accordance with U.S. generally accepted accounting
principles, by the number of shares of common stock then outstanding, net of any shares held in the treasury. The book value of the Company’s common
stock at September 30, 2008 was $13.03, and 115% of this amount is approximately $14.98. The book value of the Company’s common stock at December
31, 2011 was $16.18.
57
Pursuant to Section 3(j) of the Series B Certification of Designation, the conversion price for the Series B Preferred Stock, which was initially set at
$21.94, was required to be adjusted if, among other things, the initial conversion price of any subsequently issued series of preferred stock was lower
than the then current conversion price of the Series B Preferred Stock. As a result of the Series C Preferred Stock (see below) having an initial
conversion price of less than $21.94, the conversion price of the Series B Preferred Stock was adjusted pursuant to the terms of the Series B Certificate
of Designation based on the amount of Series C Preferred Stock sold on February 11, 2011, March 2, 2011 and May 13, 2011. The new conversion
price of the Series B Preferred Stock, certified by the Company’s accountant pursuant to Section 3(j) of the Series B Certificate of Designation, is
$21.71. If additional Series C Preferred Stock is sold following an Investor’s receipt of applicable bank regulatory approval, subsequent adjustments will
be made to the conversion price of the Series B Preferred Stock
Series C Convertible Preferred Stock. On February 11, 2011, the Company accepted from certain accredited investors, including directors, executive
officers, and certain major customers and holders of the Company’s common stock (collectively, the “Investors”), subscriptions for the purchase of
$27,500,000, in the aggregate, of a newly authorized series of preferred stock designated as Series C 8% Non-Cumulative Perpetual Convertible
Preferred Stock (the “Series C Preferred Stock”). As of February 11, 2011, $11,010,000 of the Series C Preferred Stock had been issued and sold by
the Company to certain Investors. On March 2, 2011, three Investors subsequently completed the required bank regulatory process and an additional
$2,750,000 of Series C Preferred Stock was issued and sold by the Company to these Investors. On May 13, 2011, four additional Investors received
the required bank regulatory approval and an additional $5,490,000 of Series C Preferred Stock was issued and sold by the Company to these
Investors. The balance of the Series C Preferred Stock will be issued to the remaining Investors upon the completion of the bank regulatory process, to
which the issuance of the Series C Preferred Stock is subject, applicable to their purchases. These remaining Investors have not yet been issued their
shares of Series C Preferred Stock because of unanticipated delays in applying for and obtaining the approval of the Federal Reserve Board. These
Investors are (a) individuals who are members of the Lumpkin family, including Benjamin I. Lumpkin, a director of the Company, and (b) entities
controlled by, and trusts created for the benefit of, individuals who are members of the Lumpkin family (collectively, the "Remaining Investors"). The
Company has previously accepted from the Remaining Investors subscriptions for $8,250,000 of the Series C Preferred Stock pursuant to their
respective subscription agreements.
The Series C Preferred Stock has an issue price of $5,000 per share and no par value per share. The Series C Preferred Stock was issued in a private
placement exempt from registration pursuant to Regulation D of the Securities Act of 1933, as amended.
The Series C Preferred Stock pays non-cumulative dividends semiannually in arrears, when, as and if authorized by the Board of Directors of the
Company, at a rate of 8% per year. Holders of the Series C Preferred Stock will have no voting rights, except with respect to certain fundamental
changes in the terms of the Series C Preferred Stock and certain other matters. In addition, if dividends on the Series C Preferred Stock are not paid in
full for four dividend periods, whether consecutive or not, the holders of the Series C Preferred Stock, acting as a class with any other of the Company’s
securities having similar voting rights, including the Company’s Series B Preferred Stock, will have the right to elect two directors to the Company’s
Board of Directors. The terms of office of these directors will end when the Company has paid or set aside for payment full semi-annual dividends for
four consecutive dividend periods.
Each share of the Series C Preferred Stock may be converted at any time at the option of the holder into shares of the Company’s common stock. The
number of shares of common stock into which each share of the Series C Preferred Stock is convertible is the $5,000 liquidation preference per share
divided by the Conversion Price of $20.29. The Conversion Price is subject to adjustment from time to time pursuant to the terms of the Series C
Certificate of Designation. If at the time of conversion, there are any authorized, declared and unpaid dividends with respect to a converted share of
Series C Preferred Stock, the holder will receive cash in lieu of the dividends, and a holder will receive cash in lieu of fractional shares of common stock
following conversion.
After May 13, 2016 the Company may, at its option but subject to the Company’s receipt of any required prior approvals from the Board of Governors of
the Federal Reserve System or any other regulatory authority, redeem the Series C Preferred Stock. Any redemption will be in exchange for cash in the
amount of $5,000 per share, plus any authorized, declared and unpaid dividends, without accumulation of any undeclared dividends.
The Company also has the right at any time after May 13, 2016 to require the conversion of all (but not less than all) of the Series C Preferred Stock into
shares of common stock if, on the date notice of mandatory conversion is given to holders, (a) the tangible book value per share of the Company’s common
stock equals or exceeds 115% of the tangible book value per share of the Company’s common stock at December 31, 2010, and (b) the NASDAQ Bank Index
(denoted by CBNK:IND) equals or exceeds 115% of the NASDAQ Bank Index at December 31, 2010. “Tangible book value per share of our common stock”
at any date means the result of dividing the Company’s total common stockholders equity at that date, less the amount of goodwill and intangible assets,
determined in accordance with U.S. generally accepted accounting principles, by the number of shares of common stock then outstanding, net of any shares
held in the treasury. The tangible book value of the Company’s common stock at December 31, 2010 was $9.38, and 115% of this amount is approximately
$10.79. The NASDAQ Bank Index value at December 31, 2010 was 1,847.35 and 115% of this amount is approximately 2,124.45. The tangible book value of
the Company’s common stock at December 31, 2011 was $11.24 and the NASDAQ Bank Index value at December 31, 2011 was 1,617.83.
Pursuant to the terms of the Series C Preferred Stock, the Series C Preferred Stock is both redeemable and mandatorily convertible at the Company's
discretion into common stock of the Company, subject to certain conditions being met, no earlier than 60 months following the date on which a majority
of the Series C Preferred Stock has been issued. The date on which a majority of the Series C Preferred Stock became issued was May 13, 2011 (the
"Majority Issuance Date"). As a result of the Remaining Investors not being issued their subscribed for shares of Series C Preferred Stock by the
Majority Issuance Date, it is possible that, if certain conditions are met, the Company could redeem or mandatorily convert the Series C Preferred Stock
into common stock of the Company prior to the Remaining Investors holding their subscribed shares of Series C Preferred Stock for 60 months, thus
resulting in the Remaining Investors receiving less than 60 months of 8% dividends on the Series C Preferred Stock subscribed for.
58
In November 2011, the disinterested members of the Board of Directors of the Company approved and authorized, and the Remaining Investors agreed
to, certain amendments to the Series C Preferred Stock subscription agreements resulting in the release to the Company of the funds escrowed by the
Remaining Investors for their subscribed shares of the Series C Preferred Stock and the issuance by the Company of short-term unsecured promissory
notes, which are dated November 21, 2011, to the Remaining Investors. The promissory notes (the “Notes”) collectively have an aggregate principal
amount of $8,250,000 and each have an 8% annual interest rate. Each Note also contains a prepayment provision applicable when approval from the
Federal Reserve Board is received to allow the Remaining Investors to purchase the shares of Series C Preferred Stock originally subscribed.
Additionally, if the Company experiences an Event of Default as defined in the Note, such as becoming insolvent or generally failing to pay its debts as
they become due, then a Remaining Investor may, at his, her or its option, declare the entire unpaid amount of the Note immediately due and payable,
without presentment, demand, portents or notice of any kind, and the Remaining Investor shall be entitled to recover from the Company all costs and
expenses, including reasonable attorneys' fees and disbursements and court costs, incurred in enforcing the Remaining Investor's rights under the
Note.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
Stock Incentive Awards
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, Accounting for Stock-Based Compensation,”
which was codified into ASC 718, using the modified prospective application method. Accordingly, after January 1, 2006, the Company began
expensing the fair value of stock options granted, modified, repurchased or cancelled. Additionally, compensation cost for a portion of the awards for
which requisite services had not yet been rendered that were outstanding as of January 1, 2006 are being recognized as the requisite service is
rendered. As a result of this adoption, the Company’s income before income taxes and net income for the year ended December 31, 2011 includes
stock option compensation cost of $52,000 and $51,000, respectively, which represents $.01 impact on basic and diluted earnings per share for the
year. The Company’s income before income taxes and net income for the year ended December 31, 2010 includes stock option compensation cost of
$52,000 and $51,000, respectively, which represents $.01 impact on basic and diluted earnings per share for the year. The Company’s income before
income taxes and net income for the year ended December 31, 2009 includes stock option compensation cost of $53,000 and $52,000, respectively,
which represents $.01 impact on basic and diluted earnings per share for the year.
On September 27, 2011, the Board of Directors passed a resolution authorizing and approving the Executive Long-Term Incentive Plan (“LTIP”). The
LTIP was implemented to provide methodology for granting Stock Awards and Stock Unit Awards under the Stock Incentive Plan (“SI Plan”) to select
senior executives of the Company or any subsidiary. The Company’s income before income taxes and net income for the year ended December 31,
2011 includes compensation cost for Stock Awards and Stock Unit Awards of $92,000 and $60,000, respectively, which represents $.015 impact on
basic and diluted earnings per share for the year.
A maximum of 300,000 shares of common stock may be issued under the SI Plan. As of December 31, 2011, the Company had awarded 59,500
shares as stock options under the SI Plan. During 2011, the Company awarded 17,409 shares as 50% Stock Awards and 50% Stock Unit Awards under
the SI Plan. There were no shares awarded as stock options during 2011.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income
includes unrealized appreciation (depreciation) on available-for-sale securities and unrealized appreciation (depreciation) on available-for-sale securities
for which a portion of an other-than-temporary impairment has been recognized in income.
The Company’s comprehensive income for the years ended December 31, 2011, 2010 and 2009 is as follows:
Net income
Other comprehensive income:
Unrealized gains (losses) on securities available-for-sale
Non-credit component of unrealized losses on securities available-for-sale for which a
portion of an other-than-temporary impairment has been recognized in income
Other-than-temporary impairment losses recognized in earnings
Reclassification adjustment for realized gains included in income
Other comprehensive income (loss) before taxes
Tax benefit (expense)
Total other comprehensive income (loss)
Comprehensive income
59
2011
$11,372
2010
$8,761
2009
$8,214
8,226
(2,193)
2,732
(81)
886
(486)
8,545
(3,331)
5,214
$16,586
(2,829)
1,418
(543)
(4,147)
1,617
(2,530)
$6,231
(2,465)
1,812
(637)
1,442
(562)
880
$9,094
The components of accumulated other comprehensive income (loss) included in stockholders’ equity are as follows:
December 31, 2011
Net unrealized gains on securities available-for-sale
Other-than-temporary impairment losses on securities
Tax benefit (expense)
Balance at December 31, 2011
December 31, 2010
Net unrealized gains on securities available-for-sale
Other-than-temporary impairment losses on securities
Tax benefit (expense)
Balance at December 31, 2010
Unrealized
Gain (Loss) on
Available for Sale
Securities
Other-Than-
Temporary
Impairment
Losses
$10,066
-
(3,924)
$6,142
$2,629
-
(1,025)
$1,604
$ -
(4,906)
1,912
$(2,994)
$ -
(6,014)
2,344
$(3,670)
Total
$10,066
(4,906)
(2,012)
$3,148
$2,629
(6,014)
1,319
$(2,066)
See Note 4 – “Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.
Note 2 – Earnings Per Common Share
Basic earnings per common share (“EPS”) is calculated as net income available to common shareholders divided by the weighted average number of
common shares outstanding. Diluted EPS is computed using the weighted average number of common shares outstanding, increased by the assumed
conversion of the Company’s stock options, unless anti-dilutive.
The components of basic and diluted earnings per common share for the years ended December 31, 2011, 2010 and 2009 are as follows:
Basic Earnings per Common Share:
Net income
Preferred stock dividends
Net income available to common stockholders
Weighted average common shares outstanding
Basic earnings per common share
Diluted Earnings per Common Share:
Net income available to common stockholders
Effect of assumed preferred stock conversion
Net income applicable to diluted earnings per share
Weighted average common shares outstanding
Dilutive potential common shares:
Assumed conversion of stock options
Adjustment for fair value for stock awards
Assumed conversion of preferred stock
Diluted weighted average common shares outstanding
Diluted earnings per common share
2011
2010
2009
$11,372,000
(3,576,000)
$7,796,000
6,042,015
$1.29
$8,761,000
(2,240,000)
$6,521,000
6,092,670
$1.07
$8,214,000
(1,821,000)
$6,393,000
6,131,314
$1.04
$7,796,000
-
$7,796,000
6,042,015
10,515
1,741
-
6,054,271
$1.29
$6,521,000
-
$6,521,000
6,092,670
24,057
-
-
6,116,727
$1.07
$6,393,000
-
$6,393,000
6,131,314
35,879
-
-
6,167,193
$1.04
60
The following shares were not considered in computing diluted earnings per share for the years ended December 31, 2011, 2010 and 2009 because
they were anti-dilutive:
Stock options to purchase shares of common stock
Average dilutive potential common shares associated with
convertible preferred stock
2011
2010
2009
202,970
202,970
202,970
1,998,652
1,122,833
1,036,046
Note 3 – Cash and Due from Banks
Aggregate cash and due from bank balances of $873,000, $318,000 and $686,000 were maintained in satisfaction of statutory reserve requirements of
the Federal Reserve Bank at December 31, 2011, 2010 and 2009, respectively. Effective July 21, 2010, the FDIC’s insurance limits were permanently
increased to $250,000. At December 31, 2011, the Company’s cash accounts did not exceed the federally insured limits.
Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterest-bearing transaction accounts beginning December 31, 2010 through
December 31, 2012, at all FDIC-insured institutions.
Note 4 – Investment Securities
The amortized cost, gross unrealized gains and losses and estimated fair values of available-for-sale and held-to-maturity securities by major security
type at December 31, 2011 and 2010 were as follows:
2011
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and Agencies
Obligations of states and political subdivisions
Mortgage-backed securities: Government Sponsored
Enterprise (GSE)-Residential
Trust preferred securities
Other securities
Total available-for-sale
Held-to-maturity:
Obligations of states and political subdivisions
2010
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and Agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE-Residential
Trust preferred securities
Other securities
Total available-for-sale
Held-to-maturity:
Obligations of states and political subdivisions
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$ 164,812
38,828
254,930
5,625
9,561
$473,756
$1,294
2,374
6,940
-
-
$10,608
$ (40)
-
(37)
(4,906)
(465)
$(5,448)
$166,066
41,202
261,833
719
9,096
$478,916
$ 51
$ -
$ -
$ 51
$ 152,086
26,549
158,936
6,595
2,035
$346,201
$1,319
591
3,477
-
-
$5,387
$ (1,024)
(226)
(1,482)
(6,014)
(26)
$(8,772)
$152,381
26,914
160,931
581
2,009
$342,816
$ 50
$ 3
$ -
$ 53
61
The trust preferred securities are four trust preferred pooled securities issued by FTN Financial Securities Corp. (“FTN”). The unrealized losses of these
securities, which have maturities ranging from nineteen years to twenty seven years, is primarily due to their long-term nature, a lack of demand or inactive
market for these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities. See the heading “Trust
Preferred Securities” below for further information regarding these securities. Except as discussed below, management believes the declines in fair value for
these securities are temporary.
Proceeds from sales of investment securities, realized gains and losses and income tax expense and benefit were as follows during the years ended
December 31, 2011, 2010 and 2009:
Proceeds from sales
Gross gains
Gross losses
Income tax expense
2011
$18,891
486
-
170
2010
$10,936
543
-
190
2009
$38,275
637
-
223
The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at
amortized cost, at December 31, 2011 (dollars in thousands) and the weighted average yield for each range of maturities. Mortgage-backed securities
are aged according to their weighted average life. All other securities are shown at their contractual maturity.
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$118,988
$ 45,824
Obligations of state and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total investments
Weighted average yield
Full tax-equivalent yield
Held-to-maturity:
Obligations of state and political subdivisions
$ -
Weighted average yield
Full tax-equivalent yield
One
year
or less
After 1
through
5 years
After 5
through
10 years
After
10
years
$ -
20,968
33,685
-
1,866
$56,519
3.03%
3.72%
$ -
1,026
-
5,625
35
$6,686
3.77%
3.88%
$ -
$ -
463
19,135
-
-
16,371
202,110
-
7,660
$138,586
$271,965
2.34%
2.35%
2.98%
3.10%
$ 51
4.75%
6.58%
Total
$164,812
38,828
254,930
5,625
9,561
$473,756
2.94%
3.09%
$ 51
4.75%
6.58%
The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security.
Full tax-equivalent yields have been calculated using a 34% 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
December 31, 2011.
Investment securities carried at approximately $286,568,000 and $240,838,000 at December 31, 2011 and 2010, respectively, were pledged to secure
public deposits and repurchase agreements and for other purposes as permitted or required by law.
62
The following table presents the aging of gross unrealized losses and fair value by investment category as of December 31, 2011 and 2010:
December 31, 2011:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Corporate bonds
Total
December 31, 2010:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Corporate bonds
Total
Less than 12 months
Unrealized
Losses
Fair
Value
12 months or more
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$19,960
690
15,231
-
7,190
$(40)
$ -
$ -
$19,960
$ (40)
-
(37)
-
(372)
-
-
719
1,907
-
-
(4,906)
(93)
690
15,231
719
9,096
-
(37)
(4,906)
(465)
$43,071
$(449)
$2,625
$(4,999)
$45,696
$(5,448)
$58,782
$(1,024)
$ -
$ -
$58,782
$(1,024)
7,263
62,171
-
2,009
$130,225
(216)
(1,482)
-
(26)
$(2,748)
252
-
581
-
$ 833
(10)
7,515
-
62,171
(6,014)
-
$(6,024)
581
2,009
$131,058
(226)
(1,482)
(6,014)
(26)
$(8,772)
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At December 31, 2011 and 2010, there were no U.S.
Treasury securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more.
Obligations of states and political subdivisions. At December 31, 2010, there were one obligation of states and political subdivisions with a fair
value of $252,000 and unrealized losses of $10,000 in a continuous unrealized loss position for twelve months or more. This position was due to
municipal rates increasing since the purchase of the securities resulting in the market value being lower than book value. The contractual terms of these
investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company
does not intend to sell these securities and it is not more-likely-than-not the Company will be required to sell these securities, before recovery of their
amortized cost bases, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at December 31,
2011.
Mortgage-backed Securities: GSE Residential. At December 31, 2011 and 2010, there were no mortgage-backed securities issued by Federal Home
Loan Mortgage Corporation in a continuous unrealized loss position for twelve months or more.
Trust Preferred Securities. At December 31, 2011, there were four trust preferred securities with a fair value of $719,000 and unrealized losses of
$4,906,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2010, these trust preferred securities had a fair value
of $581,000 and unrealized losses of $6,014,000 in a continuous unrealized loss position for twelve months or more. These unrealized losses were
primarily due to the long-term nature of the trust preferred securities, a lack of demand or inactive market for these securities, and concerns regarding
the underlying financial institutions that have issued the trust preferred securities. The Company recorded a total of $886,000 and $1,418,000 of OTTI
for these securities during 2011 and 2010, respectively. These losses established a new, lower amortized cost basis for these securities and reduced
non-interest income as of December 31, 2011 and 2010. Because the Company does not intend to sell these securities and it is not more-likely-than-not
that the Company will be required to sell these securities before recovery of their new, lower amortized cost basis, which may be maturity, the Company
does not consider the remainder of the investment in these securities to be other-than-temporarily impaired at December 31, 2011. However, future
downgrades or additional deferrals and defaults in these securities, in particular PreTSL XXVIII, could result in additional OTTI and consequently, have
a material impact on future earnings.
63
Following are the details for each trust preferred security (in thousands):
Book Value
(Amortized Cost) at
December 31, 2011
$ 746
1,027
200
3,652
$5,625
Market
Value
$ 314
185
92
128
$719
Unrealized
Loss
$ (432)
(842)
(108)
(3,524)
$(4,906)
PreTSL I
PreTSL II
PreTSL VI
PreTSL XXVIII
Total
Other-than-
temporary
Impairment
Recorded prior to
December 31, 2011
$ 691
2,187
127
1,111
$4,116
Other securities. At December 31, 2011, there was one corporate bond with a fair value of $1,907,000 and unrealized losses of $93,000 in a
continuous unrealized loss position for twelve months or more. The long-term nature of this security has led to increased supply, while demand has
decreased, leading to devaluation of the security. Management has evaluated this security and believes the decline in market value is liquidity, and not
credit, related. At December 31, 2010, there were no corporate bonds in a continuous unrealized loss position for twelve months or more.
The Company does not believe any other individual unrealized loss as of December 31, 2011 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 decides whether it is within the scope of the accounting guidance for beneficial interests in securitized
financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.
The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt
securities within the scope of the guidance for investments in debt and equity securities. For securities where the security is a beneficial interest in
securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security
is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.
The Company routinely conducts periodic reviews to identify and evaluate each investment security to determine whether OTTI has occurred. Economic
models are used to determine whether OTTI has occurred on these securities. While all securities are considered, the securities primarily impacted by
OTTI testing are pooled trust preferred securities. For each pooled trust preferred security in the investment portfolio (including but not limited to those
whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if OTTI has occurred. Various inputs to
the economic models are used to determine if an unrealized loss is other-than-temporary. The most significant inputs are the following:
•
•
•
Prepayments
Defaults
Loss severity
The pooled trust preferred securities relate to trust preferred securities issued by financial institutions. The pools typically consist of financial institutions
throughout the United States. Other inputs may include the actual collateral attributes, which include credit ratings and other performance indicators of
the underlying financial institutions including profitability, capital ratios, and asset quality.
To determine if the unrealized losses for pooled trust preferred securities is other-than-temporary, the Company considers the impact of each of these
inputs. The Company considers the likelihood that issuers will prepay their securities. During the third quarter of 2010, the Dodd-Frank Act eliminated
Tier 1 capital treatment for trust preferred securities issued by holding companies with consolidated assets greater than $15 billon. As a result, issuers
may prepay their securities which reduces the amount of expected cash flows. Additionally, the Company projects total estimated defaults of the
underlying assets (the financial institutions) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace
(severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the security to
determine the impact on cash flows. 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.
64
Credit Losses Recognized on Investments
As described above, some of the Company’s investments in trust preferred securities have experienced fair value deterioration due to credit losses but
are not otherwise other-than-temporarily impaired. The following table provides information about those trust preferred securities for which only a credit
loss was recognized in income and other losses are recorded in other comprehensive income (loss) for the years ended December 31, 2011, 2010 and
2009 (in thousands).
Credit losses on trust preferred securities held
Beginning of year
Additions related to OTTI losses not previously recognized
Reductions due to sales
Reductions due to change in intent or likelihood of sale
Additions related to increases in previously recognized OTTI losses
End of year
Accumulated Credit Losses as of:
December 31, 2011 December 31, 2010 December 31, 2009
$3,230
$1,812
-
-
-
886
$4,116
-
-
-
1,418
$3,230
$ -
1,812
-
-
-
$1,812
Maturities of investment securities were as follows at December 31, 2011 (in thousands). Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-sale:
Due in one year or less
Due after one-five years
Due after five-ten years
Due after ten years
Mortgage-backed securities: GSE residential
Total available-for-sale
Held-to-maturity:
Due in one year or less
Due after one-five years
Due after five-ten years
Due after ten-years
Total held-to-maturity
Total investment securities
Amortized
Cost
Estimated
Fair Value
$119,450
$119,837
69,855
22,835
6,686
218,826
254,930
473,756
-
51
-
-
51
$473,807
71,293
24,115
1,838
217,083
261,833
478,916
-
51
-
-
51
$478,967
65
Note 5 – Loans and Allowance for Loan Losses
A summary of loans including loans held for sale at December 31, 2011 and 2010 follows (in thousands):
Construction and land development
Farm loans
1-4 Family residential properties (1)
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Gross loans
Less:
Net deferred loan fees, premiums and discounts
Allowance for loan losses
Net loans
(1) Includes loans held for sale
2011
2010
$23,136
72,586
181,784
19,847
321,908
619,261
63,182
150,631
16,274
11,430
860,778
704
11,120
$848,954
$20,382
65,036
179,535
22,159
302,220
589,332
58,246
126,391
19,668
12,464
806,101
1,520
10,393
$794,188
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. The 1-4 family residential properties balance in the above table includes
loans held for sale of $1,046,000 and $114,000 at December 31, 2011 and 2010, respectively.
Most of the Company’s business activities are with customers located within central Illinois. At December 31, 2011, the Company’s loan portfolio
included $135.8 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $120.1 million was concentrated in
other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $12.5 million from $123.3 million at
December 31, 2011 while loans concentrated in other grain farming increased $12.0 million from $108.1 million at December 31, 2010. While the
Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, 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 $46.8 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 $82.6 million of loans to lessors of non-residential buildings and $44.1 million of loans to lessors of residential buildings and
dwellings.
The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan
committees, and ultimately the Board of Directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation;
however, limits well below the regulatory thresholds are generally observed. The vast majority of the Company’s loans are to businesses located in the
geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the
portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with
industry guidelines for all loan segments. The Company’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.
66
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
70% 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 1-4 units and home equity loans and lines of credit. The Company sells substantially all of its long-term fixed rate residential
real estate loans to secondary market investors. The Company also releases the servicing of these loans upon sale. The Company retains all
residential real estate loans with balloon payment features. Balloon periods are limited to five years. Residential real estate loans are typically
underwritten to conform to industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit
scores. Loans secured by first liens on residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have
amortization periods of twenty five years or less. The Company does not originate subprime mortgage loans.
Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an
automobile or other living expenses. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio,
employment history, and collateral coverage. Typically, consumer loans are set up on monthly payments with amortization periods based on the type
and age of the collateral.
Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or
equipment purchases. Underwriting guidelines for these loans are consistent with those established for commercial loans with the additional
repayment source of the taxing authority of the municipality.
Allowance for 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. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific
allocations of the allowance for loan losses. The Company considers collateral values and guarantees in the determination of such specific allocations.
Additional 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, large adversely classified
loans and nonimpaired 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 $100,000 in the commercial, commercial real estate, agricultural, agricultural real estate
segments, 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.
Adversely classified loans. A detailed analysis is also performed on each adversely classified (substandard or doubtful rated) borrower with an
aggregate, outstanding balance of $100,000 or more. This analysis includes commercial, commercial real estate, agricultural, and agricultural real
estate borrowers who are not currently identified as impaired but pose sufficient risk to warrant in-depth review. Estimated collateral shortfalls are
then calculated with allocations for each loan segment based on the five-year historical average of collateral shortfalls adjusted for 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. 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.
67
Non-classified and Watch loans. For loans, in all segments of the portfolio, that are considered to possess levels of risk commensurate with a pass
rating, management establishes base loss estimations which are derived from the historical loss experience over the past five years. Use of a five-
year historical loss period eliminates the effect of any significant losses that can be attributed to a single event or borrower during a given reporting
period. The base loss estimations for each loan segment are adjusted after consideration of several environmental factors influencing the level of
credit risk in the portfolio. In addition, loans rated as watch are further segregated in the commercial / commercial real estate and agricultural /
agricultural real estate segments. These loans possess potential weaknesses that, if unchecked, may result in deterioration to the point of becoming
a problem asset. Due to the elevated risk inherent in these loans, an allocation of twice the adjusted base loss estimation of the applicable loan
segment is determined appropriate.
Due to weakened economic conditions during recent years, the Company established allocations for each of the loan segments at levels above the
base loss estimations. 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 reserve. 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 (including loans held for sale) based on
portfolio segment and impairment method as of December 31, 2011, 2010 and 2009 (in thousands):
2011
Commercial/
Commercial
Real Estate
Agricultural/
Agricultural
Real Estate
Residential
Real Estate
Consumer
Unallocated
Total
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Ending balance:
$8,307
2,309
(3,077)
1,252
$8,791
Individually evaluated for impairment
Collectively evaluated for impairment
$575
$8,216
Loans acquired with deteriorated
$404
205
(66)
3
$546
$-
$546
$440
546
(363)
13
$636
$-
$636
$392
122
(254)
118
$378
$-
$378
$850
(81)
-
-
$10,393
3,101
(3,760)
1,386
$769
$11,120
$-
$769
$575
$10,545
credit quality
Loans:
Ending balance
Ending balance:
$-
$-
$-
$-
$-
$-
$505,693
$130,595
$185,151
$16,270
$22,365
$860,074
Individually evaluated for impairment
$4,719
$1,149
$-
$-
$-
$5,868
Collectively evaluated for impairment
$500,974
$129,446
$185,151
$16,270
$22,365
$854,206
Loans acquired with deteriorated
credit quality
$-
$-
$-
$-
$-
$-
68
2010
Commercial/
Commercial
Real Estate
Agricultural/
Agricultural
Real Estate
Residential
Real Estate
Consumer
Unallocated
Total
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated
credit quality
Loans:
Ending balance
Ending balance:
$7,428
3,473
(2,770)
176
$8,307
$1,086
$7,221
$315
89
(3)
3
$404
$-
$404
$488
(118)
(65)
135
$440
$-
$440
$410
264
(284)
2
$392
$-
$392
$821
29
-
-
$9,462
3,737
(3,122)
316
$850
$10,393
$-
$850
$1,086
$9,307
$-
$-
$-
$-
$-
$-
$465,390
$118,973
$183,000
$20,486
$16,732
$804,581
Individually evaluated for impairment
$7,332
$1,152
$-
$-
$-
$8,484
Collectively evaluated for impairment
$458,058
$117,821
$183,000
$20,486
$16,732
$796,097
Loans acquired with deteriorated
credit quality
$-
$-
$-
$-
$-
$-
2009
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Ending balance:
$5,345
3,315
(1,256)
24
$7,428
Individually evaluated for impairment
Collectively evaluated for impairment
$563
$6,865
Loans acquired with deteriorated
$223
89
-
3
$315
$-
$315
$510
202
(352)
128
$488
$-
$488
$436
240
(271)
5
$410
$-
$410
$1,073
(252)
-
-
$821
$7,587
3,594
(1,879)
160
$9,462
$-
$821
$563
$8,899
credit quality
Loans:
Ending balance
Ending balance:
$-
$-
$-
$-
$-
$-
$376,170
$111,845
$180,404
$21,518
$10,813
$700,750
Individually evaluated for impairment
$9,509
$1,356
$-
$-
$-
Collectively evaluated for impairment
$366,661
$110,489
$180,404
$21,518
$10,813
$10,865
$689,885
Loans acquired with deteriorated
credit quality
$-
$-
$-
$-
$-
$-
69
Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible.
The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.
For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when
available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial
condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its
obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an
updated appraisal or other appropriate valuation of the collateral.
The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the
loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and
junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the
loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective
delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that
collection will occur regardless of delinquency status, need not be charged off.
Credit Quality
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current
financial information, historical payment experience, collateral support, credit documentation, public information, and current economic trends, among
other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding
balance greater than $100,000 and non-homogenous loans, such as commercial and commercial real estate loans. This analysis is performed on a
continuous basis. The Company uses the following definitions for risk ratings:
Watch. Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of
the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They
are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that
the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions and values, highly questionable and
improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered pass rated loans. The
following tables present the credit risk profile of the Company’s loan portfolio by loan class based on rating category and payment activity as of
December 31, 2011 and 2010 (in thousands):
Construction &
Land Development
2010
2011
$15,778
$19,708
2,219
2,168
1,494
1,260
888
-
$20,379
$23,136
Farm Loans
1-4 Family Residential
Properties
Multifamily Residential
Properties
2011
$67,637
2,496
2,452
-
$72,585
2010
$58,751
4,710
1,531
-
$64,992
2011
$180,247
497
1,105
-
$181,849
2010
$174,782
267
4,478
-
$179,527
2011
$19,638
-
208
-
$19,846
2010
$10,381
6,204
5,561
-
$22,146
Commercial Real Estate
(Nonfarm/Nonresidential)
2011
$288,539
24,664
7,798
-
$321,001
2010
$276,174
14,598
10,053
-
$300,825
Agricultural Loans
2010
2011
$53,293
$58,133
3,269
1,840
1,745
3,284
-
-
$58,307
$63,257
Commercial & Industrial
Loans
2011
$147,591
280
2,845
-
$150,716
2010
$120,284
2,519
3,516
-
$126,319
Consumer Loans
2010
201
$19,655
$16,271
-
-
-
-
-
-
$19,655
$16,271
Pass
Watch
Substandard
Doubtful
Total
Pass
Watch
Substandard
Doubtful
Total
70
Pass
Watch
Substandard
Doubtful
Total
All Other Loans
Total Loans
2011
$11,413
-
-
-
$11,413
2010
$12,431
-
-
-
$12,431
2011
$809,177
31,945
18,952
-
$860,074
2010
$741,529
33,786
28,378
888
$804,581
The following table presents the Company’s loan portfolio by loan class aging analysis as of December 31, 2011 and 2010 (in thousands):
30-59 days
Past Due
60-89 days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total
Loans
Receivable
Total Loans
> 90 days &
Accruing
$ 23,136
$ 23,136
$ -
$ -
377
1,079
-
399
1,855
-
950
94
-
$ -
111
200
-
101
412
-
73
36
-
$ -
737
1,033
-
228
1,998
673
585
7
-
$ -
1,225
2,312
-
728
4,265
673
1,608
137
-
71,360
72,585
179,537
181,849
19,846
320,273
614,152
62,584
19,846
321,001
618,417
63,257
149,108
150,716
16,134
11,413
16,271
11,413
$2,899
$521
$3,263
$6,683
$853,391
$860,074
5
819
-
1,535
2,364
125
473
177
-
0
201
573
1,075
1,849
-
64
32
-
761
1,624
-
727
3,262
828
259
15
-
766
2,644
573
3,337
7,475
953
796
224
-
64,226
64,992
176,883
179,527
21,573
297,488
580,394
57,354
22,146
300,825
587,869
58,307
125,523
126,319
19,431
12,431
19,655
12,431
$3,139
$1,945
$4,364
$9,448
$795,133
$804,581
$ -
-
-
-
-
-
-
-
-
-
$ -
$ -
-
-
-
-
-
-
-
-
-
December 31, 2011
Construction and land development
Farm loans
1-4 Family residential properties (1)
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
December 31, 2010
Farm loans
1-4 Family residential properties (1)
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
(1) includes loans held for sale
Impaired Loans
Construction and land development
$ 5
$ -
$ 150
$ 155
$ 20,224
$ 20,379
Within all loan portfolio segments, loans are considered impaired when, based on current information and events, it is probable the Company will be
unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. The entire balance of a loan is considered
delinquent if the minimum payment contractually required to be made is not received by the specified due date. Impaired loans, excluding certain
troubled debt restructured loans, are placed on nonaccrual status. Impaired loans include nonaccrual loans and loans modified in troubled debt
restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in
the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. It is the
Company’s policy to have any restructured loans which are on nonaccrual status prior to being modified remain on nonaccrual status until, in the opinion
of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal.
If the restructured loan is on accrual status prior to being modified, the loan is reviewed to determine if the modified loan should remain on accrual
status.
71
The Company’s policy is to discontinue the accrual of interest income on all loans for which principal or interest is ninety days past due. The accrual of
interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once
interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans
are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Interest on loans
determined to be troubled debt restructurings is recognized on an accrual basis in accordance with the restructured terms if the loan is in compliance
with the modified terms. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower
indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. . The Company requires a period of satisfactory
performance of not less than six months before returning a nonaccrual loan to accrual status.
The following tables present impaired loans by loan class for the years ended December 31, 2011 and 2010 (in thousands):
December 31, 2011
Unpaid
Principal
Balance
Recorded
Balance
Specific
Allowance
Loans with a specific allowance:
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
Loans without a specific allowance:
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
$833
-
71
-
1,414
2,318
-
382
-
-
$2,700
$ -
532
1,641
-
1,226
3,399
673
660
8
-
$1,070
-
71
-
1,693
2,834
-
382
-
-
$3,216
$ -
532
1,818
-
1,256
3,606
673
1,255
20
-
Total loans
$4,740
$5,554
Total loans:
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
$833
532
1,712
-
2,640
5,717
673
1,042
8
-
$7,440
$1,070
532
1,889
-
2,949
6,440
673
1,637
20
-
$8,770
72
$295
-
27
-
183
505
-
70
-
-
$575
$-
-
-
-
-
-
-
-
-
-
$-
$295
-
27
-
183
505
-
70
-
-
$575
December 31, 2010
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
$1,804
-
917
573
1,120
4,414
-
231
-
-
$4,645
$ 151
540
1,648
-
1,916
4,255
828
692
14
0
$5,789
$1,955
540
2,565
573
3,036
8,669
828
923
14
-
$10,434
$1,804
-
917
669
1,120
4,510
-
231
-
-
$4,741
$ 151
540
1,678
-
3,095
5,464
828
804
14
-
$7,110
$1,955
540
2,595
669
4,215
9,974
828
1,035
14
-
$11,851
$478
-
273
69
79
899
-
187
-
-
$1,086
$-
-
-
-
-
-
-
-
-
-
$-
$478
-
273
69
79
899
-
187
-
-
$1,086
The following table presents average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2011
and 2010 (in thousands):
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
December 31, 2011
December 31, 2010
Average Investment
in Impaired Loans
Interest
Income
Recognized
Average Investment
in Impaired Loans
Interest
Income
Recognized
$ 841
532
1,755
-
2,688
5,816
673
1,199
10
-
$7,698
$ -
-
-
-
22
22
-
14
-
$36
$1,975
1,317
2,720
670
4,425
11,107
993
1,165
17
-
$13,282
$ -
-
-
-
56
56
-
19
-
-
$75
For the twelve months ended December 31, 2011 and 2010, the amount of interest income recognized by the Company within the period that the loans
were impaired was due to loans modified in a troubled debt restructuring that remained on accrual status. The balance of loans modified in a troubled
debt restructuring included in the impaired loans stated above that were still accruing was $395,000 of commercial real estate and $322,000 of
commercial and industrial at December 31, 2011 and $887,000 of commercial real estate and $215,000 of commercial and industrial at December 31,
2010. For the twelve months ended December 31, 2011 and 2010, the amount of interest income recognized using a cash-basis method of accounting
during the period that the loans were impaired was not material.
Non Accrual Loans
The following table presents the Company’s nonaccrual loans at December 31, 2011 and 2010 (in thousands). This table excludes purchased impaired
loans and performing troubled debt restructurings.
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
2011
2010
$ 833
532
1,712
-
2,245
5,322
673
720
8
-
$6,723
$1,955
540
2,565
573
2,149
7,782
828
708
14
-
$9,332
The aggregate principal balances of nonaccrual, past due ninety days or more loans were $6,723,000 and $9,332,000 at December 31, 2011 and 2010,
respectively. Interest income which would have been recorded under the original terms of such nonaccrual loans totaled $239,000, $428,000 and
$672,000 in 2011, 2010 and 2009, respectively.
73
Troubled Debt Restructuring
The balance of troubled debt restructurings at December 31, 2011 and 2010 was $1,834,000 and $1,102,000, respectively. Approximately $140,000
and $250,000 in specific reserves have been established with respect to these loans as of December 31, 2011 and 2010, respectively. During the year
ended December 31, 2011, the terms of two commercial loans and three commercial real estate loans were modified in troubled debt restructurings. As
troubled debt restructurings, these loans are included in nonperforming loans and are classified as impaired which requires that they be individually
measured for impairment. The modification of the terms of these loans included one or a combination of the following: a reduction of stated interest rate
of the loan; an extension of the maturity date and change in payment terms; or a permanent reduction of the recorded investment in the loan.
The modification of one commercial real estate loan involved charging down the loan to a level which is expected to be serviced by the on-
going operations of the property at a market interest rate and amortization period. The loan was in non-accrual status at the time of the
modification and will remain so until sustained performance occurs under the modified terms. Modification of the second commercial real
estate loan also involved charging down the loan and the combining of several past due notes which lowered the monthly payment of the
notes.
The third modification involved a commercial real estate loan and a commercial loan of a single borrower. These notes were restructured to
lower the monthly payments by re-amortizing the debt. The interest rates and maturity dates remained unchanged, however the balloon
payments were increased.
The second commercial loan was modified to interest-only payments for a six-month period with the maturity date extended for eighteen
months. The interest rate remained unchanged. The loan is 75% guaranteed by the Small Business Administration.
The following table presents the Company’s recorded balance of troubled debt restructurings at of December 31, 2011 (in thousands):
Troubled debt restructurings:
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total
Performing troubled debt restructurings:
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total
December 31,
2011
$ -
-
393
-
557
951
-
167
-
-
$1,117
$ -
-
-
-
395
395
-
322
-
-
$ 717
The troubled debt restructurings described above increased the allowance for loan losses by $140,000 through the allocation of a specific reserve, and
resulted in charge offs of $555,219 during the year ended December 31, 2011.
A loan is considered to be in payment default once it is 90 days past due under the modified terms. There were two loans totaling $215,000 identified
as troubled debt restructurings during the prior twelve months that experienced defaults during the year ended December 31, 2011.
74
Note 6 – Premises and Equipment, Net
Premises and equipment at December 31, 2011 and 2010 consisted of:
Land
Buildings and improvements
Furniture and equipment
Leasehold improvements
Construction in progress
Subtotal
Accumulated depreciation and amortization
Total
2011
$ 5,966
28,499
15,407
3,083
584
53,539
22,822
$30,717
2010
$ 5,533
26,174
14,707
3,005
10
49,429
20,885
$28,544
Depreciation and amortization expense was $2,452,000, $1,829,000 and $1,538,000 for the years ended December 31, 2011, 2010 and 2009,
respectively.
Note 7 – Goodwill and Intangible Assets
The Company has goodwill from business combinations, intangible assets from branch acquisitions, identifiable intangible assets assigned to core
deposit relationships and customer lists of insurance agencies acquired. The following table presents gross carrying amount and accumulated
amortization by major intangible asset class as of December 31, 2011 and 2010:
Goodwill not subject to amortization
Intangibles from branch acquisition
Core deposit intangibles
Customer list intangibles
2011
2010
Gross
Carrying Value
Accumulated
Amortization
$29,513
3,015
8,986
1,904
$43,418
$3,760
2,965
5,119
1,887
$13,731
Gross
Carrying Value
$29,513
3,015
8,986
1,904
$43,418
Accumulated
Amortization
$3,760
2,764
4,376
1,697
$12,597
Goodwill of $8.4 million was recorded for the acquisition of ten branches from First Bank, a Missouri state chartered bank, during the third quarter of
2010. All of the goodwill was assigned to the banking segment of the Company. The Company expects this goodwill to be fully deductible for tax
purposes.
The following table provides a reconciliation of the purchase price paid for the First Bank branches and the amount of goodwill recorded (in thousands):
Purchase price
Less purchase accounting adjustments:
Fair value of loans
Fair value of premises and equipment
Fair value of time deposits
Core deposit intangible
Resulting goodwill from acquisition
$2,102
(7,685)
1,413
(3,050)
Total amortization expense for the years ended December 31, 2011, 2010 and 2009 was as follows:
Intangibles from branch acquisitions
Core deposit intangibles
Customer list intangibles
2011
$201
743
190
$1,134
75
$15,610
(7,220)
$8,390
2010
$201
423
190
$814
2009
$201
339
190
$730
Estimated amortization expense for each of the five succeeding years is shown in the table below:
Estimated amortization expense:
For period ended 12/31/12
For period ended 12/31/13
For period ended 12/31/14
For period ended 12/31/15
For period ended 12/31/16
$773
$673
$643
$616
$381
In accordance with the provisions of SFAS 142,”Goodwill and Other Intangible Assets,” codified in ASC 350, the Company performed testing of goodwill
for impairment as of September 30, 2011 and 2010, and determined, as of each of these dates, that goodwill was not impaired. Management also
concluded that the remaining amounts and amortization periods were appropriate for all intangible assets.
Note 8 – Deposits
As of December 31, 2011 and 2010, deposits consisted of the following:
Demand deposits:
Non-interest bearing
Interest-bearing
Savings
Money market
Time deposits
Total deposits
2011
2010
$198,962
213,920
259,968
268,129
234,755
$183,932
209,203
215,178
287,382
317,015
$1,170,734
$1,212,710
Total interest expense on deposits for the years ended December 31, 2011, 2010 and 2009 was as follows:
Interest-bearing demand
Savings
Money market
Time deposits
Total
2011
$ 332
1,481
1,993
2,919
$6,725
2010
$ 500
1,279
2,690
4,002
$8,471
2009
$ 539
882
2,304
9,245
$12,970
As of December 31, 2011, 2010 and 2009, the aggregate amount of time deposits in denominations of more than $100,000 and the total interest
expense on such deposits was as follows:
Outstanding
Interest expense for the year
2011
$67,854
1,204
2010
$88,928
1,719
2009
$81,692
3,857
The following table shows the amount of maturities for all time deposits as of December 31, 2011:
Less than 1 year
1 year to 2 years
2 years to 3 years
3 years to 4 years
4 years to 5 years
Over 5 years
Total
76
$171,266
27,360
12,545
10,991
12,265
328
$234,755
In 2011 the Company maintained account relationships with various public entities throughout its market areas. Four public entities had total balances of
$28.7 million in various checking accounts and time deposits as of December 31, 2011. These balances are subject to change depending upon the cash
flow needs of the public entity.
Note 9 – Borrowings
As of December 31, 2011 and 2010 borrowings consisted of the following:
Securities sold under agreements to repurchase
Federal Home Loan Bank advances:
Fixed-term advances
Subordinated debentures
Other borrowings:
Due in one year or less
Total
Aggregate annual maturities of long-term borrowings at December 31, 2011 are:
2012
2013
2014
2015
2016
Thereafter
$14,750
-
-
-
-
25,620
$40,370
2011
2010
$132,380
$ 94,057
19,750
20,620
22,750
20,620
8,250
-
$181,000
$137,427
FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. The fixed term advances totaling $19.75 million are as
follows:
•
•
•
•
$5 million advance at 4.82% with a 5-year maturity, due January 19, 2012, two year lockout, callable quarterly
$5 million advance at 4.69% with a 5-year maturity, due February 23, 2012, two year lockout, callable quarterly
$4.75 million advance at 1.60% with a 5-year maturity, due December 24, 2012
$5 million advance at 4.58% with a 10-year maturity, due July 14, 2016, one year lockout, callable quarterly
Securities sold under agreements to repurchase have overnight maturities and a weighted average rate of .16%. First Mid Bank has collateral pledge
agreements whereby it has agreed to keep on hand at all times, free of all other pledges, liens, and encumbrances, whole first mortgages on improved
residential property with unpaid principal balances aggregating no less than 133% of the outstanding advances and letters of credit ($0 on December
31, 2011) from the FHLB. The securities underlying the repurchase agreements are under the Company’s control.
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end
Average amount outstanding for the year
2011
2010
2009
$132,380
108,240
$94,530
76,758
$83,826
72,589
77
At December 31, 2011 and 2010, there was no outstanding loan balance on a revolving credit agreement with The Northern Trust Company. This loan was
renewed on April 22, 2011. The revolving credit agreement has a maximum available balance of $20 million with a term of one year from the date of closing.
The interest rate (2.375% at December 31, 2011) is floating at 2.25% over the federal funds rate. The loan is unsecured and subject to a borrowing agreement
containing requirements for the Company and First Mid Bank to maintain various operating and capital ratios. The Company and First Mid Bank were in
compliance with all the existing covenants at December 31, 2011 and 2010.
As described under Note 1 — “Preferred Stock” above, the Remaining Investors have not yet been issued their shares of Series C Preferred Stock
because of unanticipated delays in applying for and obtaining the approval of the Federal Reserve Board, which the these investors must secure to be
issued their shares of Series C Preferred Stock. The Company has previously accepted from the Remaining Investors subscriptions for $8,250,000 of
the Series C Preferred Stock pursuant to their respective subscription agreements. In November 2011, the disinterested members of the Board of
Directors of the Company approved and authorized, and the Remaining Investors agreed to, certain amendments to the Series C Preferred Stock
subscription agreements resulting in the release to the Company of the funds escrowed by the Remaining Investors for their subscribed shares of the
Series C Preferred Stock and the issuance by the Company of short-term unsecured promissory notes, which are dated November 21, 2011, to the
Remaining Investors. The Notes collectively have an aggregate principal amount of $8,250,000 and each have an 8% annual interest rate. The notes
have a maturity date of January 20, 2012 and were subsequently renewed on that date for an additional 60 days. Each Note also contains a
prepayment provision applicable when approval from the Federal Reserve Board is received to allow the Remaining Investors to purchase the shares of
Series C Preferred Stock originally subscribed. Additionally, if the Company experiences an Event of Default as defined in the Note, such as becoming
insolvent or generally failing to pay its debts as they become due, then a Remaining Investor may, at his, her or its option, declare the entire unpaid
amount of the Note immediately due and payable, without presentment, demand, portents or notice of any kind, and the Remaining Investor shall be
entitled to recover from the Company all costs and expenses, including reasonable attorneys' fees and disbursements and court costs, incurred in
enforcing the Remaining Investor's rights under the Note.
On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through Trust I, a statutory
business trust and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust I for the
purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the
Company’s investment in common equity of the Trust, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The
underlying junior subordinated debentures issued by the Company to Trust I mature in 2034, bear interest at three-month London Interbank Offered
Rate (“LIBOR”) plus 280 basis points, reset quarterly, and are callable, at the option of the Company, at par on or after April 7, 2009. At December 31,
2011 and 2010 the rate was 3.10% and 3.15%, respectively. The Company used the proceeds of the offering for general corporate purposes.
On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through Trust II, a
statutory business trust and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II
for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the
Company’s investment in common equity of Trust II, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The
underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until
June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points) after June 15, 2011 (1.95% at December 31, 2011). The net proceeds
to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield.
The trust preferred securities issued by Trust I and Trust II are included as Tier 1 capital of the Company for regulatory capital purposes. On March 1,
2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1
capital for regulatory purposes. The final rule provided a five-year transition period, ending September 30, 2010, for application of the revised
quantitative limits. On March 17, 2009, the Federal Reserve Board adopted an additional final rule that delayed the effective date of the new limits on
inclusion of trust preferred securities in the calculation of Tier 1 capital until September 30, 2011. The Company does not expect the application of the
revised quantitative limits to have a significant impact on its calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized.
The Dodd-Frank Act, signed into law July 21, 2010, removes trust preferred securities as a permitted component of a holding company’s Tier 1 capital
after a three-year phase-in period beginning January 1, 2013 for larger holding companies. For holding companies with less than $15 billion in
consolidated assets, existing issues of trust preferred securities are grandfathered and not subject to this new restriction. Therefore, the existing trust
preferred securities issued by Trust I and Trust II will continue to count as Tier I capital. New issuances of trust preferred securities, however would not
count as Tier 1 regulatory capital.
Note 10 – Regulatory Capital
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow
minimum regulatory requirements established by the Federal Reserve Board. First Mid Bank follows similar minimum regulatory requirements
established for national banks by the OCC. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly
additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Quantitative measures established by each regulatory agency to ensure capital adequacy require the reporting institutions to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 2011 and 2010, that all capital adequacy requirements have been met.
78
As of December 31, 2011 and 2010, the most recent notification from the primary regulators categorized First Mid Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios must be maintained as set forth in the table. At December 31, 2011, there are no conditions or events since the most recent notification
that management believes have changed this categorization.
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$145,006
14.48%
$ 80,093
> 8.00%
N/A
N/A
127,386
12.83
79,434
> 8.00
$99,292
> 10.00%
133,886
116,266
13.37
11.71
133,886
116,266
8.99
7.85
40,046
39,717
59,574
59,228
> 4.00
> 4.00
> 4.00
> 4.00
N/A
N/A
59,575
> 6.00
N/A
N/A
74,035
> 5.00
$118,622
12.84%
$ 73,914
> 8.00%
N/A
N/A
113,143
12.32
73,491
> 8.00
$91,864
> 10.00%
108,229
102,748
11.71
11.19
108,229
102,748
7.42
7.07
36,957
36,745
58,369
58,141
> 4.00
> 4.00
> 4.00
> 4.00
N/A
N/A
55,118
> 6.00
N/A
N/A
72,676
> 5.00
December 31, 2011
Total Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to average assets)
Company
First Mid Bank
December 31, 2010
Total Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to average assets)
Company
First Mid Bank
Note 11 – Disclosure of Fair Values of Financial Instruments
ACS Topic 820, “Fair Value Measurements,” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In accordance with Topic 820, the Company groups its
financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. These levels are:
Level 1 Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are
obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing
services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
79
Available-for-Sale Securities. The fair value of available-for-sale securities are determined by various valuation methodologies. Where quoted market
prices are available in an active market, securities are classified within Level 1. Level 1 securities include exchange traded equities. If quoted market prices
are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include
U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed
securities, collateralized mortgage obligations and corporate bonds. In certain cases where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy and include subordinated tranches of collateralized mortgage obligations and investments in trust preferred
securities.
The trust preferred securities are collateralized debt obligation securities that are backed by trust preferred securities issued by banks, thrifts, and
insurance companies. The market for these securities at December 31, 2011 is not active and markets for similar securities are also not active. The
inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred securities trade and then by
a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as no new trust preferred securities have
been issued since 2007. There are currently very few market participants who are willing and or able to transact for these securities. The market values
for these securities (and any securities other than those issued or guaranteed by the US Treasury) are very depressed relative to historical levels.
Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:
• The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at December
31, 2011,
• An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use
of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior
measurement dates , and
• The Company’s trust preferred securities will be classified within Level 3 of the fair value hierarchy because we determined that significant
adjustments are required to determine fair value at the measurement date.
The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which
the fair value measurements fall as of December 31, 2011 and 2010 (in thousands):
December 31, 2011
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total available-for-sale securities
December 31, 2010
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total available-for-sale securities
Fair Value Measurements Using
Quoted Prices in
Active Markets
for Identical
Significant Other
Observable
Assets
(Level 1)
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$ -
-
-
-
29
$29
$ -
-
-
-
31
$31
$166,066
41,202
261,755
-
9,067
$478,110
$ 152,381
26,914
160,863
-
1,978
$342,136
$ -
-
58
719
-
$777
$ -
-
68
581
-
$ 649
$166,066
41,202
261,833
719
9,096
$478,916
$ 152,381
26,914
160,931
581
2,009
$342,816
80
The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011
and 2010 is summarized as follows (in thousands):
December 31, 2011
Beginning balance
Transfers into Level 3
Transfers out of Level 3
Total gains or losses
Included in net income
Included in other comprehensive income (loss)
Purchases, issuances, sales and settlements
Purchases
Issuances
Sales
Settlements
Ending balance
Mortgaged-backed
Securities
$68
-
-
-
-
-
-
-
(10)
$58
Available-for-Sale Securities
Trust Preferred
Securities
Total
$ 581
-
-
(886)
1,108
-
-
-
(84)
$ 719
$ 649
-
-
(886)
1,108
-
-
-
(94)
$ 777
Total gains or losses for the period included in net income
attributable to the change in unrealized gains or losses
related to assets and liabilities still held at the reporting date
$ -
$(886)
$(886)
December 31, 2010
Beginning balance
Transfers into Level 3
Transfers out of Level 3
Total gains or losses
Included in net income
Included in other comprehensive income (loss)
Purchases, issuances, sales and settlements
Purchases
Issuances
Sales
Settlements
Ending balance
Mortgaged-backed
Securities
Available-for-Sale Securities
Trust Preferred
Securities
Total
$ 75
-
-
-
1
-
-
-
(8)
$ 68
$3,155
-
-
(1,418)
(1,411)
-
-
-
255
$ 581
$3,230
-
-
(1,418)
(1,410)
-
-
-
247
$ 649
Total gains or losses for the period included in net income
attributable to the change in unrealized gains or losses
related to assets and liabilities still held at the reporting date
$ -
$(1,418)
$(1,418)
Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Impaired Loans (Collateral Dependent). Loans for which it is probable that the Company will not collect all principal and interest due according to
contractual terms are measured for impairment. Allowable methods for determining the amount of impairment and estimating fair value include using the fair
value of the collateral for collateral dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the
amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value
method.
81
Management establishes a specific reserve for loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for
which a specific reserve has been established as of December 31, 2011 was $2,562,000 and a fair value of $2,282,000 resulting in specific loss exposures
of $280,000. At December 31, 2010, the total carrying amount of loans for which a specific reserve had been established was $4,809,000. These loans had
a fair value of $3,854,000 which resulted in specific loss exposures of $955,000.
When there is little prospect of collecting either principal or interest, loans, or portions of loans, may be charged-off to the allowance for loan losses. Losses
are recognized in the period an obligation becomes uncollectible. The recognition of a loss does not mean that the loan has absolutely no recovery or
salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be effected in the future.
Foreclosed Assets Held For Sale. Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the
subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could
differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through
noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the
disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real
estate owned as of December 31, 2011 was $4,606,000. Other real estate owned measured at fair value on a nonrecurring basis during the period
amounted to $2,336,000. The total carrying amount of other real estate owned as of December 31, 2010 was $6,127,000. Other real estate owned
measured at fair value on a nonrecurring basis during the period amounted to $940,000.
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy
in which the fair value measurements fall at December 31, 2011 and 2010 (in thousands):
December 31, 2011
Fair Value
Fair Value Measurements Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Impaired loans (collateral dependent)
Foreclosed assets held for sale
December 31, 2010
Impaired loans (collateral dependent)
Foreclosed assets held for sale
$2,282
2,336
$3,854
940
$ -
-
$ -
-
$ -
-
$ -
-
$2,282
2,336
$3,854
940
Other
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts
other than fair value.
Cash and Cash Equivalents and Federal Reserve and Federal Home Loan Bank Stock
The carrying amount approximates fair value.
Certificates of Deposit Investments
The fair value of certificates of deposit investments is estimated using a discounted cash flow calculation that applies the rates currently offered for
deposits of similar remaining maturities.
Held-to-maturity Securities
Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices
for similar securities.
Loans
For loans with floating interest rates, it is assumed that the estimated fair values generally approximate the carrying amount balances. Fixed rate
loans have been valued using a discounted present value of projected cash flow. The discount rate used in these calculations is the current rate at
which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amount of accrued
interest approximates its fair value.
82
Deposits
Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount of these deposits
approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates
currently offered for deposits of similar remaining maturities.
Securities Sold Under Agreements to Repurchase
The fair value of securities sold under agreements to repurchased is estimated using a discounted cash flow calculation that applies the rates
currently offered for deposits of similar remaining maturities.
Short-term Borrowings and Interest Payable
The carrying amount approximates fair value.
Long-term Debt and Federal Home Loan Bank Advances
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
The following table presents estimated fair values of the Company’s financial instruments in accordance with FAS 107-1 and APB 28-1, codified
with ASC 805.
Financial Assets
Cash and due from banks
Federal funds sold
Certificates of deposit investments
Available-for-sale securities
Held-to-maturity securities
Loans held for sale
December 31, 2011
December 31, 2010
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$52,105
20,997
13,231
478,916
51
1,046
$52,105
20,997
13,225
478,916
51
1,046
$151,493
$151.493
80,000
10,000
342,816
50
114
80,000
9,996
342,816
53
114
Loans net of allowance for loan losses
847,908
850,308
794,074
799,039
Interest receivable
Federal Reserve Bank stock
Federal Home Loan Bank stock
Financial Liabilities
Deposits
7,052
1,520
3,727
7,052
1,520
3,727
6,390
1,520
3,727
6,390
1,520
3,727
$1,170,734
$1,172,069
$1,212,710
$1,214,025
Securities sold under agreements to repurchase
132,380
132,383
Interest payable
Federal Home Loan Bank borrowings
Other borrowings
Junior subordinated debentures
510
19,750
8,250
20,620
510
20,619
8,250
11,969
94,057
701
22,750
-
20,620
94,058
701
23,953
-
11,438
Note 12—Deferred Compensation Plan
The Company follows the provisions of ASC 710, for purposes of the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan (“DCP”). At
December 31, 2011, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately
$2,904,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $2,904,000
as an equity instrument (deferred compensation).
The DCP was effective as of June 1984. The purpose of the DCP is to enable directors, advisory directors, and key employees the opportunity to defer
a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation
arrangements. The Company invests all participants’ deferrals in shares of common stock. Dividends paid on the shares are credited to participants’
DCP accounts and invested in additional shares. During 2011 and 2010 the Company issued 5,920 common shares and 4,766 common shares,
respectively, pursuant to the DCP.
83
Note 13 – Stock Incentive Plan
At the Annual Meeting of Stockholders held May 23, 2007, the stockholders approved the First Mid-Illinois Bancshares, Inc. 2007 Stock Incentive Plan
(“SI Plan”). The SI Plan was implemented to succeed the Company’s 1997 Stock Incentive Plan, which had a ten-year term that expired October 21,
2007, under which there are still options outstanding. 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.
On September 27, 2011, the Board of Directors passed a resolution authorizing and approving the Executive Long-Term Incentive Plan (“LTIP”). The
LTIP was implemented to provide methodology for granting Stock Awards and Stock Unit Awards under the SI Plan to select senior executives of the
Company or any subsidiary.
A maximum of 300,000 shares are authorized under the SI Plan. This amount reflects the Company’s stock split which occurred on June 29, 2007.
Options to acquire shares are awarded at an exercise price equal to the fair market value of the shares on the date of grant and have a 10-year term.
Options granted to employees vest over a four-year period and options granted to directors vest at the time they are issued. As of December 31, 2010,
the Company had awarded 59,500 shares as stock options under the SI Plan.
During the third quarter of 2011, the Company awarded 17,409 shares as 50% Stock Awards and 50% Stock Unit Awards under the LTIP of the SI Plan.
There were no shares awarded as stock options during 2011.
The fair value of options granted is estimated on the grant date using the Black-Scholes option-pricing model. Expected volatility is based on historical
volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercise and employee termination within the
valuation model; separate groups of employees who have similar historical exercise behavior are considered separately for valuation purposes. The
expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are
expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at
the time of the grant. There were no options granted during 2011, 2010 or 2009.
The following table summarizes the compensation cost, net of forfeitures, related to stock-based compensation:
For the Years Ended December 31,
2010
2011
2009
Stock and stock unit awards
Pre-tax compensation expense
Income tax benefit
Stock and stock unit awards expense, net of income taxes
Stock options
Pre-tax compensation expense
Income tax benefit
Stock options expense, net of income taxes
Total share-based compensation
Pre-tax compensation expense
Income tax benefit
Total share-based compensation expense, net of income taxes
$92
(32)
$60
$52
(1)
$51
$144
(33)
$111
$ -
$ -
-
-
$ -
$ -
$52
(1)
$51
$52
(1)
$51
$53
(2)
$51
$53
(2)
$52
84
A summary of option activity under the SI Plan and the 1997 Stock Incentive Plan as of December 31, 2011, 2010 and 2009, and changes during the
years then ended is presented below:
Shares
Weighted-Average
Exercise Price
2011
Weighted-Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
239,532
-
(11,392)
-
228,140
207,265
$22.50
-
10.67
-
$23.09
$22.98
3.32
2.99
$159,552
$159,552
Stock options for 202,970 and 182,095 shares of common stock were not considered in computing the aggregate intrinsic value of outstanding shares
and exercisable shares, respectively, for 2011 because they were anti-dilutive.
Shares
Weighted-Average
Exercise Price
2010
Weighted-Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
289,033
-
(49,500)
(1)
239,532
204,407
$20.54
-
11.05
8.37
$22.50
$22.18
4.16
3.58
$204,345
$204,345
Stock options for 202,970 and 167,845 shares of common stock were not considered in computing the aggregate intrinsic value of outstanding shares
and exercisable shares, respectively, for 2010 because they were anti-dilutive.
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
Shares
352,425
-
(37,267)
(26,125)
289,033
239,658
Weighted-Average
Exercise Price
2009
Weighted-Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
$19.73
-
10.42
24.08
$20.54
$19.73
4.67
3.88
$533,000
$533,000
Stock options for 202,970 and 153,595 shares of common stock were not considered in computing the aggregate intrinsic value of outstanding shares
and exercisable shares, respectively, for 2009 because they were anti-dilutive.
The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009, was $90,000, $365,000, and $308,000,
respectively.
85
A summary of the status of the Company’s shares subject to unvested options under the SI Plan and the 1997 Stock Incentive Plan as of December 31,
2011, 2010 and 2009, and changes during the years then ended, is presented below:
2011
2010
2009
Weighted-
Average
Grant-Date
Fair Value
$3.29
-
3.47
-
Shares
35,125
-
(14,250)
-
Unvested, beginning of year
Granted
Vested
Forfeited
Weighted-
Average
Grant-Date
Fair Value
Shares
Shares
Weighted-
Average
Grant-Date
Fair Value
49,375
$3.34
75,953
$3.90
-
-
(14,250)
3.47
-
-
-
(24,453)
(2,125)
49,375
-
5.29
3.70
$3.34
Unvested, end of year
20,875
$3.16
35,125
$3.29
As of December 31, 2011 and 2010, there was $17,000 and $69,000, respectively, of total unrecognized compensation cost related to unvested options
granted under the SI Plan and the 1997 Stock Incentive Plan. That cost is expected to be recognized over a period of one year. The total fair value of
shares subject to options that vested during the years ended December 31, 2011, 2010, and 2009, was $49,000, $49,000, and $129,000, respectively.
The following table summarizes information about stock options under the SI Plan outstanding at December 31, 2011:
Range of Exercise
Prices
Number
Outstanding
Weighted-Average
Remaining
Contractual Life
Weighted-Average
Exercise Price
Number
Exercisable
Weighted-Average
Exercise Price
Options Outstanding
Options Exercisable
Below $17.50
$17.50 to $25.00
Above $25.00
25,171
91,469
111,500
228,140
0.96
3.41
3.78
3.32
$12.11
$21.34
$27.00
$23.09
25,170
78,220
103,875
207,265
$12.11
$21.06
$27.06
$22.98
In September 2011, as part of the LTIP approval, the Board approved a form of Stock Award/Stock Unit Award Agreement and a form of Stock Unit
Award Agreement. These forms set forth the terms and conditions of the Stock Awards and Stock Units granted to participants in the Plan as part of
their Annual Performance Award and Cumulative Performance Award. Each of the Annual Performance Award and Cumulative Performance Award
consists of Stock Awards (50%) and Stock Units (50%), except that Awards to retirement-eligible employees are made 100% in Stock Units. The target
number of shares subject to the Stock Awards and/or Stock Units is adjusted by the Board at the end of each applicable performance period based on
the actual level of attainment of performance goals previously set by the Board. The Annual Performance Award has a one-year performance period
and vest over four years. The Cumulative Performance Award has a three-year performance period and vest at the end of the three-year period. Stock
Awards are settled in shares while Stock Units are settled in cash (although Stock Units held by retirement-eligible employees are settled half in shares
and half in cash). The following table summarizes non-vested stock and stock unit activity for the year ended December 31, 2011:
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
Fair value of shares vested
Shares
-
17,409
(2,313)
-
15,096
2011
Weighted-avg
Grant-date Fair
Value
$ -
18.70
18.70
-
$18.70
$42,675
86
The fair value of the awards is amortized to compensation expense over the vesting periods of the awards (four years for annual awards and three
years for cumulative awards) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares
granted that are expected to vest. As of December 31, 2011, there was $216,000, of total unrecognized compensation cost related to unvested stock
and stock unit awards under the SI. That cost is expected to be recognized over a period of three years.
Note 14 – Retirement Plans
The Company has a defined contribution retirement plan which covers substantially all employees and which provides for a Company contribution equal
to 4% of each participant’s compensation and a Company matching contribution of up to 50% of the first 4% of pre-tax contributions made by each
participant. Employee contributions are limited to the 402(g) limit of compensation. The total expense for the plan amounted to $930,000, $803,000
and $757,000 in 2011, 2010 and 2009, respectively. The Company also has two agreements in place to pay $50,000 annually for 20 years from the
retirement date to the surviving spouse of a deceased former senior officer of the Company and to one current senior officer. Total expense under
these two agreements amounted to $55,000, $60,000 and $90,000 in 2011, 2010 and 2009, respectively. The current liability recorded for these two
agreements was $918,000 and $913,000, as of December 31, 2011 and 2010, respectively.
Note 15 – Income Taxes
The components of federal and state income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 were as follows:
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Total
2011
2010
2009
$5,558
1,641
7,199
(435)
(235)
(670)
$4,167
790
4,957
(286)
(149)
(435)
$6,529
$4,522
$4,761
761
5,522
(1,201)
(314)
(1,515)
$4,007
Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. federal tax rate of 35% to
income before income taxes). During 2011, 2010 and 2009, the Company was in a graduated tax rate position. The principal reasons for the difference
are as follows:
Expected income taxes
Effects of:
Tax-exempt income
Nondeductible interest expense
State taxes, net of federal taxes
Other items
Effect of marginal tax rate
Total
2011
$6,265
(618)
16
914
52
(100)
$6,529
2010
$4,649
(511)
20
417
47
(100)
$4,522
2009
$4,277
(483)
31
291
(9)
(100)
$4,007
In 2011, the State of Illinois increased the corporate income tax rate from 7.3% to 9.5%. Tax expense recorded by the Company during 2011, 2010 and
2009 did not include any interest or penalties. Tax returns filed with the Internal Revenue Service and Illinois Department of Revenue are subject to
review by law under a three-year statute of limitations. The Company is no longer subject to U.S. federal or state income tax examinations by tax
authorities for years before 2008.
87
The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31,
2011 and 2010 are presented below:
Deferred tax assets:
Allowance for loan losses
Available-for-sale investment securities
Deferred compensation
Supplemental retirement
Core deposit premium amortization
Interest on non-accrual loans
Other-than-temporary impairment on securities
Expense from other real estate properties held for sale
Other
Total gross deferred tax assets
Deferred tax liabilities:
Deferred loan costs
Goodwill
Prepaid expenses
FHLB stock dividend
Depreciation
Purchase accounting
Accumulated accretion
Available-for-sale investment securities
Total gross deferred tax liabilities
Net deferred tax assets
2011
2010
$4,489
-
984
370
120
155
1,662
492
148
$8,420
$ 82
2,069
187
334
790
274
59
2,012
$5,807
$ 2,613
$4,059
1,319
951
357
26
229
1,261
49
211
$8,462
$ 92
1,620
135
322
373
587
59
-
$3,188
$ 5,274
Net deferred tax assets are recorded in other assets on the consolidated balance sheets. No valuation allowance related to deferred tax assets was
recorded at December 31, 2011 and 2010 as management believes it is more likely than not that the deferred tax assets will be fully realized.
Note 16 – Dividend Restrictions
The National Bank Act imposes limitations on the amount of dividends that may be paid by a national bank, such as First Mid Bank. Generally, a
national bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank’s board of directors deems prudent.
Without prior OCC approval, however, a national bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank’s year-to-
date net income plus the bank’s adjusted retained net income for the two preceding years. Factors that could adversely affect First Mid Bank’s net
income include other-than-temporary impairment on investment securities that result in credit losses and economic conditions in industries where there
are concentrations of loans outstanding that result in impairment of these loans and, consequently loan charges and the need for increased allowances
for losses. See “Item 1A. Risk Factors,” Note 4 – “Investment Securities” and Note 5 – “Loans” for a more detailed discussion of the factors.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described above, First Mid Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 2011. As of December 31, 2011, approximately $24.3 million was available to be paid as dividends to the Company by
First Mid Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends by First Mid Bank if
the OCC determines that such payment would constitute an unsafe or unsound practice.
Note 17 – Commitments and Contingent Liabilities
First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments
involves, to varying degrees, elements of credit, and interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance
sheets. The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of
credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments.
However, the Company does not anticipate any losses from these instruments.
88
The off-balance sheet financial instruments whose contract amounts represent credit risk at December 31, 2011 and 2010 are as follows:
Unused commitments including lines of credit:
Commercial real estate
Commercial operating
Home Equity
Other
Total
Standby letters of credit
2011
2010
$ 33,970
119,102
24,804
44,433
$222,309
$6,267
$ 15,882
87,068
25,421
34,556
$162,927
$6,349
Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded
within ninety days. Lines of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long
as there is no violation of any condition established in the loan agreement. Both commitments to originate credit and lines of credit generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the liens and some commitments are expected to expire
without being drawn upon, the total amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties.
Standby letters of credit are primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less. The credit
risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers. The maximum amount of credit
that would be extended under letters of credit is equal to the total off-balance sheet contract amount of such instrument at December 31, 2011 and
2010. The Company’s deferred revenue under standby letters of credit agreements was nominal.
Note 18—Related Party Transactions
Certain officers, directors and principal stockholders of the Company and its subsidiaries, their immediate families or their affiliated companies (“related
parties”) have loans with one or more of the subsidiaries. These loans are made in the ordinary course of business on substantially the same terms,
including interest and collateral, as those prevailing for comparable transactions with others. Loans to related parties totaled approximately $20,787,000
and $21,271,000 at December 31, 2011 and 2010, respectively. Activity during 2011 and 2010 was as follows:
Beginning balance
New loans
Loan repayments
Ending balance
2011
$21,271
4,935
(4,986)
$21,220
2010
$23,221
4,067
(6,017)
$21,271
Deposits from related parties held by First Mid Bank at December 31, 2011 and 2010 totaled $35,095,000 and $38,569,000, respectively.
See Note 1-“Preferred Stock” regarding the Series C Preferred Stock, the Remaining Investors and the Notes.
Note 19 – Business Combination
On September 10, 2010, First Mid Bank completed its acquisition of 10 Illinois bank branches (the “Branches”) from First Bank, a Missouri state
chartered bank, located in Bartonville, Bloomington, Galesburg, Knoxville, Peoria and Quincy, Illinois. The acquisition was consistent with the
Company’s strategy to expand its overall service area and bring added convenience to its customers by offering banking capabilities in 25 Illinois
communities. In accordance with the Branch Purchase and Assumption Agreement, dated as of May 7, 2010, by and between First Mid Bank and First
Bank, First Mid Bank acquired approximately $336 million of deposits, approximately $135 million of performing loans and the bank facilities and certain
other assets of the Branches. First Mid Bank paid First Bank (a) the principal amount of the loans acquired, (b) the net book value, or approximately
$5.3 million, for the bank facilities and certain assets located at the Branches, (c) a deposit premium of 4.77% on the core deposits acquired, which
equated to approximately $15.6 million, and (d) approximately $1.8 million for the cash on hand at the Branches, with proration of certain periodic
expenses. The acquisition settled by First Bank paying cash of $178.3 million to First Mid Bank for the difference between these amounts and the total
deposits assumed. The purchase was accounted for under the acquisition method in accordance with ASC 805, “Business Combinations,” and
accordingly the assets and liabilities were recorded at their fair values on the date of acquisition.
89
The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands).
Assets
Cash
Loans
Premises and equipment
Goodwill
Core deposit intangible
Other assets
Total assets acquired
Liabilities
Deposits
Securities sold under agreements to repurchase
Other liabilities
Total liabilities assumed
Acquired
Book Value
Fair Value
Adjustments
As Recorded by
First Mid Bank
$180,074
135,219
5,266
-
-
488
$321,047
$336,016
126
515
$336,657
$ -
(2,102)
7,685
8,390
3,050
-
$17,023
$1,413
$1,413
$180,074
133,117
12,951
8,390
3,050
488
$338,070
$337,429
126
515
$338,070
The Company recognized $1,154,000 of costs related to completion of the acquisition during 2010. These acquisition costs were included in other
expense. The difference between the fair value and acquired value of the purchased loans of $2,102,000 is being accreted to interest income over the
remaining term of the loans. The difference between the fair value and acquired value of the assumed time deposits of $1,413,000 is being amortized to
interest expense over the remaining term of the time deposits. The core deposit intangible asset, with a fair value of $3,050,000, is being amortized on
an accelerated basis over its estimated life of ten years.
The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of
the purchase accounting adjustments and acquisition expenses, had the acquisition taken place at the beginning of 2010 (in thousands). The actual
results of operations of the Company include all of the effects of the purchase accounting adjustments and acquisition expenses and, accordingly, no
pro forma information is provided.
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Dividends on preferred shares
Net income available to common stockholders
Earnings per share
Basic
Diluted
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
For the year ended
December 31, 2010
$46,425
4,737
14,686
41,614
14,760
4,527
$10,233
2,240
$ 7,993
$1.31
$1.31
6,092,670
6,116,727
90
The unaudited pro forma condensed combined financial statements do not reflect any anticipated cost savings and revenue enhancements.
Accordingly, the pro forma results of operations of the Company as of and after the business combination may not be indicative of the results that
actually would have occurred if the combination had been in effect during the periods presented or of the results that may be attained in the future.
Note 20 – Leases
The Company has several noncancellable operating leases, primarily for property rental of banking buildings that expire over the next ten years. These
leases generally contain renewal options for periods ranging from one to five years. Rental expense for these leases was $1,331,000, $884,000 and
$543,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Future minimum lease payments under operating leases are:
2012
2013
2014
2015
2016
Thereafter
Total minimum lease payments
Operating Leases
$1,141
1,002
1,002
352
352
880
$4,729
Note 21– Parent Company Only Financial Statements
Presented below are condensed balance sheets, statements of income and cash flows for the Company:
First Mid-Illinois Bancshares, Inc. (Parent Company)
Balance Sheets
December 31,
Assets
Cash
Premises and equipment, net
Investment in subsidiaries
Other assets
Total Assets
Liabilities and Stockholders’ equity
Liabilities
Dividends payable
Debt
Other liabilities
Total Liabilities
Stockholders’ equity
Total Liabilities and Stockholders’ equity
2011
2010
$ 20,538
$ 2,381
3,112
147,225
2,495
$173,370
$ 2,200
28,870
1,333
32,403
140,967
$173,370
481
130,179
2,800
$135,841
$ 1,706
20,620
1,250
23,576
112,265
$135,841
91
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Income
Years ended December 31,
Income:
Dividends from subsidiaries
Other income
Total income
Operating expenses
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries
Income tax benefit
Income (loss) before equity in undistributed
earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Cash Flows
Years ended December 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, accretion, net
Dividends received from subsidiary
Equity in undistributed earnings of subsidiaries
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash provided by (used in) operating activities
Cash flows from financing activities:
Repayment of long-term debt
Proceeds from short-term debt
Proceeds from issuance of preferred stock
Proceeds from issuance of common stock
Purchase of treasury stock
Dividends paid on preferred stock
Dividends paid on common stock
Net cash provided by (used in) financing activities
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
92
2011
2010
2009
$ 938
40
978
2,414
(1,436)
1,005
(431)
11,803
$11,372
$6,744
8
6,752
2,728
4,024
1,062
5,086
3,675
$8,761
$ -
29
29
2,958
(2,929)
1,148
(1,781)
9,995
$8,214
2011
2010
2009
$11,372
$ 8,761
$ 8,214
71
938
(11,803)
(3,283)
128
(2,577)
-
8,250
19,150
406
(2,385)
(2,990)
(1,697)
20,734
18,157
2,381
47
6,744
(3,675)
(9,966)
(12)
1,899
-
-
-
971
(2,499)
(2,136)
(1,714)
(5,378)
(3,479)
5,860
47
-
(9,995)
(447)
(126)
(2,307)
(13,000)
-
24,635
894
(3,122)
(1,242)
(1,521)
6,644
4,337
1,523
$20,538
$ 2,381
$ 5,860
Note 22 – Quarterly Financial Data – Unaudited
The following table presents summarized quarterly data for each of the two years ended December 31:
Selected operations data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expense
Income before income taxes
Income taxes
Net income
Dividends on preferred shares
Quarters ended in 2011
March 31
June 30
September 30
December 31
$14,029
$14,122
$14,168
$14,453
2,324
11,705
940
10,765
4,005
10,292
4,478
1,633
2,845
707
2,243
11,879
916
10,963
4,059
11,011
4,011
1,433
2,578
1,011
2,026
12,142
728
11,414
3,700
10,864
4,250
1,571
2,679
919
1,911
12,542
517
12,025
4,023
10,886
5,162
1,892
3,270
939
Net income available to common stockholders
$ 2,138
$ 1,567
$ 1,760
$ 2,331
Basic earnings per common share
Diluted earnings per common share
$0.35
$0.35
$0.26
$0.26
$0.29
$0.29
$0.39
$0.39
Selected operations data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expense
Income before income taxes
Income taxes
Net income
Dividends on preferred shares
Net income available to common stockholders
Basic earnings per common share
Diluted earnings per common share
Quarters ended in 2010
March 31
June 30
September 30
December 31
$12,210
$12,071
$12,464
$14,138
2,661
9,410
1,083
8,327
3,043
8,708
2,662
880
1,782
554
$ 1,228
$0.20
$0.20
2,686
9,778
884
8,894
3,652
9,536
3,010
998
2,012
554
$ 1,458
$0.24
$0.24
2,590
11,548
1,010
10,538
4,057
10,893
3,702
1,283
2,419
555
$ 1,864
$0.31
$0.31
2,819
9,391
760
8,631
3,068
7,790
3,909
1,361
2,548
577
$ 1,971
$0.32
$0.32
93
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid-Illinois Bancshares, Inc.
Mattoon, Illinois
We have audited the accompanying consolidated balance sheets of First Mid-Illinois Bancshares, Inc. as of December 31, 2011 and 2010 and the
related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended
December 31, 2011. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Mid-Illinois
Bancshares, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), First Mid-Illinois
Bancshares, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2012
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Decatur, Illinois
March 6, 2012
94
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief
financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2011. Based upon that evaluation, the chief executive officer along with the
chief financial officer concluded that the Company’s disclosure controls and procedures as of December 31, 2011, were effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The
Company’s internal control over financial reporting is a process designed under the supervision of the Company’s chief executive officer and chief
financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements
for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 based on the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control—Integrated Framework.” Based on the
assessment, management determined that, as of December 31, 2011, the Company’s internal control over financial reporting is effective, based on
those criteria. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has
been audited by BKD, LLP, an independent registered public accounting firm, as stated in their report following.
March 6, 2012
William S. Rowland
President and Chief Executive Officer
Michael L. Taylor
Chief Financial Officer
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fourth fiscal quarter of 2011 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
95
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid-Illinois Bancshares, Inc.
Mattoon, Illinois
We have audited First Mid-Illinois Bancshares, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s report. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, First Mid-Illinois Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December
31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements of First Mid-Illinois Bancshares, Inc. and our report dated March 6, 2012 expressed an unqualified opinion thereon.
Decatur, Illinois
March 6, 2012
96
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information called for by Item 10 with respect to directors and director nominees is incorporated by reference to the Company’s Proxy Statement for
the 2012 Annual Meeting of the Company’s shareholders under the captions “Proposal 1 – Election of Directors,” “Corporate Governance Matters” and
“Section 16 – Beneficial Ownership Reporting Compliance.”
The information called for by Item 10 with respect to executive officers is incorporated by reference to Part I hereof under the caption “Supplemental
Item – Executive Officers of the Company” and to the Company’s Proxy Statement for the 2012 Annual Meeting of the Company’s shareholders under
the caption “Section 16 – Beneficial Ownership Reporting Compliance.”
The information called for by Item 10 with respect to audit committee financial expert is incorporated by reference to the Company’s Proxy Statement for
the 2012 Annual Meeting of the Company’s shareholders under the captions “Audit Committee” and “Report of the Audit Committee to the Board of
Directors.”
The information called for by Item 10 with respect to corporate governance is incorporated by reference to the Company’s Proxy Statement for the 2012
Annual Meeting of the Company’s shareholders under the caption “Corporate Governance Matters.”
The Company has adopted a code of ethics for senior financial management applicable to the Chief Executive Officer and Chief Financial Officer of the
Company. This code of ethics is posted on the Company’s website. In the event that the Company amends or waives any provisions of this code of
ethics, the Company intends to disclose the same on its website at www.firstmid.com.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the Company’s Proxy Statement for the 2012 Annual Meeting of the Company’s
shareholders under the captions “Executive Compensation,” “Non-qualified Deferred Compensation,” Potential Payments Upon Termination or Change
in Control of the Company,” “Director Compensation,” Corporate Governance Matters – Compensation Committee Interlocks and Insider Participation,”
and “Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by Item 12 with respect to equity compensation plans is provided in the table below.
Plan category
Equity compensation plans approved by
security holders:
(A) Deferred Compensation Plan
(B) Stock Incentive Plan
Equity compensation plans not approved by
security holders (5)
Equity Compensation Plan Information
Number of securities to be
issued upon exercise of
outstanding options
(a)
Weighted-average exercise
price of outstanding options
(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(c)
-
-
228,140 (2)
$23.09 (3)
398,454 (1)
225,591 (4)
-
-
-
Total
228,140
$23.09
624,045
(1) Consists of shares issuable with respect to participant deferral contributions invested in common stock.
(2) Consists of stock options.
(3) Represents the weighted-average exercise price of outstanding stock options.
(4) Consists of stock option and/or restricted stock.
(5) The Company does not maintain any equity compensation plans not approved by stockholders.
97
The Company’s equity compensation plans approved by security holders consist of the Deferred Compensation Plan and the Stock Incentive Plan.
Additional information regarding each plan is available in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Stock Plans” and Note 13 – “Stock Incentive herein.
The information called for by Item 12 with respect to security ownership is incorporated by reference to the Company’s Proxy Statement for the 2012
Annual Meeting of the Company’s shareholders under the caption “Voting Securities and Principal Holders Thereof.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by Item 13 is incorporated by reference to the Company’s Proxy Statement for the 2012 Annual Meeting of the Company’s
shareholders under the captions “Certain Relationships and Related Transactions” and “Corporate Governance Matters – Board of Directors.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is incorporated by reference to the Company’s Proxy Statement for the 2012 Annual Meeting of the Company’s
shareholders under the caption “Fees of Independent Auditors.”
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
PART IV
The following consolidated financial statements and financial statement schedules of the Company are filed as part of this document under Item 8.
Financial Statements and Supplementary Data:
•
•
•
•
Consolidated Balance Sheets -- December 31, 2011 and 2010
Consolidated Statements of Income -- For the Years Ended December 31, 2011, 2010 and 2009
Consolidated Statements of Changes in Stockholders’ Equity -- For the Years Ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2011, 2010 and 2009.
(a)(3) – Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that follows the Signature Page and immediately
precedes the exhibits filed.
98
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
FIRST MID-ILLINOIS BANCSHARES, INC.
(Company)
Dated: March 6, 2012
By:
William S. Rowland
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 6th day of March 2012, by the following
persons on behalf of the Company and in the capacities listed.
Signature and Title
William S. Rowland, Chairman of the Board,
President and Chief Executive Officer and Director
(Principal Executive Officer)
Michael L. Taylor, Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Joseph R. Dively, Senior Executive Vice President and Director
Charles A. Adams, Director
Steven L. Grissom, Director
Benjamin I. Lumpkin, Director
Gary W. Melvin, Director
Sara Jane Preston, Director
Ray A. Sparks, Director
99
Exhibit
Number
Exhibit Index to Annual Report on Form 10-K
Description and Filing or Incorporation Reference
2.1 Branch Purchase and Assumption Agreement between First Mid-Illinois Bank & Trust, N.A. and First Bank dated May 7, 2010
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s 8-K filed with the SEC on May 7, 2010.
3.1 Restated Certificate of Incorporation and Amendment to Restated Certificate of Incorporation of First Mid-Illinois Bancshares, Inc.
Incorporated by reference to Exhibit 3(a) to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1987.
3.2 Amended and Restated Bylaws of First Mid-Illinois Bancshares, Inc.
Incorporated by reference to Exhibit 3.2 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on November 14, 2007.
3.3 Certificate of Designation, Preferences and Rights of Series B 9% Non-Cumulative Perpetual Convertible Preferred Stock of the Company
Incorporated by reference to Exhibit 4.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 11, 2009.
3.4 Certificate of Designation, Preferences and Rights of Series C 8% Non-Cumulative Perpetual Convertible Preferred Stock of the Company
Incorporated by reference to Exhibit 4.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 11, 2011.
4.1 Rights Agreement, dated as of September 22, 2009, between First Mid-Illinois Bancshares, Inc. and Harris Trust and Savings Bank,
as Rights Agent
Incorporated by reference to Exhibit 4.1 to First Mid-Illinois Bancshares, Inc.’s Registration Statement on Form 8-A filed with the SEC on
September 24, 2009.
4.2
Form of Registration Rights Agreement
Incorporated by reference to Exhibit 4.2 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 11, 2009.
4.3
Form of Registration Rights Agreement
Incorporated by reference to Exhibit 4.2 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 11, 2011.
4.4
Form of Promissory Note
Incorporated by reference to Exhibit 4.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on November 21, 2011.
10.1 Employment Agreement between the Company and William S. Rowland
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on December 16, 2010.
10.2 Employment Agreement between the Company and Joseph R. Dively
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Report on Form 8-K filed with the SEC on April 27, 2011.
10.3 Employment Agreement between the Company and John W. Hedges
Incorporated by reference to Exhibit 10.2 to First Mid-Illinois Bancshares, Inc.’s Report on Form 8-K filed with the SEC on April 27, 2011.
10.4 Employment Agreement between the Company and Michael L. Taylor
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on May 3, 2010.
10.5 Employment Agreement between the Company and Laurel G. Allenbaugh
Incorporated by reference to Exhibit 10.2 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on May 3, 2010.
10.6 Employment Agreement between the Company and Charles A. LeFebvre
Incorporated by reference to Exhibit 10.3 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on May 3, 2010.
10.9 Employment Agreement between the Company and Eric S. McRae
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 24, 2009.
10.10 Amended and Restated Deferred Compensation Plan
Incorporated by reference to Exhibit 10.4 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the for the year ended
December 31, 2005.
100
Exhibit
Number
10.11 2007 Stock Incentive Plan
Exhibit Index to Annual Report on Form 10-K
Description and Filing or Incorporation Reference
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on May 23, 2007.
10.12 First Amendment to 2007 Stock Incentive Plan
Incorporated by reference to Exhibit 10.12 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the for the year ended
December 31, 2009.
10.13 1997 Stock Incentive Plan
Incorporated by reference to Exhibit 10.5 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the for the year ended
December 31, 1998.
10.14 Form of 2007 Stock Incentive Plan Stock Option Agreement
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on December 12, 2007.
10.15 Form of Stock Award/Stock Unit Award Agreement
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on September 27, 2011.
10.16 Form of Stock Unit Award Agreement
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on September 27, 2011.
10.17 Supplemental Executive Retirement Plan
Incorporated by reference to Exhibit 10.8 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the for the year ended
December 31, 2005.
10.18 First Amendment to Supplemental Executive Retirement Plan
Incorporated by reference to Exhibit 10.9 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the for the year ended
December 31, 2005.
10.19 Participation Agreement (as Amended and Restated) to Supplemental Executive Retirement Plan between the Company and
William S. Rowland
Incorporated by reference to Exhibit 10.10 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005.
10.20 Description of Incentive Compensation Plan
Incorporated by reference to Exhibit 10.16 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008.
11.1 Statement re: Computation of Earnings Per Share (Filed herewith)
21.1 Subsidiaries of the Company (Filed herewith)
23.1 Consent of BKD LLP (Filed herewith)
31.1 Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
31.2 Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
(Filed herewith)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
(Filed herewith)
101
Exhibit 31.1
I, William S. Rowland, certify that:
1.
I have reviewed this annual report on Form 10-K of First Mid-Illinois Bancshares, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 6, 2012
William S. Rowland
President and Chief Executive Officer
102
Exhibit 31.2
I, Michael L. Taylor, certify that:
1.
I have reviewed this annual report on Form 10-K of First Mid-Illinois Bancshares, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 6, 2012
Michael L. Taylor
Chief Financial Officer
103
Exhibit 32.1
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2011 (the
“Report”), I, William S. Rowland, as President and Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 6, 2012
William S. Rowland
President and Chief Executive Officer
104
Exhibit 32.2
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2011 (the
“Report”), I Michael L. Taylor, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 6, 2012
Michael L. Taylor
Chief Financial Officer
105
Banking Centers
ALTAMONT
101 West Washington 62411
618-483-5151
ARCOLA
249 West Springfield Road 61910
217-268-5700
BARTONVILLE
1401 West Garfield Avenue 61607
309-697-4911
BLOOMINGTON
201 North Prospect Road 61704
309-664-7444
CHAMPAIGN
2229 South Neil Street 61820
913A West Marketview 61822
217-359-9837
CHARLESTON
500 West Lincoln Avenue 61920
701 Sixth Street 61920
EIU Student Union 61920
217-345-3977
DECATUR
100 South Water 62523
3101 North Water 62526
217-423-7700
EFFINGHAM
902 North Keller Drive 62401
217-342-6111
GALESBURG
101 East Main Street 61401
1535 North Henderson 61401
309-343-9181
HIGHLAND
12616 State Route 143 62249
1301 Broadway 62249
618-654-1111
KNOXVILLE
331 East Main Street 61448
309-289-2331
MAHOMET
502 East Oak 61853
217-586-3450
MANSFIELD
1 Jefferson 61854
217-489-2271
MARYVILLE
2930 North Center Street 62062
618-288-5500
MATTOON
1515 Charleston Avenue 61938
1500 Lafayette Avenue 61938
333 Broadway Avenue East 61938
1504A Lake Land Boulevard 61938
217-234-7454
MONTICELLO
100 West Washington 61856
219 West Center Street 61856
217-762-2111
NEOGA
102 East Sixth Street 62447
217-895-2226
PEORIA
230 Southwest Adams 61602
1021 West Bird Boulevard 61615
3037 North Sterling Avenue 61604
309-637-7500
POCAHONTAS
103 Park Street 62275
618-669-2277
QUINCY
636 Hampshire Street 62301
3233 Broadway Street 62301
217-223-4983
SULLIVAN
200 South Hamilton 61951
217-728-4311
TAYLORVILLE
200 North Main 62568
217-824-9855
TUSCOLA
410 South Main Street 61953
217-253-3344
URBANA
601 South Vine Street 61801
217-367-8451
WELDON
490 Maple 61882
217-736-2294
Executive Management
William S. Rowland
Chairman and
Chief Executive Officer
Joseph R. Dively
Senior Executive Vice President and
President, First Mid-Illinois Bank & Trust, NA
Michael L. Taylor
Executive Vice President and
Chief Financial Officer
John W. Hedges
Executive Vice President and
Chief Credit Officer, First Mid-Illinois Bank & Trust, NA
Eric S. McRae
Executive Vice President and
Senior Lender, First Mid-Illinois Bank & Trust, NA
Laurel G. Allenbaugh
Executive Vice President and
President, Mid-Illinois Data Services, Inc.
Charles A. LeFebvre
Executive Vice President and
Trust & Wealth Management Director
First Mid-Illinois Bancshares
Board of Directors
Charles A. Adams
President, Howell Paving, Inc.
Joseph R. Dively
Senior Executive Vice President and
President, First Mid-Illinois Bank & Trust, NA
Steven L. Grissom
Administrative Officer, SKL Investment Group, LLC
Benjamin I. Lumpkin
Owner, Big Toe Press, LLC
Member, SKL Investment Group Finance
Committee
Gary W. Melvin
President and Co-Owner, Rural King Stores
Sara J. Preston
Retired Bank Executive
William S. Rowland
Chairman and Chief Executive Officer,
First Mid-Illinois Bancshares, Inc.
Ray A. Sparks
Private Investor, Sparks Investment Group, LP
Executive Director, Mattoon Area Family YMCA
Corporate Profile
First Mid-Illinois Bancshares, Inc. is the parent company of First Mid-Illinois Bank & Trust, N.A.; Mid-Illinois Data
Services, Inc.; and First Mid Insurance Group. The bank was first chartered in 1865 and has since grown into a more
than $1.5 billion community-focused organization that provides financial services through a network of 38 banking
centers in 25 Illinois communities. Our talented team is comprised of over 400 men and women who take great pride
in First Mid, their work and their ability to serve our customers.
Our mission is to satisfy the broad financial needs of our customers, provide profit for our shareholders, ensure
satisfaction for our staff and contribute to the well-being of our communities. We distinguish ourselves by our actions
and by our results.
More information about First Mid is available on our website at www.firstmid.com. Our stock is traded in the
over-the-counter market under the symbol “FMBH.”
1421 Charleston Avenue Mattoon, Illinois 61938www.firstmid.com