OUR FOCUS
2 0 1 3 A N N U A L R E P O R T
S E R V I N G .
G R O W I N G .
P R O T E C T I N G .
Our Vision is to be the best financial
institution in our region, where
service is provided at a level above
expectation, and to be recognized as
such by our customers, our employees,
and by the communities we serve.
C O R P O R A T E P R O F I L E
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 $1.6 billion community-focused organization that provides
financial services through a network of 37 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 value for our shareholders, career
opportunities for employees, 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.”
S T O C K H O L D E R I N F O R M A T I O N
DIVIDEND REINVESTMENT
PLAN TRANSFER AND
DIVIDEND PAYING AGENT
For information concerning the Company’s
PRIMARY MARKET MAKERS
FIG Partners, LLC
1175 Peachtree St. NE
FORM 10-K
A copy of the 2013 Annual Report
on Form 10-K with all exhibits filed
100 Colony Square Suite 2250
with the Securities and Exchange
Dividend Reinvestment Plan or for
Atlanta, GA 30361
stockholder inquiries concerning dividend
866-344-2657
checks or their stockholder records, contact:
REGULAR MAIL
Computershare
P.O. Box 30170
College Station , TX 77842-3170
STREET ADDRESS FOR
OVERNIGHT DELIVERY
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
(312) 360-5377 | (877) 373-6374
www.computershare.com/contactus
Boenning & Scattergood
9916 Brewster Lane
Powell, OH 43065
866-326-8113
Raymond James
222 S. Riverside Plaza 7th Floor
Chicago, IL 60606
800-800-4693
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 30, 2014,
at 4:00 p.m. in the lobby of First
Mid-Illinois Bank & Trust, 1515
Charleston Avenue, Mattoon, Illinois.
2013 ANNUAL REPORT 1
2013 ANNUAL REPORT 1
2 2 2 22 2222 22 222222 22220130130131301301301301100011 ANANANAN ANAANANANANNAANNNNUANUANUUUANUANUANUANUAUAUANU L RL RL RL RRL RR RREPOEPOEPOOEPOEPOEPOEPOPOOPOOORTRTRTRTRTRTTTTTTTTTTTRRTRTT 11111111111 1 1111111111111111 1 111
A M E S S A G E
F R O M T H E
CHAIRMAN
W I L L I A M S . R O W L A N D
J O S E P H R . D I V E L Y
F O R M E R C H A I R M A N A N D C H I E F
C H A I R M A N , P R E S I D E N T A N D C H I E F
E X E C U T I V E O F F I C E R
E X E C U T I V E O F F I C E R
2 F I R S T M I D - I L L I N O I S B A N C S HA R E S , I N C .
2 F I R S T M I D - I L L I N O I S B A N C S HA R E S , I N C .
2 F I R S T M I DM I D - I L- I LI LI LLI L L I NL I NL I N O I SO I SO I S B AB A B A N C SN C SN C S HHHHHHHHHHHA RHA RHA RHA RHA RHA RHAHA RHA RA RA RA RA RHA RRRRRRHA RHA RHHHHA RHAHAHAHA RHA RRHHHHA RAA RHHHHA RHA RRRHHHA RHA RRRRA RRHA RAAHHHAHHHH RH RAHH
I NII NI N I NI N I N I NI NI NI NI NI N I NI NII NI NNII NNI N CCC .C .C .C .C .CC .C .C .CC .CC .C .CCCCC
E S ,E SE S ,E S ,E SE S ,E S ,E S ,E S ,E S ,E SE S ,E S ,E SE SE SE S ,E SE S ,E S ,E SSEEEEEEE
Year-End Assets
2003-2013 (Dollars in Thousands)
$1,750,000
$1,500,000
$1,250,000
$1,000,000
$750,000
$500,000
$250,000
$0
2003 2004 2005
2006
2007
2008
2009
2010
2011
2012
2013
First Mid-Illinois Bank & Trust Assets Trust & Wealth Management Assets
As we close the books on our
148th year in business, I am
pleased to announce that
First Mid-Illinois Bancshares, Inc.
three years as President of First Mid-
that goal. I am delighted that Bill will
Illinois Bank & Trust, N.A. We have
remain on the Board of Directors
a committed team who understands
where his knowledge and experience
the special role that community banks
will allow him to continue to serve
completed a very successful 2013. Our
play in the communities we serve.
as a trusted advisor and where
net income, earnings per share, and
he will continue his vigilance on
total assets finished at all-time highs
Bill Rowland retired after 25 years of
the behalf of our stakeholders.
and we continued to have strong asset
service to First Mid. Our growth and
quality ratios. When we combine the
financial success is a statement of his
From a financial perspective, net
strength of these results and our balance
leadership. During Bill’s years with the
income for 2013 was $14,722,000
sheet along with the capabilities of the
company, net income grew from $1.7
compared to $14,025,000 for 2012
First Mid team, I am confident we are
million to over $14 million, our assets
which tops our highest net income
well positioned for future growth.
grew from $239 million to more than
for the third year in a row. Net
$1.6 billion, we expanded the number
income was higher than last year as
On January 1, 2014, I assumed the roles
of First Mid-Illinois Bank & Trust
net interest income increased due to
of Chairman and CEO succeeding Bill
locations to 37 banking centers, and our
growth in loan balances and sustained
Rowland who retired at the end of the
employee base grew from fewer than
low funding costs, the provision
year. I am incredibly proud to represent
100 to over 400. Clearly the impact
for loan losses was reduced given
the First Mid-Illinois Bancshares,
that Bill has had on our organization is
lower non-performing assets and net
Inc. team. Having previously served
significant and his contribution will be
charge-offs and non-interest income
on the Board of Directors for seven
felt for years to come. I feel fortunate
increased as a result of more gains
years, I knew that the Company
that Bill and I worked together closely
recognized on the sale of securities
was strong financially and had an
for over two and a half years co-leading
and greater trust and brokerage
experienced, professional staff, and
the organization to ensure that, when
revenues. Diluted earnings per share
strong shareholder support. Those
he retired, the transition would be
increased 6.8% to $1.73 per share
views only strengthened in my nearly
smooth. I feel we have accomplished
compared to $1.62 per share for 2012.
2013 ANNUAL REPORT 3
2013 ANNUAL REPORT 3
ANNUAL REPOORRT 3 3
22220130
Net interest income was $49.9 million
for 2013 compared to $49.6 million for
2012. This was due to growth in the
balance sheet with greater balances of
loans and deposits. Our loan balances
increased 7.9% from $911 million at
December 31, 2012 to $983 million at
December 31, 2013. This increase was
primarily due to growth in commercial
real estate and agricultural real estate
loans. Deposit balances increased
$13.6 million during 2013 with higher
checking and time deposit account
balances. The growth in the balance
declined to $7.0 million at December
31, 2013 compared to $8.8 million at
December 31, 2012. Net loan charge-
offs amounted to $.7 million in 2013,
down from $2.0 million charged-off
in 2012. The improvement in these
two metrics allowed us to reduce
the provision for loan losses. Also,
the balance of allowance for loan
losses increased to $13.2 million as of
December 31, 2013 and we continue
to have a strong coverage ratio of
the allowance for loan losses to the
level of non-accrual loans of 216%.
Michael L. Taylor, Senior Executive Vice President
of First Mid-Illinois Bank & Trust
sheet helped to offset a decline in the
Many community banks saw a more
net interest margin. The spread between
significant margin decline and had less
Non-interest income also increased
the interest rate received on loans
balance sheet growth. We are pleased
in 2013 to $19.3 million compared to
and the amount paid on deposits and
that while we held down our funding
$18.3 million in 2012. During 2013,
borrowings continues to be “squeezed”
costs, we were able to increase loan
we had more gains on the sale of
as we remain in this historically-low
and deposit balances through further
securities primarily due to the sale of
interest rate environment. While there
expansion of customer relationships.
two trust preferred securities which
was an increase in intermediate-term
resulted in a gain of $1.4 million.
treasury rates during 2013 that impacted
Overall, our credit quality was strong
These securities were comprised
mortgage rates, the rate increase has
heading into 2013 and we ended
of community bank debt issuances
not translated to increased yields on
the year even stronger on key asset
and have increased in value as the
commercial loans as pricing for quality
quality metrics. The provision for
banking industry recovers from the
borrowers remains ultra-competitive.
loan losses decreased to $2.2 million
recession. In addition to security
We have maintained our low funding
in 2013 compared to $2.6 million
gains, revenues from trust and
costs in 2013 which helped reduce the
in 2012. Non-performing loans and
wealth management also increased
impact of the reduction in rate spread.
other real estate owned balances
by $380,000 due to increased
Comparison of 5 Year Cumulative Total Return*
Among First Mid-Illinois Bancshares, Inc.,
the S&P 500 Index, and the NASDAQ Bank Index
$300
$250
$200
$150
$100
$50
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
4 F I R S T M I D - I L L I N O I S B A N C S HA R E S , I N C .
First Mid-Illinois Bancshares, Inc.
S&P 500
NASDAQ Bank
12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13
$100.00 $ 80.54 $ 81.06 $ 88.51 $ 111.18 $109.72
$100.00 $ 126.46 $ 145.51 $148.59 $ 172.37 $228.19
$100.00 $ 83.70 $ 95.55 $ 85.52 $101.50 $143.84
* $100 invested on 12/31/08 in stock or index, including
reinvestment of dividends. Fiscal year ending December 31.
Source: SNL Financial LC, Charlottesville, VA. ©2014
Year-End Net Income
2003-2013 (Dollars in Thousands)
Dividends Paid Per Share
2003-2013
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
revenue from the retirement services
Trust and Wealth Management,
working closely with Tony and the
and brokerage areas. These increases
and Insurance. In 2013, we worked
entire Board in the years to come.
offset the decline in mortgage banking
diligently to coordinate activities
income during the year as refinances
across our business units for the
Overall, I am pleased with our 2013
slowed with the increase in interest rates.
betterment of our customers. Our
progress and optimistic about the
customer feedback has been clear that
future for First Mid. While we can’t
Our regulatory capital ratios remain
they expect us to provide financial
predict the economic future, we have
strong. Despite the 2013 earnings added
advice for all of their financial
a more positive outlook entering
to capital (an increase in retained
needs across all three lines of our
2014 than the past several years have
earnings), our Tier 1 capital and Total
business. We’ve taken that feedback
afforded us. I’m confident about our
capital ratios at December 31, 2013 were
and are focusing our efforts to more
capabilities to serve the financial needs
slightly below the ratios in 2012. This
effectively serve the broad range
of our customers while also exploring
was primarily due to the mark-to-market
of our customers’ financial needs
opportunities to expand both our
entry for securities resulting from
in a more coordinated method.
services and our customer base. As we
the rise in intermediate interest rates
continue to look for new opportunities,
during 2013. Most banks experienced
I also want to highlight a couple of
we remain committed to the principals
a decline in market value of securities
changes relating to our Management
that got us here and that serve as
from the interest rate increase in 2013.
team and Board of Directors. I’m
the foundation of our organization:
pleased to announce that Mike Taylor
safety and soundness, integrity,
I also wanted to note that our dividends
was promoted to Senior Executive
professionalism, confidentiality,
per share of $.46 paid in 2013 is lower
Vice President of the bank. Mike has
and responsibility. These values
than the $.63 per share paid in 2012. You
worked on the First Mid team since
contributed to our history, define our
might remember that in December 2012
May 2000 as Executive Vice President
culture, and will guide our future.
the Board of Directors elected to move
and Chief Financial Officer. Over the
forward the dividend that would have
past 13 years, he has played a critical
Thank you for your continued support
normally been paid in January 2013.
role in navigating the company
of First Mid-Illinois Bancshares, Inc.
In effect, there was an extra one-time
through the difficult regulatory and
dividend payment in 2012. We resumed
economic environment and he will
Sincerely,
our semi-annual dividend in 2013 and
continue to help guide us as we move
paid dividends in June and December.
forward. Also, Ray Anthony (Tony)
Sparks was nominated and elected
Our financial growth is a direct reflection
to serve as the lead independent
of the strong teams that we have across
director for First Mid-Illinois
our three core business lines: Banking,
Bancshares, Inc. I look forward to
Joseph R. Dively
Chairman, President
and Chief Executive Officer
2013 ANNUAL REPORT 5
B U S I N E S S
BANKING
A T I T S F I N E S T
6 F I R S T M I D - I L L I N O I S B A N C S HA R E S , I N C .
6 F I R S T M I D - I L L I N O I S B A N C S HA R E S , I N C .
Banking has seen a consistent increase in net
last two years. Loan balances increased 7.9%
loans, and a steady increase in deposits over the
from $911 million at December 31, 2012 to $983 million
at December 31, 2013. Deposit balances increased $13.6
million during 2013 with higher checking and time
deposit account balances.
J O H N H E D G E S
E X E C U T I V E V I C E P R E S I D E N T ,
C O M M E R C I A L L E N D I N G
C L AY D E A N
S E N I O R V I C E P R E S I D E N T ,
D E P O S I T S E R V I C E S
E R I C M C R A E
E X E C U T I V E V I C E P R E S I D E N T ,
C O M M E R C I A L L E N D I N G
“One of our goals every year is to increase
quality loans in all communities we serve by
staffing well trained, skilled loan officers across
our footprint. 2013 was an excellent year as
all of our asset quality metrics improved and
we grew our loan totals by $72 million.”
“Our treasury management team works with our
business customers to provide cash management
and technological solutions and advice for
financial safety in uncertain economic times.
Our goal is to help them operate as optimally as
possible while protecting their liquid assets.”
– J O H N H E D G E S
– C L A Y D E A N
2013 ANNUAL REPORT 7
2013 ANNUAL REPORT 7
C H U C K L E F E B V R E
E X E C U T I V E V I C E P R E S I D E N T ,
T R U S T & W E A L T H M A N A G E M E N T
P A U L S A E G E S S E R
C H I E F E X E C U T I V E O F F I C E R ,
F I R S T M I D I N S U R A N C E G R O U P
8 F I R S T M I D - I L L I N O I S B A N C S HA R E S , I N C .
8 F I R S T M I D - I L L I N O I S B A N C S HA R E S , I N C .
S A F E G U A R D I N G
Y O U R F I N A N C I A L F U T U R E ,
H O M E , F A M I L Y & B U S I N E S S
FOR OVER 100 YEARS
In 2013, we worked diligently to better align our Trust and Wealth
Management and Insurance divisions with the Banking business unit.
This proved successful for both the bank and our customers allowing us
to better meet the broad financial needs of our customers. We will continue
to focus on areas in which we can leverage our knowledge and relationships
across these business units to assist our customers with their wealth building
and preserving strategies.
“With over 20 experts on our Trust and Wealth
Management team, we’re able to offer our
customers customized solutions in estate and trust
administration, farm management, investment
planning, and retirement services. In 2013, we
provided financial solutions to over 2,600 client
households and businesses in addition to increasing
our revenue by $380,000 due to increased revenue
from the retirement services and brokerage areas.”
“The agency has always believed the key to
long-term success is in two guiding values
– exceed the customer’s expectations and
earn the respect of our insurance company
partners. 2013 gave us the chance to perform
on both. The unprecedented overhaul of
healthcare allowed us to help our customers
navigate the new rules and choices.”
– C H U C K L E F E B V R E
– P A U L S A E G E S S E R
2013 ANNUAL REPORT 9
2013 ANNUAL REPORT 9
BOARD OF DIRECTORS PHOTO (left to right): Seated: Steve Grissom and Gary Melvin. Standing: William Rowland, Ray Sparks, Holly Bailey, Benjamin Lumpkin and Joseph Dively.
B O A R D O F D I R E C T O R S
HOLLY A. BAILEY
President of Howell Asphalt Company
Executive Vice President of Howell Paving, Inc.
JOSEPH R. DIVELY
Chairman, President and Chief Executive Officer,
First Mid-Illinois Bancshares, Inc.
STEVEN L. GRISSOM
Administrative Officer, SKL Investment Group, LLC
BENJAMIN I. LUMPKIN
Owner, Big Toe Press, LLC
Member, SKL Investment Group Finance Committee
E X E C U T I V E M A N A G E M E N T T E A M
JOSEPH R. DIVELY
Chairman, President and Chief Executive Officer,
First Mid-Illinois Bancshares, Inc.
President and Chief Executive Officer,
First Mid-Illinois Bank & Trust, N.A.
MICHAEL L. TAYLOR
Executive Vice President, First Mid-Illinois Bancshares, Inc.
Senior Executive Vice President and Chief Financial Officer,
First Mid-Illinois Bank & Trust, N.A.
JOHN W. HEDGES
Executive Vice President, First Mid-Illinois Bancshares, Inc.
Senior Executive Vice President and Chief Credit Officer,
First Mid-Illinois Bank & Trust, N.A.
ERIC S. MCRAE
Executive Vice President, First Mid-Illinois Bancshares, Inc.
Executive Vice President and Senior Lender,
First Mid-Illinois Bank & Trust, N.A.
10 F I R S T M I D - I L L I N O I S B A N C S HA R E S , I N C .
GARY W. MELVIN
Consultant and Director, Rural King Stores
WILLIAM S. ROWLAND
Former Chairman and Chief Executive Officer,
First Mid-Illinois Bancshares, Inc.
RAY A. SPARKS
Private Investor, Sparks Investment Group, LP
Chief Executive Officer, Mattoon Area Family YMCA
LAUREL G. ALLENBAUGH
Executive Vice President, First Mid-Illinois Bancshares, Inc.
Executive Vice President and Chief Operations and IT Officer,
First Mid-Illinois Bank & Trust, N.A.
CHARLES A. LEFEBVRE
Executive Vice President, First Mid-Illinois Bancshares, Inc.
Executive Vice President and Wealth Management Officer,
First Mid-Illinois Bank & Trust, N.A.
CHRISTOPHER L. SLABACH
Senior Vice President, First Mid-Illinois Bancshares, Inc.
Senior Vice President and Chief Risk Management Officer,
First Mid-Illinois Bank & Trust, N.A.
CLAY M. DEAN
Senior Vice President, First Mid-Illinois Bancshares, Inc.
Senior Vice President and Chief Deposit Services Officer,
First Mid-Illinois Bank & Trust, N.A.
Five-Year Financial Data
(Dollars in thousands, except share data)
Selected Income Statement Data:
2013
2012
2011
2010
2009
Interest income
Interest expense
Net interest income
Provision for loan losses
Net income after provision for loan losses
Other income
Other expenses
Income before income taxes
Income taxes
Net income
Dividends on preferred shares
$53,459
$55,767
$56,772
$50,883
$51,409
3,535
6,157
8,504
10,756
15,837
49,924
49,610
48,268
40,127
35,572
2,193
47,731
19,341
43,504
23,568
8,846
14,722
4,417
2,647
3,101
3,737
3,594
46,963
45,167
36,390
31,978
18,310
15,787
13,820
13,455
42,838
43,053
36,927
33,212
22,435
17,901
13,283
12,221
8,410
6,529
4,522
4,007
14,025
11,372
8,761
8,214
4,252
3,576
2,240
1,821
Net income available to common stockholders
$10,305
$9,773
$7,796
$6,521
$6,393
Selected Balance Sheet Data:
Assets
Cash and cash equivalents
$65,102
$82,712
$73,102
$231,493
$90,411
Certificates of deposit investments
—
6,665
13,231
10,000
9,344
Investment securities
Loans held for sale
Net loans
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits
Other borrowings
Other liabilities
Total liabilities
Stockholders’ equity
488,724
508,309
478,967
342,866
239,156
514
212
1,046
114
149
969,041
899,077
847,908
794,074
691,139
82,117
81,057
86,702
89,698
64,956
$1,605,498
$1,578,032 $1,500,956 $1,468,245 $1,095,155
$1,287,616
$1,274,065
$1,170,734
$1,212,710
$840,410
159,807
139,104
181,000
137,427
133,756
8,694
8,176
8,255
5,843
9,768
1,456,117
1,421,345
1,359,989
1,355,980
983,934
149,381
156,687
140,967
112,265
111,221
Total liabilities and stockholders’ equity
$1,605,498
$1,578,032 $1,500,956 $1,468,245 $1,095,155
Dividends to preferred stockholders
$4,417
$4,252
$3,576
$2,240
$1,821
Dividends paid to common stockholders
Dividends paid per common share
Basic earnings per common share
Diluted earnings per common share
Book value per common share
2,713
0.46
1.74
1.73
16.54
3,787
0.63
1.62
1.62
2,304
2,314
2,329
0.38
1.29
1.29
0.38
1.07
1.07
0.38
1.04
1.04
17.53
16.18
14.46
14.23
2013 ANNUAL REPORT 11
O U R S T R A T E G Y
T O O P E R A T E A S A C U S T O M E R - F O C U S E D O R G A N I Z A T I O N ; T O R E C R U I T
A N D R E TA I N A W E L L - E D U C A T E D , Q UA L I T Y S TA F F ; T O I N V E S T I N O U R
C O M M U N I T I E S ; T O B U I L D T E C H N O L O G I C A L C A PA B I L I T I E S W H I C H W I L L
B E T T E R S E R V E T H E N E X T G E N E R A T I O N O F C U S T O M E R S ; T O A C H I E V E L O N G -
T E R M C O N S I S T E N T G R O W T H ; A N D T O P R O D U C E L E V E L S O F P R O F I TA B I L I T Y
T H A T P R O V I D E T H E R E S O U R C E S N E C E S S A R Y T O R E I N V E S T I N T H E B A N K .
12 F I R S T M I D - I L L I N O I S B A N C S HA R E S , I N C .
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, 2013
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)
1421 Charleston Avenue, Mattoon, Illinois
(Address of principal executive offices)
37-1103704
(I.R.S. employer identification no.)
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 amendments to this
Form Yes [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 [ ]
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 $80,907,564. 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, 2014, 5,872,977 shares of the Registrant’s common stock, $4.00 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Into Form 10-K Part:
Portions of the Proxy Statement for 2014 Annual Meeting of Shareholders to be held on April 30, 2014 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
13
15
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17
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20
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49
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ITEM 1.
BUSINESS
Company and Subsidiaries
PART I
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:
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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 First Mid Insurance, 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.
In 2013, the Company opened a de novo branch in Decatur.
Employees
The Company, MIDS, First Mid Insurance and First Mid Bank, collectively, employed 406 people on a full-time equivalent basis as of December 31,
2013. 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.
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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 91% 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.
Business Strategies
Mission Statement. The Company’s mission statement is to satisfy the broad financial needs of its customers, provide value for its shareholders, career
opportunities for its employees, and contribute to the well-being of its communities.
Excellence 2015. Excellence 2015 is a strategic plan that was developed in 2012. This multi-year strategic plan has broad-based initiatives designed to
ensure the Company performs at a level with the highest performing community banks in the Midwest and to increase value for its shareholders, customers
and employees in the future. The strategic plan was developed by executive management of the Company, and modified and adopted by the Board of
DIrectors, without incurring any costs for third-party assistance. This initiative coincides with the 150th anniversary of the organization that will occur in April
2015. The Excellence 2015 plan was not undertaken as a result of any weaknesses or deficiencies identified during the Company’s control assessments but
rather as part of the Company’s effort to continually assess and improve. Excellence 2015 is comprised of broad strategies for growth, customers,
employees, operations and infrastructure, shareholders and risk management. Following is a description of these strategies.
Growth Strategy. The Company believes that growth of revenues and its customer base is vital to the goal of increasing the value of its shareholders’
investment. The Company strives to create shareholder value by maintaining a strong balance sheet and increasing profits. 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 attempt to match products and services with the particular financial needs of individual customers and prospective customers. Many senior
officers of the organization are required to attend monthly 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 $226 million at December 31, 2009 to $357 million at December 31, 2013. Approximately 60% of the Company’s total revenues were derived
from lending activities in the fiscal year ended December 31, 2013. The Company has also focused on growing its 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 and group medical 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. The Company would also consider a stock-based acquisition if the strategic
and financial metrics were compelling.
Customer Strategy. The Company uses its market and customer knowledge to build relationships that provide high-value customer experiences.
Employee Strategy. The judgments, experiences and capabilities of the Company’s employees are used to create an environment where meeting the
needs of our customer, communities and stockholders is always of importance.
Strategy for Operations & Infrastructure. Operationally, the Company centralizes most administrative and operational tasks within its home office 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 practicable, and allows for better management of risk inherent in the business. The Company also utilizes technology where practicable in
daily banking activities to reduce 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 and customer technology.
Shareholder Strategy. The Company strives to provide a competitive dividend as well as the opportunity for stock price appreciation.
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Risk Management Strategy. The Company maintains a comprehensive risk management framework. The Company has initiated an Enterprise Risk
Management (“ERM”) process whereby management assesses the relevant risks inherent in the business, determines internal controls and procedures are
in place to address the various risks, develops a structure for monitoring and reporting risk indicators and trends over time, and incorporates action plans to
manage risk positions. The ERM process was not undertaken as a result of any weaknesses or deficiencies identified during the Company’s control
assessments but rather is part of the Company’s effort to continually assess and improve by taking a more holistic approach to risk management. The
Company's Chief Risk Management Officer is responsible for facilitating the ERM process. The Company utilizes a comprehensive set of operational
policies and procedures that have been developed over time. These policies are continually reviewed by management, the Chief Risk Management Officer,
and the Board of Directors. The Company’s internal audit function completes procedures to ensure compliance with these policies. While there are several
risks that pertain to the business of banking, three risks that are inherent with most banking companies are credit risk, interest rate risk, and liquidity risk.
In the business of banking, credit risk is an important risk as losses from uncollectible loans can 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 $24.2 million at December 31, 2013. The full 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 (0.27% of total loans) over the past five years. Nonperforming loans were $6.5 million
(0.66% of total loans) at December 31, 2013. 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 banking business. 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 for evaluating these risks. 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 2013, the Company’s net interest margin decreased to 3.38% from 3.44% in
2012.
Markets and Competition
The Company has active competition in all areas in which First Mid Bank 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.
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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.
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.
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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.
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. The Company will continue to evaluate the
affects of these changes. 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 began 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.
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.
Limits and regulates, under the provisions of the Act know as the Volker Rule, a financial institution's ability to engage in proprietary trading or to
own or invest in certain private equity and hedge funds.
Basel III
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. On July 2, 2013, the Federal Reserve Board approved a final rule to implement these reforms
and changes required by the Dodd-Frank Act. This final rule was subsequently adopted by the OCC and the FDIC.
As included in the proposed rule of June 2012, the final rule includes new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019,
and refines the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the
Company and First Mid Bank beginning in 2015 are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital
ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum
capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1
capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in
beginning in January 2016 at 0.625% of risk weighted assets and will increase by that amount each year until fully implemented in January 2019. An
institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the
buffer amount.
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The final rule also makes three changes to the proposed rule of June 2012 that impact the Company. First, the proposed rule would have required banking
organizations to include accumulated other comprehensive income (“AOCI”) in common equity tier 1 capital. AOCI includes accumulated unrealized gains
and losses on certain assets and liabilities that have not been included in net income. Under existing general risk-based capital rules, most components of
AOCI are not included in a banking organization's regulatory capital calculations. The final rule allows community banking organizations to make a one-time
election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital
rules that excludes most AOCI components from regulatory capital.
Second, the proposed rule would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to
divide residential mortgage exposure into two categories in order to determine the applicable risk weight. The final rule, however, retains the existing
treatment for residential mortgage exposures under the general risk-based capital rules.
Third, the proposed rule would have required banking organizations with total consolidated assets of less than $15 billion as of December 31, 2009, such as
the Company, to phase out over ten years any trust preferred securities and cumulative perpetual preferred securities from its Tier 1 capital regulatory
capital. The final rule, however, permanently grandfathers into Tier 1 capital of depository institution holding companies with total consolidated assets of less
than $15 billion as of December 31, 2009 any trust preferred securities or cumulative perpetual preferred stock issued before May 19, 2010.
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 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.
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As of December 31, 2013, 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 15.58%, a Tier 1 risk-based ratio of 14.37% and a leverage ratio of 10.12%.
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 July 21,
2010, The Dodd-Frank Act permanently raised the standard maximum deposit insurance amount from $100,000 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.
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 $743,000, $783,000 and $1,064,000 for this assessment during 2013, 2012 and 2011, respectively. The
decrease in this assessment was primarily due to a lower assessment rate as a result of improvement in asset quality.
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 $89,000, $92,000 and $103,000 during 2013, 2012 and
2011, respectively, for this assessment.
On September 29, 2009, the FDIC Board proposed a Deposit Insurance Fund 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 was being amortized to non-interest expense over the three year period. In June 2013, as required by the DIF plan, the FDIC
returned approximately $1,204,000, the remainder of the prepaid assessment, to the Company.
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, 2013,
First Mid Bank paid supervisory fees to the OCC totaling $333,000.
9
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, 2013, 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 14.89%, a Tier 1 risk-based ratio of 13.67% and a leverage ratio of 9.62%.
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, 2013. As of December 31, 2013, approximately $40.4 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.
10
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.
11
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
Joseph R. Dively (54)
Chairman of the Board of Directors, President and Chief Executive Officer
Michael L. Taylor (45)
Executive Vice President and Chief Financial Officer
John W. Hedges (65)
Executive Vice President
Laurel G. Allenbaugh (53)
Executive Vice President
Eric S. McRae (48)
Executive Vice President
Charles A. LeFebvre (44)
Executive Vice President
Christopher L. Slabach (51)
Senior Vice President
Clay M. Dean (39)
Senior Vice President
Joseph R. Dively, age 54, is the Chairman of the Board of Directors, President and Chief Executive Officer of the Company since January 1, 2014 and the
President of First Mid Bank since May 2011. Prior to assuming these positions in the Company, he was the Senior Executive Vice President of the Company
beginning in May 2011. He was with Consolidated Communications Holdings, Inc. in Mattoon, Illinois from 2003 to May 2011.
Michael L. Taylor, age 45, has been Executive Vice President and Chief Financial Officer of the Company since May 2007. He served as Vice President from
May 2000 to May 2007. He was with AMCORE Bank in Rockford, Illinois from 1996 to 2000.
John W. Hedges, age 65, 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 53, 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 48, 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 44, 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.
Christopher L. Slabach, age 51, 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.
Clay M. Dean, age 39, has been Senior Vice President of the Company and Senior Vice President Chief Deposit Services Officer of First Mid Bank since
November 2012. He served as Senior Vice President Director of Treasury Management of First Mid bank from 2010 to 2012.
12
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 the past several 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, led to market-wide liquidity problems in recent year 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.)
13
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 $727 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, 2013. A listing of these industries is contained in under “Item 7. 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.
Additional 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. Increases in commercial and consumer delinquency levels or 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 and capital. 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 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, 2013, 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, 2013. 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.
14
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 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.
15
ITEM 2.
PROPERTIES
The Company's headquarters is located at 1421 Charleston Avenue, Mattoon Illinois . 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, 2013 was
$28.6 million.
ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
16
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER OF
PURCHASES OF EQUITY SECURITIES
PART II
The Company’s common stock was held by approximately 586 shareholders of record as of December 31, 2013 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
2013
2012
4th
3rd
2nd
1st
4th
3rd
2nd
1st
$23.25
$23.30
$23.95
$25.00
$25.50
$27.00
$26.00
$23.45
$21.55
$21.00
$22.11
$21.60
$22.00
$22.17
$21.60
$18.45
The Board of Directors of the Company declared cash dividends semi-annually during the two years ended December 31, 2013 and 2012. The following
table sets forth the cash dividends per share on the Company’s common stock for the last two years.
Date Declared
Date Paid
10/22/2013
04/24/2013
10/23/2012
04/24/2012
12/13/2011
12/06/2013
06/07/2013
12/07/2012
06/08/2012
01/09/2012
Dividend
Per Share
$0.250
$0.210
$0.210
$0.210
$0.210
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.
During 2012, the Board of Directors voted to pay the dividend scheduled to be paid in January 2013 prior to year-end 2012. Accordingly, there were three
dividends paid during 2012. The Company resumed its practice of paying semi-annual dividends in 2013 subject to Board of Director approval.
17
The following table summarizes share repurchase activity for the fourth quarter of 2013:
Period
October 1, 2013 – October 31, 2013
November 1, 2013 – November 30, 2013
December 1, 2013 – December 31, 2013
Total
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
5,625
78,373
5,171
89,169
$22.13
$22.48
$22.90
$22.49
5,625
78,373
5,171
89,169
$1,182,000
$5,120,000
$5,001,000
$5,001,000
Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately
$71.7 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.
On November 13, 2012 repurchases of $5 million of additional shares of the Company’s common stock.
On November 19, 2013, repurchases of $5 million additional shares of the Company's common stock.
18
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
Basic earnings per share
Diluted earnings per share
Dividends declared 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
Dividend on common shares payout ratio
Average equity to average assets
Allowance for loan losses as a percent of total loans
Year End Balances
Total assets
2013
2012
2011
2010
2009
$
53,459
$
55,767
$
56,772
$
50,883
$
$
$
$
$
3,535
49,924
2,193
19,341
43,504
23,568
8,846
14,722
4,417
10,305
1.74
1.73
0.46
16.54
15.58%
14.37%
10.12%
3.38%
0.94%
10.11%
26.44%
9.81%
1.35%
$
$
6,157
49,610
2,647
18,310
42,838
22,435
8,410
14,025
4,252
9,773
1.62
1.62
0.42
17.53
15.65%
14.51%
9.66%
3.44%
0.91%
9.53%
25.93%
9.76%
1.29%
$
$
8,504
48,268
3,101
15,787
43,053
17,901
6,529
11,372
3,576
7,796
1.29
1.29
0.40
16.18
14.48%
13.37%
8.99%
3.45%
0.76%
8.36%
31.01%
8.88%
1.29%
$
$
10,756
40,127
3,737
13,820
36,927
13,283
4,522
8,761
2,240
6,521
1.07
1.07
0.38
14.46
12.84%
11.71%
7.42%
3.51%
0.72%
7.20%
35.51%
9.44%
1.29%
51,409
15,837
35,572
3,594
13,455
33,212
12,221
4,007
8,214
1,821
6,393
1.04
1.04
0.38
14.23
15.76%
14.57%
10.63%
3.40%
0.74%
9.56%
36.54%
9.59%
1.35%
$
1,605,498
$
1,578,032
$
1,500,956
$
1,468,245
$
1,095,155
Net loans, including loans held for sale
969,555
899,289
848,954
794,188
1,287,616
1,274,065
1,170,734
1,212,710
149,381
156,687
140,967
112,265
691,288
840,410
111,221
Total deposits
Total equity
Average Balances
Total assets
$
1,568,638
$
1,543,453
$
1,502,794
$
1,219,353
$
1,108,669
Net loans, including loans held for sale
912,452
855,335
796,520
Total deposits
Total equity
1,283,599
1,236,598
1,212,206
153,922
150,578
133,444
708,367
972,811
115,151
692,961
744,043
106,295
19
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 years ended December 31, 2013, 2012 and 2011. 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, 2013, 2012 and 2011
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 $14.72 million, 14.02 million, and $11.37 million and diluted earnings per share were $1.73, $1.62, and $1.29 for the years ended December
31, 2013, 2012 and 2011, respectively. The increases in net income and earnings per share in 2013 was primarily the result of an increase in net interest
income due to growth in loan balances and sustained low funding costs, the provision for loan losses was reduced given lower non-performing assets and
net charge-offs and non-interest income increased as a result of more gains recognized on the sale of securities and greater trust and brokerage
revenues.The following table shows the Company’s annualized performance ratios for the years ended December 31, 2013, 2012 and 2011:
Return on average assets
Return on average common equity
Average common equity to average assets
2013
2012
2011
0.94%
10.11%
9.81%
0.91%
9.53%
9.76%
0.76%
8.36%
8.88%
Total assets at December 31, 2013, 2012 and 2011 were $1.61 billion, $1.58 billion, and $1.50 billion, respectively. Net loan balances increased to $970
million at December 31, 2013, from $899 million at December 31, 2012, from $849 million at December 31, 2011. Of the increase in 2013, $61.4 million or
86% was due to increases in loans secured by real estate. Of the increase in 2012, $46.9 million or 93% was due to increases in loans secured by real
estate.
Total deposit balances increased to $1.29 billion at December 31, 2013 from $1.27 billion at December 31, 2012 and from $1.17 billion at December 31,
2011. The increase in 2013 was due to increases in interest-bearing deposits offset by declines in savings account balances and non-interest bearing
deposits. The increase in 2012 was due to increases in non-interest bearing and savings account balances offset by higher rate CDs that matured and were
not replaced.
Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.38% for 2013, 3.44% for 2012 and 3.45% for 2011.
The decrease during 2013 was primarily due to a greater decrease in rates on earning assets compared to the decline in rates on interest bearing liabilities.
The decrease during 2012 was the result of a greater decline in asset yields for loans and and investments than deposit rates due to the continued
historically low level of interest rates.
Net interest income increased to $49.9 million in 2013 from $49.6 million in 2012 and $48.3 million in 2011. 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.
20
Non-interest income increased to $19.3 million in 2013 compared to $18.3 million in 2012 and $15.8 million in 2011. The primary reason for the increase of
$1 million or 5.6% from 2012 to 2013 was more gains on the sale of securities primarily due to the sale of two trust preferred securities which resulted in a
gain of $1.4 million. In addition to security gains, revenues from trust and wealth management also increased by $380,000 due to increased revenue from
the retirement services area and more growth through the brokerage platform. These increases offset the decline in mortgage banking income during the
year as refinances slowed with the increase in interest rates. The primary reason for the increase of $2.5 million or 16% from 2011 to 2012 was increases in
trust revenue and mortgage banking revenue and no other-than-temporary impairment charges on investment securities.
Non-interest expenses increased $666,000, to $43.5 million in 2013 compared to $42.8 million in 2012, and $43.1 million in 2011. The increase during 2013
of less than 2% was primarily due to an increase in salaries and benefits expenses due to additions in sales staff and employees added for a new branch
location. The decrease during 2012 was primarily due to a decline in expenses from other real estate owned offset by an increase in salaries and benefits
expenses.
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
2013 vs 2012
2012 vs 2011
$
$
314
$
454
1,031
(666)
(436)
697
$
1,342
454
2,523
215
(1,881)
2,653
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $6.5 million at December 31, 2013 compared to $7.6 million
at December 31, 2012, and $7.4 million at December 31, 2011. The decrease in 2013 was the result of loans that paid off or became current during the
year and loans transferred to other real estate owned. The increase in 2012 was primarily the result of additional loans becoming past-due and put on non-
accrual. Other real estate owned balances totaled $568,000 at December 31, 2013 compared to $1.2 million at December 31, 2012, and $4.6 million at
December 31, 2011. The decreases in 2013 and 2012 were due to more properties sold during the year than properties transferred in. The Company’s
provision for loan losses was $2.2 million for 2013, compared to $2.6 million for 2012, and $3.1 million for 2011. At December 31, 2013, the composition of
the loan portfolio remained similar to year-end 2012. Loans secured by both commercial and residential real estate comprised of 74% of the loan portfolio at
December 31, 2013 and 73% for 2012.
The Company also held an investment in one trust preferred security with a fair value of $191,000 and unrealized losses of $3.5 million at December 31,
2013 compared to three trust preferred securities with a fair value of $585,000 and unrealized losses of $4.4 million at December 31, 2012. On July 22,
2013, the company sold its holding in PreTSL I and II. The proceeds of these sales were sufficient to pay off the book value of $1.1 million of these
securities, reverse the recorded OTTI impairment of $2.9 million and record a gain on sale of approximately $1.4 million. During 2013 the Company did not
record any additional impairment charges for these securities. On July 3, 2012, the Company's holding in PreTSL VI was redeemed in full. The payment
received was sufficient to pay-off the book value of the security of $123,000, reverse the recorded OTTI impairment of $127,000 and recover previously
unrecorded interest of $11,500. During 2012, the Company recorded no other-than-temporary impairment charges for the credit portion of the unrealized
losses of these securities compared to $886,000 during 2011. The charge during 2011 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, 2013, 2012, and 2011 was 14.37%, 14.51%, and 13.37%, respectively. The
Company’s total capital to risk weighted assets ratio at December 31, 2013, 2012, and 2011 was 15.58%, 15.65% ,and 14.48%, respectively. The decline in
these ratios during 2013 was primarily due to a decrease in retained earning resulting from a greater amount of preferred dividends paid following the issuance
of additional Series C Preferred Stock in 2012. The increase in 2012 was primarily the result of an increase in retained earnings due to the Company’s net
income and the issuance of $8,250,000 of Series C Preferred Stock. (See “Preferred Stock” in Note 1 to consolidated financial statements for more detailed
information.)
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, 2013, 2012 and 2011 were $244.2 million, $234.9 million, and $228.6 million, respectively. See Note 17 – “Commitments and Contingent Liabilities”
herein for further information.
21
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.
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.
22
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 2013 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.
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.”
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.
23
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
December 31, 2013
Year Ended
December 31, 2012
Year Ended
December 31, 2011
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
ASSETS
Interest-bearing deposits
$
13,633 $
Federal funds sold
Certificates of deposit investments
6,923
2,554
Investment securities
Taxable
Tax-exempt (1)
Loans (2) (3)
Total earning assets
Cash and due from banks
Premises and equipment
Other assets
Allowance for loan losses
466,031
61,127
924,900
1,475,168
30,397
29,089
46,432
(12,448)
33
6
14
9,153
2,069
42,184
53,459
0.24% $
16,559 $
0.09%
0.55%
1.96%
3.38%
4.56%
41,484
10,714
458,158
49,198
866,912
3.62% 1,443,025
40
37
57
9,970
1,714
43,949
55,767
0.24% $
83,877 $
0.09%
0.53%
2.18%
3.48%
5.07%
78,227
11,651
388,108
30,971
807,463
3.85% 1,400,297
213
69
78
9,819
1,194
45,399
56,772
0.25%
0.09%
0.67%
2.53%
3.86%
5.62%
4.05%
35,125
30,234
46,646
(11,577)
31,554
29,374
52,512
(10,943)
Total assets
$ 1,568,638
$ 1,543,453
$ 1,502,794
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits, interest-bearing $
544,157
Savings deposits
Time deposits
Securities sold under agreements
to repurchase
FHLB advances
Federal funds purchased
Subordinated debentures
Other debt
294,615
207,454
87,468
13,258
1,463
20,620
—
795
452
1,456
46
254
9
523
—
0.15% $
511,199
0.15%
0.70%
281,831
224,350
0.05%
1.91%
0.62%
2.54%
—%
113,443
10,619
59
20,620
4,035
1,443
1,186
2,214
117
308
—
563
326
0.28% $
499,184
0.42%
0.99%
251,268
264,508
0.10%
2.90%
0.68%
2.73%
8.00%
108,240
20,238
14
20,620
927
2,325
1,481
2,919
172
765
—
770
72
Total interest-bearing liabilities
1,169,035
3,535
0.30% 1,166,156
6,157
0.53% 1,164,999
8,504
Demand deposits
Other liabilities
Stockholders’ equity
237,373
8,308
153,922
219,218
7,501
150,578
197,246
7,105
133,444
Total liabilities & equity
$ 1,568,638
$ 1,543,453
$ 1,502,794
$
49,924
$
49,610
$
48,268
Net interest income
Net interest spread
Impact of non-interest bearing funds
Net yield on interest-earning assets
(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.
3.32%
0.12%
3.44%
3.32%
0.06%
3.38%
24
0.47%
0.59%
1.10%
0.16%
3.78%
0.55%
3.73%
8.00%
0.73%
3.32%
0.13%
3.45%
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):
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
2013 Compared to 2012
Increase – (Decrease)
2012 Compared to 2011
Increase – (Decrease)
Total
Change
Volume (1)
Rate (1)
Total
Change
Volume (1)
Rate (1)
$
(7) $
(7) $
— $
(173) $
(165) $
(31)
(43)
(817)
355
(1,765)
(2,308)
(648)
(734)
(758)
(71)
(54)
9
(40)
(326)
(2,622)
(31)
(45)
175
405
2,827
3,324
83
52
(155)
(22)
66
9
—
(326)
(293)
—
2
(992)
(50)
(4,592)
(5,632)
(731)
(786)
(603)
(49)
(120)
—
(40)
—
(32)
(21)
151
520
(1,450)
(1,005)
(882)
(295)
(705)
(55)
(457)
—
(207)
254
(2,329)
(2,347)
(32)
(6)
1,623
645
3,191
5,256
57
166
(425)
8
(307)
—
—
254
(247)
$
314
$
3,617
$
(3,303) $
1,342
$
5,503
$
(8)
—
(15)
(1,472)
(125)
(4,641)
(6,261)
(939)
(461)
(280)
(63)
(150)
—
(207)
—
(2,100)
(4,161)
(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 $314,000 or .6% in 2013 compared to an increase of $1.3 million or 2.8% in 2012. The increase in 2013 was primarily due to
growth in investment security and loan balances offset by a decline in earning asset rates that was greater than the decline in rates of interest-bearing
liabilities. The increase in net interest income in 2012 was primarily due to a greater increase in investment and loan balances offset by declines in interest-
bearing asset rates compared to declines in rates of interest-bearing liabilities during the same period.
In 2013, average earning assets increased by $32.1 million or 2.2% and average interest-bearing liabilities increased $2.9 million or .2% compared with
2012. In 2012, average earning assets increased by $42.7 million, or 3%, and average interest-bearing liabilities increased $1.2 million or .1% compared
with 2011. Changes in average balances are shown below:
•
•
•
Average interest-bearing deposits held by the Company decreased $2.9 million or 17.7% in 2013 compared to 2012. In 2012, average interest-
bearing deposits held by the Company decreased $67.3 million or 80.2% compared to 2011.
Average federal funds sold decreased $34.6 million or 83.3% in 2013 compared to 2012. In 2012, average federal funds sold decreased $36.7
million or 46.9% compared to 2011.
Average certificates of deposit investments decreased $8.2 million or 76.2% in 2013 compared to 2012. In 2012, average certificates of deposit
investments decreased $.9 million or 7.7% compared to 2011.
25
•
•
•
•
•
•
•
Average loans increased by $58.0 million or 6.7% in 2013 compared to 2012. In 2012, average loans increased by $59.4 million or 7.4% compared
to 2011.
Average securities increased by $19.8 million or 3.9% in 2013 compared to 2012. In 2012, average securities increased by $88.3 million or 21.1%
compared to 2011.
Average deposits increased by $28.8 million or 2.8% in 2013 compared to 2012. In 2012, average deposits increased by $2.4 million or .2%
compared to 2011.
Average securities sold under agreements to repurchase decreased by $26 million or 22.9% in 2013 compared to 2012. In 2012, average
securities sold under agreements to repurchase increased by $5.2 million or 4.8% compared to 2011.
Average borrowings and other debt increased by $8 million or .02% in 2013 compared to 2012. In 2012, average borrowings and other debt
decreased by $6.5 million or 15.6% compared to 2011.
The federal funds rate remained at a range of .25% to .30% at December 31, 2013, 2012 and 2011.
Net interest margin decreased to 3.38% compared to 3.44% in 2012 and 3.45% in 2011. Asset yields decreased by 23 basis points in 2013, and
interest-bearing liabilities decreased by 23 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 2013, 2012
and 2011 were $1,316,000, $1,038,000, and $615,000, respectively. The net yield on interest-earning assets on a tax equivalent basis was 3.47% in 2013,
3.51% in 2012 and 3.51% in 2011.
Provision for Loan Losses
The provision for loan losses in 2013 was $2,193,000 compared to $2,647,000 in 2012 and $3,101,000 in 2011. Nonperforming loans decreased to
$6,469,000 at December 31, 2013 from $7,593,000 at December 31, 2012 and compared to $7,440,000 at December 31, 2011. The decrease in 2013 was
primarily due to loans that paid-off or became current during the year and loans transferred to other real estate owned. The increase in 2012 was primarily
due to additional loans becoming past due and being put on non-accrual. Net charge-offs were $720,000 during 2013, $1,991,000 during 2012 and
$2,374,000 during 2011. 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):
Trust
Brokerage
Insurance commissions
Service charges
Securities gains
Impairment recoveries (losses) on securities
Mortgage banking
ATM / debit card revenue
Other
Total other income
2013
2012
2011
2013
2012
$ Change From Prior Year
$
3,565
$
3,330
$
3,030
$
235
$
833
1,638
4,865
2,293
—
935
3,772
1,440
688
1,813
4,808
934
127
1,509
3,554
1,547
650
1,786
4,817
486
(886)
788
3,483
1,633
145
(175)
57
1,359
(127)
(574)
218
(107)
300
38
27
(9)
448
1,013
721
71
(86)
$
19,341
$
18,310
$
15,787
$
1,031
$
2,523
26
Total non-interest income increased to $19.3 million in 2013 compared to $18.3 million in 2012 and $15.8 million in 2011. The primary reasons for the more
significant year-to-year changes in other income components are as follows:
•
•
•
•
•
•
Trust revenues increased $235,000 or 7.1% in 2013 to $3,565,000 from $3,330,000 in 2012 and $3,030,000 in 2011. The increase from 2012
to 2013 in trust revenues was due primarily to an increase in revenues from from Investment Management & Advisory Agency accounts and
increases in market value related fees. Trust assets were $722.9 million at December 31, 2013 compared to $633.8 million at December 31,
2012 and $546.7 million at December 31, 2011.
Revenue from brokerage annuity sales increased $145,000 or 21.1% to $833,000 in 2013 from $688,000 in 2012 and $650,000 in 2011. The
increase from 2012 to 2013 was due an increase in the number of brokerage accounts from new business development efforts.
Insurance commissions decreased $175,000 or 9.7% to $1,638,000 in 2013 from $1,813,000 in 2012 compared to $1,786,000 in 2011. The
decrease from 2012 to 2013 was due to a decrease in property and casualty insurance commissions during 2013 compared to 2012.
Fees from service charges increased $57,000 or 1.2% to $4,865,000 in 2013 from $4,808,000 in 2012 and $4,817,000 in 2011. The increase
from 2012 to 2013 was primarily due to an increase in commercial transaction account fees.
Net securities gains in in 2013 were $2.3 million up $1.4 million or 145.5% from $934,000 in 2012 and $486,000 in 2011. The increase in
securities gains during 2013 was primarily due to the sale of two trust preferred securities that resulted in net security gains of $1.4 million.
The remaining gains were due to several securities in the investment portfolio were sold to improve the overall portfolio mix and the margin.
During 2012, the Company received payment for the redemption of one of its investments in trust preferred securities that resulted in the
reversal of $127,000 of previous other-than-temporary impairment charges. During 2011, the Company recorded other-than-temporary
impairment charges amounting to $886,000 for its investments in four trust preferred securities. See Note 4 - Investment Securities in the
notes to the financial statements for a more detailed description of these charges.
• Mortgage banking income decreased $574,000 or 38.0% to $935,000 in 2013 from $1,509,000 in 2012 and $788,000 in 2011. The decrease
from 2012 to 2013 was due to an decrease in the volume of loans originated and sold by First Mid Bank due to less refinancing as interest
rates rose on various loan types. Loans sold balances are as follows:
$65 million (representing 552 loans) in 2013
$101 million (representing 796 loans) in 2012
$60 million (representing 500 loans) in 2011
First Mid Bank generally releases the servicing rights on loans sold into the secondary market.
•
•
Revenue from ATMs and debit cards increased $218,000 or 6.1% to $3,772,000 in 2013 from $3,554,000 in 2012 compared to $3,483,000 in
2011. The increase from 2012 to 2013 was primarily due to in increase in electronic transactions. The increase from 2011 to 2012 was due to
an increase in the number of transactions processed offset by lower fees received for processing these transactions.
Other income decreased $107,000 or 6.9% in 2013 to $1,440,000 from $1,547,000 in 2012 compared to $1,633,000 in 2011. The decrease
from 2012 to 2013 was primarily due to a decline in rental income from other real estate owned that was sold during the third quarter of 2013
and less loan closing fees compared to 2012. The decrease from 2011 to 2012 was primarily due to non-recurring income received in 2011 for
distribution of an investment in other assets and decreases in various other expenses.
27
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
2013
2012
2011
2013
2012
$ Change From Prior Year
$
24,128
$
23,433
$
22,247
$
695
$
8,223
8,088
163
832
674
603
2,070
1,221
5,590
390
875
773
609
2,093
1,014
5,563
7,960
1,471
1,167
1,134
581
2,070
1,050
5,373
135
(227)
(43)
(99)
(6)
(23)
207
27
$
43,504
$
42,838
$
43,053
$
666
$
1,186
128
(1,081)
(292)
(361)
28
23
(36)
190
(215)
Total non-interest expense increased to $43.5 million in 2013 from $42.8 million in 2012 and $43.1 million in 2011. The primary reasons for the more
significant year-to-year changes in other expense components are as follows:
•
•
•
•
•
•
•
Salaries and employee benefits, the largest component of other expense, increased $695,000 or 3% to $24.1 million from $23.4 million in 2012,
and $22.7 million in 2011. The increases in 2013 and 2012 were primarily due to increases in incentive compensation expense as a result of
achieving desired objectives and merit raises for continuing employees. There were 406 full-time equivalent employees at December 31, 2013,
compared to 400 at December 31, 2012, and 402 at December 31, 2011.
Occupancy and equipment expense increased $135,000 or 1.7% to $8.2 million in 2013 from $8.1 million in 2012, compared to $8 million in 2011.
The increase in 2013 was primarily due to increases in maintenance and repair expense for equipment and software. The increase in 2012 was
primarily due to increases in building depreciation expense and other expenses associated with the Company's purchase of a building in Mattoon,
Illinois in 2011.
Net other real estate owned expense decreased $227,000 or 58.2% to $163,000 from $390,000 in 2012, and $1,471,000 in 2011. The decrease
in 2013 was primarily due to less properties owned compared to 2012. The decrease in 2012 was due to less expenses for maintenance, insurance
and property taxes resulting from less properties owned and fewer losses on properties sold compared to 2011.
FDIC insurance expense decreased $43,000 or 4.9% to $832,000 from $875,000 in 2012, compared to $1,167,000 in 2011. The decrease in
2013 was due to lower assessment rates during 2013 compared to 2012 primarily due to improvements in asset quality. The decrease in 2012
was due to a full year of assessments calculated under the new rules implemented during the second quarter of 2011 and lower assessment
rates during 2012 compared to 2011.
Amortization of other intangibles expense decreased $99,000 or 12.8% to $674,000 from $773,000 in 2012, compared to $1,134,000 in 2011.
The decreases in 2013 and 2012 were due to the customer list intangibles becoming fully amortized during the first quarter of 2012 and less
amortization expense for core deposit intangibles.
Other operating expenses increased $27,000 or .5% to $5,590,000 from $5,563,000 in 2012, compared to $5,373,000 in 2011. The increases in
2013 and 2012 were due to increases in various expenses.
On a net basis, all other categories of operating expenses increased $178,000 or 4.8% to $3,894,000 from $3,716,000 in 2012, compared to
$3,701,000 in 2011. The increase in 2013 was primarily due to an increase in marketing and promotion expenses, offset by a decrease in stationery
and supplies expense, and legal and professional fees.
28
Income Taxes
Income tax expense amounted to $8,846,000 in 2013 compared to $8,410,000 in 2012, and $6,529,000 in 2011. Effective tax rates were 37.5%, 37.5%,
and 36.5%, respectively, for 2013, 2012 and 2011. Beginning January 1, 2011, the State of Illinois increased the corporate income tax rate to 9.5%
compared to 7.3% previously. The increase in the Company's effective tax rate in 2013 and 2012 was primarily due to a decline in the amount of tax-exempt
securities held by the Company.
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 2010.
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 amortized cost of the available-for-sale and held-to-maturity securities for the last three years (dollars in thousands):
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
2013
December 31,
2012
2011
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
$
197,805
1.56% $
180,851
1.75% $
164,812
65,304
229,661
3,652
6,035
3.43%
2.60%
1.14%
1.17%
53,064
252,310
4,974
9,663
3.62%
2.81%
3.50%
1.92%
38,879
254,930
5,625
9,561
$
502,457
2.27% $
500,862
2.53% $
473,807
1.99%
3.92%
3.17%
4.05%
1.92%
2.81%
At December 31, 2013, the Company’s investment portfolio increased by $1.6 million from December 31, 2012 due to the purchase of various securities
offset by pay downs, maturities and sales of mortgaged-backed securities and sales of trust-preferred 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, 2013 for certain investment securities (in thousands):
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of state and political
subdivisions
Trust preferred securities
Other securities
Total investments
Amortized
Cost
Estimated
Fair Value
AAA
AA +/-
A +/-
BBB +/-
< BBB -
Not rated
Average Credit Rating of Fair Value at December 31, 2013 (1)
$
197,805
$
190,368
$
190,368
$
— $
— $
— $
— $
—
65,304
64,562
4,979
34,839
23,287
3,652
6,035
191
6,002
—
—
—
—
—
—
—
—
5,935
—
—
—
—
—
—
191
—
1,457
227,601
—
67
$
502,457
$
488,724
$
195,347
$
34,839
$
29,222
$
— $
191
$
229,125
Mortgage-backed securities (2)
229,661
227,601
(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.
29
The trust preferred securities consist of one trust preferred pooled security issued by FTN Financial Securities Corp. (“FTN”). The following table contains
information regarding this security as of December 31, 2013:
Deal name
Class
Book value
Fair value
Unrealized gains/(losses)
Other-than-temporary impairment recorded in earnings
Lowest credit rating assigned
Number of performing banks
Number of issuers in default
Number of issuers in deferral
Original collateral
Actual defaults & deferrals as a % of original collateral
Remaining collateral
Actual defaults & deferrals as a % of remaining collateral
Expected defaults & deferrals as a % of remaining collateral
Performing collateral
Current balance of class
Subordination
Excess subordination
Excess subordination as a % of remaining performing collateral
Discount rate (1)
Expected defaults & deferrals as a % of remaining collateral (2)
Recovery assumption (3)
Prepayment assumption (4)
$
$
$
$
$
$
$
$
$
$
PreTSL XXVIII
Mezzanine C-1
3,652,000
191,000
(3,461,000)
1,111,000
C
27
8
8
360,850,000
23.8 %
340,988,000
25.2 %
27.4 %
256,076,777
37,555,675
281,825,395
(25,748,618)
(10.1)%
1.54%-6.20%
2% / .36
10 %
1 %
(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) Additional assumptions regarding prepayments:
Banks with more than $15 billion in total assets as of 12/31/2009:
(a) For fixed rate TruPS, all securities will be called in one year
(b) For floating rate TruPS, (1) all securities with spreads greater than 250 bps will be called in one year (2) all securities with spreads between 150 bps and 250 bps will be
called at a rate of 5% annually (3) all securities with spreads less than 150 bps will be called at a rate of 1% annually
Banks with less than $15 billion in total assets as of 12/31/2009:
(a) For fixed rate TruPS, (1) all securities with coupons greater than 8% that were issued by healthy banks with the capacity to prepay will be called in one year (2) All
remaining fixed rate securities will be called at a rate of 1% annually
(b) For floating rate TruPs, all securities will be called at a rate of 1% annually
30
The trust preferred pooled security is a Collateralized Debt Obligations (“CDOs”) 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 and all classes senior to the specified class. Excess subordination is the amount that the
performing collateral balance exceeds the current outstanding balance of the specific 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.
During the year ended December 31, 2013 the Company was receiving “payment in kind” (“PIK”) in lieu of cash interest on its trust preferred security
investment as and to the extent described below. 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 security investment allows, under the terms of the issue, for issuers to defer interest for up to five consecutive years. After five
years, if not cured, the security is 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 the trust preferred security 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 security
investment is in the mezzanine branch or class which are subordinate to the more senior tranches of the issues. The Company is receiving PIK for this
security due to failure of the required senior tranche coverage tests described. This security is projected to remain in full or partial PIK status for
approximately two more 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 of its 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 to the principal balance of the securities. The Company intends to keep its remaining trust preferred security 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 perform 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 the 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, 2013 and 2012.
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.
31
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.
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
OTTI, related to other factors, is recognized in other comprehensive earnings, net of applicable taxes.
The term “other-than-temporary” is not intended to indicate that the decline is permanent, but 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 in the notes to the financial statements for a discussion of the Company’s evaluation and, when applicable,
charges for OTTI.
Loans
The loan portfolio (net of unearned interest) is the largest category of the Company’s earning assets. The following table summarizes the composition of the
loan portfolio, including loans held for sale, for the last five years (in thousands):
%
Outstanding
Loans
2013
2012
2011
2010
2009
Construction and land development
$
25,321
2.6% $
31,341
$
23,136
$
20,379
$
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
109,405
184,761
50,174
356,999
726,660
64,128
168,353
14,579
9,084
11.1%
18.8%
5.1%
36.4%
74.0%
6.5%
17.1%
1.5%
0.9%
86,271
186,498
44,863
316,322
665,295
61,014
160,299
16,264
8,193
72,585
181,849
19,846
321,001
618,417
63,257
150,716
16,271
11,413
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
$
982,804
100.0% $
911,065
$
860,074
$
804,581
$
700,750
Loan balances increased by $71.7 million or 7.9% from December 31, 2012 to December 31, 2013 primarily due to originations of loans secured by real
estate, agricultural loans, and commercial and industrial loans. Loan balances increased by $51 million or 5.9% from December 31, 2011 to December 31,
2012 primarily due to originations of loans secured by real estate and commercial and industrial loans. The balances of loans sold into the secondary market
were $65 million in 2013 compared to $101 million in 2012. The balance of real estate loans held for sale, included in the balances shown above, amounted
to $514,000 and $212,000 as of December 31, 2013 and 2012, respectively.
32
All of the loans acquired in the acquisition of the Branches during 2010 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, 2013 and 2012 is $322,000 and $503,000, respectively.
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.
The following table summarizes the loan portfolio geographically by branch region as of December 31, 2013 and 2012 (dollars in thousands):
Mattoon region
Charleston region
Sullivan region
Effingham region
Decatur region
Peoria region
Highland region
Total all regions
December 31, 2013
December 31, 2012
Principal
balance
% Outstanding
Loans
Principal
balance
% Outstanding
Loans
$
$
207,009
50,207
133,573
66,004
241,784
166,618
117,609
982,804
21.1% $
5.1%
13.6%
6.7%
24.6%
16.9%
12.0%
100.0% $
183,657
51,179
128,650
63,910
218,318
156,370
108,981
911,065
20.2%
5.6%
14.1%
7.0%
24.0%
17.2%
11.9%
100.0%
Loans are geographically dispersed among these regions located in central and southwestern Illinois. While these regions have experienced some economic
stress during 2013 and 2012, 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 some 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, 2013 and 2012, the Company did have industry loan
concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):
December 31, 2013
December 31, 2012
Principal
balance
% Outstanding
Loans
Principal
balance
% Outstanding
Loans
Other grain farming
$
147,110
14.97% $
124,367
Lessors of non-residential buildings
Lessors of residential buildings & dwellings
Hotels and motels
97,982
58,792
50,608
9.97%
5.98%
5.15%
89,940
59,848
45,783
13.65%
9.87%
6.57%
5.03%
The Company had no further industry loan concentrations in excess of 25% of total risk-based capital.
33
The following table presents the balance of loans outstanding as of December 31, 2013, by contractual maturities (in thousands):
Maturity (1)
One year
or less(2)
Over 1 through
5 years
Over
5 years
Total
Construction and land development
$
18,256
$
6,999
$
66
$
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.
10,911
20,839
1,379
35,974
87,359
47,476
109,278
3,082
586
44,072
86,208
21,195
218,505
376,979
14,845
43,617
10,971
2,455
54,422
77,714
27,600
102,520
262,322
1,807
15,458
526
6,043
25,321
109,405
184,761
50,174
356,999
726,660
64,128
168,353
14,579
9,084
$
247,781
$
448,867
$
286,156
$
982,804
As of December 31, 2013, loans with maturities over one year consisted of approximately $656.6 million in fixed rate loans and approximately $78.5 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 Nonperforming Other 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 “troubled debt restructurings”. 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 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. 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.
34
The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets (in thousands):
2013
2012
2011
2010
2009
December 31,
Nonaccrual loans
$
6,121
$
7,573
$
6,723
$
9,332
$
12,720
Restructured loans which are performing in accordance with
revised terms
Total nonperforming loans
Repossessed assets
348
6,469
568
20
7,593
1,229
717
7,440
4,606
1,102
10,434
6,199
—
12,720
2,896
Total nonperforming loans and repossessed assets
$
7,037
$
8,822
$
12,046
$
16,633
$
15,616
Nonperforming loans to loans, before allowance for loan losses
Nonperforming loans and repossessed assets to loans, before
allowance for loan losses
0.66%
0.72%
0.83%
0.98%
0.87%
1.40%
1.30%
2.07%
1.82%
2.23%
The $1.5 million decrease in nonaccrual loans during 2013 resulted from the net of $2.5 million of loans put on nonaccrual status, offset by $.9 million of
loans transferred to other real estate owned, $.5 million of loans charged off and $2.6 million 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
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Total loans
December 31, 2013
December 31, 2012
Balance
% of Total
Balance
% of Total
1,483
105
1,009
2,807
5,404
—
706
11
24.2% $
1.7%
16.5%
45.9%
88.3%
—%
11.5%
0.2%
1,522
418
1,899
2,063
5,902
930
704
37
20.1%
5.5%
25.1%
27.2%
77.9%
12.3%
9.3%
0.5%
$
6,121
100.0% $
7,573
100.0%
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $45,000, $173,000 and $239,000 for the
years ended December 31, 2013, 2012 and 2011, respectively.
The $661,000 decrease in repossessed assets during 2013 resulted from the net of $1,082,000 of additional assets repossessed, $1,634,000 of
repossessed assets sold and $109,000 of further write-downs of repossessed assets to current market value. The following table summarizes the
composition of repossessed assets (in thousands):
Construction and land development
Farm Loans
1-4 family residential properties
Multi-family residential properties
Commercial real estate
Total real estate
Agricultural Loans
Consumer Loans
Total repossessed collateral
December 31, 2013
December 31, 2012
Balance
% of Total
Balance
% of Total
$
$
278
3
135
—
46
462
106
—
568
49.0% $
0.5%
23.8%
—%
8.0%
81.3%
18.7%
—%
278
—
539
30
340
1,187
—
42
22.6%
—%
43.9%
2.4%
27.7%
96.6%
—%
3.4%
100.0% $
1,229
100.0%
35
Repossessed assets sold during 2013 resulted in net losses of $37,000, of which $32,000 was related to real estate asset sales and $5,000 was related to
other repossessed assets sales. Repossessed assets sold during 2012 resulted in net gains of $273,000, of which net gains of $268,000 were related to real
estate asset sales and a net loss of $5,000 was related to other repossessed assets 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 probable losses existing 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.
Management believes the allocations and loss factors utilized during 2013 were appropriate. During 2012, given the current state of the economy,
management assessed the impact of the recession on each category of loans and adjusted historical loss factors for more recent economic trends.
Management utilized a five-year loss history as one of several components in assessing the probability of inherent future losses. Given the continued
weakened economic conditions, management also increased its allocation to various loan categories for economic factors during 2012. 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, drought
conditions 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, 2013, the Company’s loan portfolio included $173.4 million of loans to borrowers whose businesses are directly
related to agriculture. Of this amount, $147.1 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related
to agriculture increased $26.2 million from $147.2 million at December 31, 2012 while loans concentrated in other grain farming increased $22.7 million from
$124.4 million at December 31, 2012.
While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought
conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the
level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio.
In addition, the Company has $50.6 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 $98 million of loans to lessors of non-residential buildings and $58.8 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 minimizes credit risk by adhering to sound underwriting and credit review policies. Management and the Board of Directors of the Company
review these policies at least annually. 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. On a quarterly basis, the Board of Directors and management review the status of problem loans and determine a best estimate of the
allowance. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for
loan losses.
36
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
$
924,900
$
866,912
$
807,463
$
718,669
$
701,521
Allowance-beginning of period
11,776
11,120
10,393
9,462
7,587
2013
2012
2011
2010
2009
Charge-offs:
Real estate-mortgage
Commercial, financial & agricultural
Installment
Other
Total charge-offs
Recoveries:
Real estate-mortgage
Commercial, financial & agricultural
Installment
Other
Total recoveries
Net charge-offs
Provision for loan losses
Allowance-end of period
479
426
35
188
1,423
2,625
2,551
1,240
699
79
170
881
92
162
287
103
181
287
176
176
1,128
2,371
3,760
3,122
1,879
36
232
30
110
408
720
2,193
137
85
67
91
380
1,991
2,647
1,171
97
28
90
1,386
2,374
3,101
146
35
29
106
316
2,806
3,737
$
13,249
$
11,776
$
11,120
$
10,393
$
6
27
31
96
160
1,719
3,594
9,462
0.25%
1.35%
74.4%
Ratio of annualized net charge-offs to average loans
0.08%
0.23%
0.29%
Ratio of allowance for loan losses to loans outstanding (less
unearned interest at end of period)
Ratio of allowance for loan losses to nonperforming loans
1.35%
204.8%
1.29%
155.1%
1.29%
149.5%
0.39%
1.29%
99.6%
The ratio of the allowance for loan losses to nonperforming loans is 204.8% as of December 31, 2013 compared to 155.1% as of December 31, 2012.
Management believes that the overall estimate of the allowance for loan losses appropriately accounts for probable losses attributable to current exposures.
During 2013, the Company had net charge-offs of $720,000 compared to $2.0 million in 2012. During 2013, the company's significant charge offs included
$288,000 on seven commercial real estates of four borrowers, $49,000 on a residential real estate loan of one borrower and $352,000 on nine commercial
operating loans of six borrowers. During 2012, the Company’s significant charge-offs included $506,000 on commercial real estate loans of seven
borrowers, $174,000 on one residential real estate loan and $4,347,000 on commercial operating loans of six borrowers.
At December 31, 2013, the allowance for loan losses amounted to $13.2 million or 1.35% of total loans, and 204.8% of nonperforming loans. At December
31, 2012 the allowance for loan losses amounted to $11.8 million or 1.29% of total loans, and 155.1% of nonperforming loans.
37
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, 2013
December 31, 2012
December 31, 2011
Residential real estate
$
771
19.1% $
Commercial / Commercial real estate
Agricultural / Agricultural real estate
Consumer
Total allocated
Unallocated
Allowance for
loan losses
% of
loans to
total
loans
Allowance for
loan losses
% of
loans to
total
loans
Allowance for
loan losses
10,646
533
377
61.8%
17.6%
1.5%
726
9,301
558
403
19.7% $
62.5%
16.0%
1.8%
636
8,791
546
378
% of
loans to
total
loans
21.5%
58.8%
15.2%
4.5%
12,327
100.0%
10,988
100.0%
10,351
100.0%
922
N/A
788
N/A
769
N/A
Allowance at end of year
$
13,249
100.0% $
11,776
100.0% $
11,120
100.0%
Residential real estate
Commercial / Commercial real estate
Agricultural / Agricultural real estate
Consumer
Total allocated
Unallocated
December 31, 2010
December 31, 2009
Allowance for
loan losses
% of
loans to
total
loans
Allowance for
loan losses
440
8,307
404
392
25.1% $
55.7%
15.3%
3.9%
488
7,428
315
410
% of
loans to
total
loans
28.5%
51.4%
16.6%
3.5%
9,543
100.0%
8,641
100.0%
850
N/A
821
N/A
Allowance at end of year
10,393
100.0% $
9,462
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 for 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.
38
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 the the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):
2013
2012
2011
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
Demand deposits:
Non-interest-bearing
Interest-bearing
Savings
Time deposits
$
237,373
—% $
219,218
—% $
197,246
544,157
294,615
207,454
0.15%
0.15%
0.70%
511,199
281,831
224,350
0.28%
0.42%
0.98%
499,184
251,268
264,508
Total average deposits
$
1,283,599
0.21% $
1,236,598
0.39% $
1,212,206
—%
0.47%
0.59%
1.10%
0.56%
The following table sets forth the high and low month-end balances for the years ended December 31, 2013, 2012 and 2011 (in thousands):
High month-end balances of total deposits
Low month-end balances of total deposits
2013
2012
2011
$
1,310,169
$
1,274,065
$
1,233,633
1,263,941
1,193,341
1,170,734
In 2013, the average balance of deposits increased by $47 million from 2012. The increase was primarily attributable to increases in non-interest bearing
and savings account balances offset by declines in time deposits. Average non-interest bearing deposits increased by $18 million, average money market
account balances decreased by $7.5 million, average savings account balances increased by $12.8 million and average time deposit balances decreased by
$16.9 million. In 2012, the average balance of deposits increased by $24.4 million from 2011. The increase was primarily attributable to increases in non-
interest bearing and savings account balances offset by declines in time deposits. Average non-interest bearing deposits increased by $22 million, average
money market account balances decreased by $7.8 million, average savings account balances increased by $30.6 million and average time deposit
balances decreased by $40.2 million.
Balances of time deposits of $100,000 or more include time deposits maintained for public fund entities and consumer time deposits. 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
2013
December 31,
2012
2011
17,946
$
16,468
$
12,625
38,084
28,060
10,847
15,778
19,469
96,715
$
62,562
$
17,095
11,037
22,126
17,596
67,854
$
$
The balance of time deposits of $100,000 or more increased $34.2 million from December 31, 2012 to December 31, 2013. The balance of time deposits of
$100,000 or more decreased $5.3 million from December 31, 2011 to December 31, 2012. The increase in 2013 was primarily due to an increase in public
funds invested in CD's and the addition of $10 million in brokered CDs during 2013. The decreases in 2012 in balances were primarily attributable to higher
rate time deposits that matured and were not replaced.
In 2013 the Company maintained account relationships with various public entities throughout its market areas. Three public entities had total balances of
$31.1 million in various checking accounts and time deposits as of December 31, 2013. These balances are subject to change depending upon the cash flow
needs of the public entity.
39
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,
loans (short-term or long-term debt) that the Company has outstanding and junior subordinated debentures. Information relating to securities sold under
agreements to repurchase and other borrowings as December 31, 2013, 2012 and 2011 is presented below (dollars in thousands):
At December 31:
Securities sold under agreements to repurchase
$
119,187
$
113,484
$
132,380
2013
2012
2011
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 end of period
Maximum outstanding at any month-end:
Securities sold under agreements to repurchase
Federal funds purchased
Federal Home Loan Bank advances:
FHLB-overnite
Fixed term – due in one year or less
Fixed term – due after one year
Debt:
Debt due in one year or less
Junior subordinated debentures
Averages for the period (YTD):
10,000
10,000
20,620
—
—
5,000
20,620
—
14,750
5,000
20,620
8,250
$
159,807
$
139,104
$
181,000
0.47%
0.61%
1.13%
$
119,187
$
118,030
$
132,380
5,000
11,000
10,000
10,000
—
20,620
—
—
9,750
5,000
8,250
20,620
—
—
14,750
14,750
8,250
20,620
Securities sold under agreements to repurchase
$
87,468
$
113,443
$
108,240
Federal funds purchased
Federal Home Loan Bank advances:
FHLB-overnite
Fixed term – due in one year or less
Fixed term – due after one year
Debt:
Loans due in one year or less
Junior subordinated debentures
Total
Average interest rate during the period
1,463
2,915
3,589
6,754
—
20,620
59
3
5,616
5,000
4,035
20,620
14
3
9,863
10,372
927
20,620
$
122,809
$
148,776
$
150,039
0.68%
0.88%
1.19%
40
At December 31, 2013 the advances totaling $20.0 million were as follows:
•
•
•
$10 million advance with a 3-month maturity, at .22%, due February 25, 2014
$5 million advance with a 2-year maturity, at .57%, due August 26, 2015
$5 million advance with a 10-year maturity, at 4.58% due July 14, 2016, on year lockout, callable quarterly
At December 31, 2013 and 2012, there was no outstanding loan balance on a revolving credit agreement with The Northern Trust Company. This loan was
renewed on April 21, 2013 for one year as a revolving credit agreement with a maximum available balance of $15 million. The interest rate is floating at
2.25% over the federal funds rate (2.5% at December 31, 2013). 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 its subsidiary bank were in compliance with the
existing covenants at December 31, 2013 and 2012.
On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through First Mid-Illinois
Statutory Trust I (“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 Trust I, 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 (3.09% and 3.19% at December 31, 2013 and 2012, respectively), reset quarterly, and are callable at par, at
the option of the Company, quarterly. 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 First Mid-Illinois
Statutory Trust II (“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 (1.84% and 1.91% at December 31, 2013
and 2012, respectively). The net proceeds to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield
Bancorp, Inc. in 2006.
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 March 31, 2012. The application of the revised quantitative limits did not and is not expected 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. New issuances of trust preferred securities, however would not count as Tier 1 regulatory
capital.
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 interest-bearing assets differ significantly from the maturity
or repricing characteristics of interest-bearing 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.
41
The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at December 31, 2013 (dollars in thousands):
1 year
1-2 years
2-3 years
3-4 years
4-5 years
Thereafter
Total
Fair Value
Rate Sensitive Within
$
31,649
$
— $
— $
— $
— $
— $
31,649
$
31,649
—
7,085
10
—
1,303
565
—
—
—
—
—
—
—
11,694
34,953
369,127
424,162
424,162
423,139
129,816
141,640
159,532
801
1,707
316
67,054
61,163
61,623
64,562
982,804
64,562
978,016
$
461,883
$
131,684
$ 142,441
$
172,933
$
102,323
$ 491,913
$ 1,503,177
$ 1,498,389
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:
Savings and NOW accounts
$
120,942
$
32,495
$
33,718
$
47,177
$
48,561
$ 287,369
$
570,262
$
570,262
Money market accounts
Other time deposits
Short-term borrowings/debt
Long-term borrowings/debt
204,419
165,435
129,187
20,620
4,098
31,663
—
5,000
Total
$
640,603
$
73,256
Rate sensitive assets – rate
sensitive liabilities
$ (178,720) $
58,428
$
$
4,212
13,660
—
5,000
56,590
85,851
5,464
9,517
—
—
$
$
62,158
110,775
Cumulative GAP
$ (178,720) $ (120,292) $
(34,441) $
76,334
$
$
$
5,578
8,253
—
—
29,484
123
—
—
253,255
228,651
129,187
30,620
253,255
228,922
129,192
22,569
62,392
$ 316,976
$ 1,211,975
$ 1,204,200
39,931
$ 174,937
$
291,202
116,265
$ 291,202
Cumulative amounts as % of
total Rate sensitive assets
-11.9%
3.9%
5.7%
Cumulative Ratio
-11.9%
-8.0%
-2.3%
7.4%
5.1%
2.7%
7.7%
11.6%
19.4%
The static GAP analysis shows that at December 31, 2013, the Company was liability sensitive, on a cumulative basis, through the twelve-month time
horizon. This indicates that future increases in interest rates could have an adverse effect on net interest income.
There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis. 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. The Company is
currently experiencing downward pressure on asset yields resulting from the extended period of historically low interest rates and heightened competition for
loans. A continuation of this environment could result in a decline in interest income and the net interest margin.
Capital Resources
At December 31, 2013, the Company’s stockholders' equity had decreased $7.3 million, or 4.7%, to $149,381,000 from $156,687,000 as of December 31,
2012. During 2013, net income contributed $14,722,000 to equity before the payment of dividends to stockholders. The change in market value of available-
for-sale investment securities decreased stockholders' equity by $12,924,000, net of tax. Additional purchases of treasury stock (202,170 shares at an
average cost of $22.84 per share) decreased stockholders’ equity by approximately $4,619,000.
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 and 2012, the Company sold to certain accredited investors including directors, executive officers, and certain major customers and holders of the
Company’s common stock, $27,500,000, in the aggregate, of a newly authorized series of its preferred stock designated as Series C Preferred Stock.
42
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, 2012, the Company classified the cost basis of its
common stock issued and held in trust in connection with the DCP of approximately $2,989,000 as treasury stock. The Company also classified the cost
basis of its related deferred compensation obligation of approximately $2,989,000 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:
•
•
•
12,700 common shares during 2013,
6,048 common shares during 2012, and
5,920 common shares during 2011
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:
•
•
•
9,747 common shares during 2013,
19,366 common shares during 2012, and
9,693 common shares during 2011
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
$2,713,000 in common stock dividends paid during 2013, $699,000 or 25.8% was reinvested into shares of common stock of the Company through the
DRIP. Of the $4,417,000 in preferred stock dividends paid during 2013, $367,000 or 8.3% was reinvested into shares of common stock through the DRIP.
Events that resulted in common shares being reinvested in the DRIP:
•
•
•
During 2013, 31,035 common shares were issued from common stock dividends and 15,885 common shares were issued from preferred
stock dividends.
During 2012, 41,729 common shares were issued from common stock dividends and 12,215 common shares were issued from preferred
stock dividends,
During 2011, 34,405 common shares were issued from common stock dividends and 10,116 common shares were issued from preferred
stock dividends and
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, 2013, the Company had awarded 59,500 shares as
stock options under the SI Plan. There were no shares awarded as stock options during 2013 or 2012. During 2013 and 2012, the Company awarded 14,054
shares and 15,162 shares, respectively, 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.
43
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 $66.7 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.
On November 13, 2012, repurchases of $5 million of additional shares of the Company’s common stock.
On November 19, 2013, repurchases of $5 million additional shares of the Company's common stock.
During 2013, the Company repurchased 202,170 (3.4% of common shares) at a total price of $4,619,000. During 2012, the Company repurchased 165,117
(2.8% of common shares) at a total price of $3,912,000. As of December 31, 2013, approximately $5.0 million remains available for purchase under the
repurchase programs. Treasury stock is further affected by activity in the DCP.
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, 2013, 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, 2013 follows:
First Mid-Illinois Bancshares, Inc. (Consolidated)
First Mid-Illinois Bank & Trust, N.A.
Total
Capital Ratio
Tier One
Capital Ratio
Tier One
Leverage Ratio
(Capital to
Average Assets)
15.58%
14.89%
14.37%
13.67%
10.12%
9.62%
44
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 of cash include overnight federal fund lines, Federal Home Loan Bank advances, the ability to borrow at the Federal Reserve
Bank of Chicago, and the Company’s operating line of credit with The Northern Trust Company. Details for these 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 First Mid Bank meeting minimum regulatory
capital requirements for total capital to risk-weighted assets and Tier 1 capital to total average assets. As of December 31, 2013, First Mid
Bank met these regulatory requirements.
First Mid Bank can borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of
collateral to the Federal Home Loan Bank. Collateral that can be pledged includes one-to-four family residential real estate loans and
securities. At December 31, 2013, the excess collateral at the FHLB would support approximately $83.1 million of additional advances.
First Mid Bank is a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged.
In addition, as of December 31, 2013, the Company had a revolving credit agreement in the amount of $15 million with The Northern Trust
Company with an outstanding balance of zero and $15 million in available funds. This loan was renewed on April 21, 2013 for one year as a
revolving credit agreement with a maximum available balance of $15 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 its subsidiary bank were in compliance with the existing covenants at December
31, 2013 and 2012.
Management continues to monitor 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 provisions on U.S. Treasury and government agency
securities; and
operating activities, including scheduled debt repayments and dividends to stockholders.
The following table summarizes significant contractual obligations and other commitments at December 31, 2013 (in thousands):
Time deposits
Debt
Other borrowings
Operating leases
Supplemental retirement
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
$
228,651
$
159,419
$
49,502
$
19,607
$
20,620
139,187
3,528
871
—
129,187
1,210
50
—
10,000
1,011
200
—
—
550
196
123
20,620
—
757
425
$
392,857
$
289,866
$
60,713
$
20,353
$
21,925
For the year ended December 31, 2013, net cash of $24.6 million and $24.9 million was provided from operating activities and financing activities,
respectively and $67.1 million was used in investing activities. In total cash and cash equivalents decreased by $17.6 million since year-end 2012.
For the year ended December 31, 2012, net cash of $22.9 million and $60.4 million was provided from operating activities and financing activities,
respectively and $73.7 million was used in investing activities. In total, cash and cash equivalents increased by $9.6 million since year-end 2011.
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. The
decrease in cash balances during 2011 was primarily due to cash received related to the acquisition of the Branches being invested in loans and investment
securities.
For the years ended December 31, 2013 and 2012, the Company also had $10 million of floating rate trust preferred securities outstanding through each of
Trust I and Trust II. See Note 9 – “Borrowings” for a more detailed description.
45
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 2014-04 - Receivables--Troubled Debt Restructurings by Creditors (Topic 310-40): Reclassification of Residential
Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure ("ASU 2014-04"). In January 2014, the Financial Accounting Standards Board
("FASB") issued ASU 2014-04 to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real
estate property that collateralizes a consumer mortgage loan so that the loan should be derecognized and the real estate property recognized in the financial
statements. ASU 2014-04 amends Topic 310-40 to clarify that an in substance repossession of foreclosure occurs, and a creditor is considered to have
received physical possession of residential real estate property collateralizing a consumer mortgage loan when either: (1) the creditor obtains legal title to
the property upon completion of foreclosure or (2) the borrower conveys all interest in the property to the creditor to satisfy that loan through completion of a
deed in lieu of foreclosure or through a similar agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of
foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real
estate property that are in the process of foreclosure. ASC 2014-04 is effective for annual and interim reporting periods beginning on or after December 15,
2014. Early implementation is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
46
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, 2013, 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, 2013
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:
100 basis points to 2.25%
200 basis points to 1.25%
The following table shows the same analysis performed as of December 31, 2012:
December 31, 2012
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:
100 basis points to 2.25%
200 basis points to 1.25%
Increase (Decrease) In
Net Interest Income
Return On
Average Equity
($000)
(%)
2013=9.80%
(2,387)
(1,255)
(1,250)
(3,025)
(7.1)%
(3.7)%
(3.7)%
(9.0)%
(1.40)%
(0.70)%
(1.70)%
(1.70)%
Increase (Decrease) In
Net Interest Income
Return On
Average Equity
($000)
(%)
2012=9.88%
(585)
59
(2,161)
(2,595)
(1.8)%
0.2 %
(6.8)%
(8.1)%
(0.35)%
0.04 %
(1.30)%
(1.57)%
$
$
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.
47
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.
The following table presents First Mid Bank’s projected change in EVE for the various rate shock levels at December 31, 2013 and 2012 (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, 2013
December 31, 2012
Changes In
Economic Value of Equity
Interest Rates
(basis points)
+200
+100
-200
-100
+200
+100
-200
-100
bp
bp
bp
bp
bp
bp
bp
bp
Amount of
Change
($000)
$
(23,203)
(10,347)
(28,130)
(5,745)
(1,987)
3,042
(45,321)
(28,890)
Percent
of Change
(9.6)%
(4.3)%
(11.6)%
(2.4)%
(0.9)%
1.4 %
(20.1)%
(12.8)%
As indicated above, at December 31, 2013, in the event of a sudden and sustained increase in prevailing market interest rates, First Mid Bank’s EVE would
be expected to decrease if rates increased 100 or 200 basis points. 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, 2013, 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, 2013, 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.
48
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
December 31, 2013 and 2012
(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
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
Interest bearing
Total deposits
Interest payable
Other borrowings
Junior subordinated debentures
Other liabilities
Total liabilities
Stockholders’ Equity:
Convertible preferred stock, no par value; authorized 1,000,000 shares; issued 10,427
shares in 2013 and 2012
Common stock, $4 par value; authorized 18,000,000 shares; issued 7,797,597 shares
in 2013 and 7,682,535 shares in 2012
Additional paid-in capital
Retained earnings
Deferred compensation
Accumulated other comprehensive income (loss)
Less treasury stock at cost, 1,913,817 shares in 2013 and 1,711,646 shares in 2012
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
49
2013
2012
$
33,453
$
31,152
497
65,102
—
488,724
514
982,290
(13,249)
969,041
6,614
568
28,578
25,753
2,487
18,117
38,110
24,103
20,499
82,712
6,665
508,309
212
910,853
(11,776)
899,077
6,775
1,187
29,670
25,753
3,161
14,511
$
$
1,605,498
$
1,578,032
235,448
$
1,052,168
1,287,616
277
139,187
20,620
8,417
263,838
1,010,227
1,274,065
341
118,484
20,620
7,835
1,456,117
1,421,345
52,035
31,190
33,911
86,578
2,989
(8,380)
(48,942)
149,381
52,035
30,730
31,685
78,986
2,953
4,544
(44,246)
156,687
$
1,605,498
$
1,578,032
Consolidated Statements of Income
For the years ended December 31, 2013, 2012 and 2011
(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 borrowings
Interest on other borrowings
Interest on subordinated debentures
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 recoveries (losses)
Portion of loss recognized in other comprehensive loss
Other-than-temporary impairment recoveries (losses) recognized in earnings
Mortgage banking revenue, net
ATM / debit card revenue
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 intangible assets
Stationery and supplies
Legal and professional
Marketing and donations
Other expense
Total other expense
Income before income taxes
Income taxes
Net income
Dividends on preferred shares
Net income available to common stockholders
$
Per share data:
Basic net income per common share available to common stockholders
Diluted net income per common share available to common stockholders
Cash dividends declared per common share
See accompanying notes to consolidated financial statements.
50
2013
2012
2011
$
42,184
$
43,949
$
45,399
9,153
2,069
14
6
33
53,459
2,703
46
254
9
523
3,535
49,924
2,193
47,731
3,565
833
1,638
4,865
2,293
—
—
—
935
3,772
1,440
19,341
24,128
8,223
163
832
674
603
2,070
1,221
5,590
43,504
23,568
8,846
14,722
4,417
10,305
1.74
1.73
0.46
$
9,987
1,697
57
37
40
55,767
4,843
117
308
326
563
6,157
49,610
2,647
46,963
3,330
688
1,813
4,808
934
127
—
127
1,509
3,554
1,547
18,310
23,433
8,088
390
875
773
609
2,093
1,014
5,563
42,838
22,435
8,410
14,025
4,252
9,773
1.62
1.62
0.42
$
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
0.40
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2013, 2012 and 2011
(in thousands)
Net income
Other Comprehensive Income (Loss)
Unrealized gains (losses) on available-for-sale securities, net of
taxes of $7,362, $(1,256) and $(3,206), for the years ended
December 31, 2013, 2012 and 2011, respectively
Less: reclassification adjustment for realized gains included in net
income net of taxes of $894, $364 and $189, for the years ended
December 31, 2013, 2012 and 2011, respectively
Other-than-temporary impairment losses recognized in earnings net
income taxes of $0, for the years ended December 31, 2013 and
2012 and $(345) for 2011
Unrealized losses on available-for-sale securities for which a
portion of an other-than-temporary impairment has been recognized
in income, net of taxes of $0, for the years ended December 31,
2013 and 2012 and $31 for 2011
2013
2012
2011
$
14,722
$
14,025
$
11,372
(11,525)
1,966
5,020
(1,399)
(570)
(297)
—
—
—
—
541
(50)
5,214
16,586
Other comprehensive income (loss), net of taxes
(12,924)
1,396
Comprehensive income
$
1,798
$
15,421
$
See accompanying notes to consolidated financial statements.
51
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2013, 2012 and 2011
(In thousands, except share and per share data)
Preferred
Stock
Common
Stock
Additional
Paid-In-
Capital
Retained
Earnings
Deferred
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
December 31, 2010
$ 24,635 $ 29,909 $
28,223 $ 66,356 $
2,929 $
(2,066) $ (37,721) $ 112,265
Net income
Net unrealized change in available-for-sale
investment securities
Dividends on preferred stock ($407 per sh)
Dividends on common stock ($.40 per sh)
—
—
—
—
Issuance of 3,850 shares of preferred stock
19,150
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
178
23
39
18
—
—
—
—
45
—
—
—
—
—
—
—
629
85
138
65
—
—
19
70
76
11
52
11,372
—
(3,576)
(2,413)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(25)
—
—
—
—
—
—
5,214
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,372
5,214
(3,576)
(2,413)
19,150
807
108
177
83
(2,385)
(2,385)
(83)
(108)
—
—
—
—
—
19
70
121
11
52
December 31, 2011
$ 43,785 $ 30,212 $
29,368 $ 71,739 $
2,904 $
3,148 $ (40,189) $ 140,967
See accompanying notes to consolidated financial statements.
52
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2013, 2012 and 2011
(In thousands, except share and per share data)
Preferred
Stock
Common
Stock
Additional
Paid-In-
Capital
Retained
Earnings
Deferred
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
December 31, 2011
$ 43,785 $ 30,212 $
29,368 $ 71,739 $
2,904 $
3,148 $ (40,189) $ 140,967
Net income
Net unrealized change in available-for-sale
investment securities
Dividends on preferred stock ($850 per sh)
Dividends on common stock ($.42 per sh)
—
—
—
—
Issuance of 1,650 shares of preferred stock
8,250
—
—
—
—
—
—
—
—
—
—
Issuance of 53,944 common shares pursuant
to the Dividend Reinvestment Plan
Issuance of 6,048 common shares pursuant
to the Deferred Compensation Plan
Issuance of 19,366 common shares pursuant
to the First Retirement & Savings Plan
Issuance of 5,320 restricted common shares
pursuant to the 2007 Stock Incentive Plan
Purchase of 165,117 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 44,763 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
Vested restricted shares/units compensation
expense
—
—
—
—
—
—
—
—
—
—
—
—
—
216
1,028
24
78
21
—
—
—
—
107
335
114
—
—
29
61
179
533
—
—
—
—
71
22
17
—
14,025
—
(4,252)
(2,526)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(135)
—
145
—
(61)
—
—
—
—
100
—
1,396
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,025
1,396
(4,252)
(2,526)
8,250
1,244
131
413
—
(3,912)
(3,912)
(145)
—
—
—
—
—
—
—
—
29
—
712
71
22
17
100
December 31, 2012
$ 52,035 $ 30,730 $
31,685 $ 78,986 $
2,953 $
4,544 $ (44,246) $ 156,687
See accompanying notes to consolidated financial statements.
53
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2013, 2012 and 2011
(In thousands, except share and per share data)
Preferred
Stock
Common
Stock
Additional
Paid-In-
Capital
Retained
Earnings
Deferred
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
December 31, 2012
$ 52,035 $ 30,730 $
31,685 $ 78,986 $
2,953 $
4,544 $ (44,246) $ 156,687
Net income
Net unrealized change in available-for-sale
investment securities
Dividends on preferred stock ($424 per sh)
Dividends on common stock ($.46 per sh)
Issuance of 46,920 common shares
pursuant to the Dividend Reinvestment Plan
Issuance of 12,700 common shares
pursuant to the Deferred Compensation Plan
Issuance of 9,747 common shares pursuant
to the First Retirement & Savings Plan
Issuance of 6,322 restricted common shares
pursuant to the 2007 Stock Incentive Plan
Purchase of 202,170 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 39,373 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 restricted shares/units compensation
expense
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
187
51
39
25
—
—
—
—
—
—
—
—
879
226
172
124
—
—
88
52
158
657
—
—
—
22
6
—
14,722
—
(4,417)
(2,713)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(200)
—
77
—
—
—
—
—
159
—
—
14,722
(12,924)
— (12,924)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,417)
(2,713)
1,066
277
211
(51)
(4,619)
(4,619)
(77)
—
—
—
—
—
—
—
88
52
815
22
6
159
December 31, 2013
$ 52,035 $ 31,190 $
33,911 $ 86,578 $
2,989 $
(8,380) $ (48,942) $ 149,381
See accompanying notes to consolidated financial statements.
54
Consolidated Statements of Cash Flows
For the years ended December 31, 2013, 2012 and 2011
(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
Stock-based compensation expense
Gains on investment securities, net
Other-than-temporary impairment (recoveries) losses recognized in earnings
Losses on sales of other real property owned, net
Loss on write down of fixed assets
Gains on sale 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 sale of loans held for sale
Decrease (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
Purchases of certificates of deposit 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 in loans
Purchases of premises and equipment
Proceeds from sales of other real property owned
Net cash used in investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Increase (decrease) in repurchase agreements
Proceeds from FHLB advances
Repayment of FHLB advances
Proceeds from short-term debt
Repayment of short-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 period
Cash and cash equivalents at end of period
2013
2012
2011
$
14,722
$
14,025
$
11,372
2,193
4,661
339
(2,293)
—
32
36
(918)
971
161
(64)
(65,172)
65,788
3,805
401
24,662
6,665
—
69,665
134,300
—
(204,766)
(73,203)
(1,397)
1,590
(67,146)
13,551
5,703
36,000
(21,000)
—
—
1,303
—
(4,619)
(4,050)
(2,014)
24,874
(17,610)
82,712
2,647
5,403
227
(934)
(127)
268
33
(1,401)
230
277
(169)
(99,923)
102,158
(912)
1,087
22,889
12,982
(6,416)
30,500
235,013
51
(293,654)
(54,539)
(1,486)
3,873
(73,676)
103,331
(18,896)
—
(14,750)
—
(8,250)
1,255
8,250
(3,912)
(3,788)
(2,843)
60,397
9,610
73,102
3,101
5,398
144
(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
$
65,102
$
82,712
$
55
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2013, 2012 and 2011
(In thousands)
2013
2012
2011
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
Income taxes
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned
Dividends reinvested in common stock
Net tax benefit related to option and deferred compensation plans
$
3,599
$
6,326
$
7,657
1,046
1,066
117
8,203
723
1,244
123
8,695
5,470
2,622
807
31
See accompanying notes to consolidated financial statements.
56
First Mid-Illinois Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
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 year’s consolidated financial statements have been reclassified to conform to the 2013 presentation and there was no impact on net
income or stockholders’ equity from these reclassifications. The Company operates as a single 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.
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.
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.
57
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.
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 years to 40 years
5 years to 15 years
3 years to 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, 2013 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.
58
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.
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.
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, 2013, the Company managed or administered 1,498 accounts with assets totaling approximately $722.9 million. At December 31, 2012,
the Company managed or administered 1,486 accounts with assets totaling approximately $633.8 million.
Convertible 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.
59
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, 2013 was $16.54.
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, May 13, 2011 and June 28, 2012. The current 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 $21.62.
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. On June 28, 2012, the final
$8,250,000 of the Company’s Series C Preferred Stock was issued and sold by the Company to Investors following their receipt of the required bank
regulatory approval, for a total of $27,500,000 of outstanding Series C Preferred Stock. All of the Series C Preferred Stock subscribed for by investors has
been issued. 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, 2013 was $11.75 and the NASDAQ Bank Index value at December 31, 2013 was 2,601.96.
60
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
Stock Incentive Awards
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 in the SI Plan. On September 27, 2011, the Board of Directors passed
a resolution relating to the SI Plan whereby they authorized and approved the Executive Long-Term Incentive Plan (“LTIP”). The LTIP was implemented to
provide methodology for granting Stock Awards and Stock Unit Awards 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. Prior to December 31, 2008, the Company had awarded 59,500 shares as
stock options under the SI plan. There have been no stock options awarded since 2008. The Company awarded 14,054 shares, 15,162 shares and 17,409
shares during 2013, 2012 and 2011, respectively, as 50% Stock Awards and 50% Stock Unit Awards under the SI plan.
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income included in stockholders’ equity as of December 31, 2013 and 2012 are as follows (in
thousands):
December 31, 2013
Net unrealized losses on securities available-for-sale
Securities with other-than-temporary impairment losses
Tax benefit
Balance at December 31, 2013
December 31, 2012
Net unrealized gains on securities available-for-sale
Securities with other-than-temporary impairment losses
Tax benefit (expense)
Balance at December 31, 2012
Unrealized Gain
(Loss) on
Available for Sale
Securities
Securities with
Other-Than-
Temporary
Impairment Losses
Total
$
$
$
$
(10,272) $
— $
(10,272)
—
4,004
(3,461)
1,349
(6,268) $
(2,112) $
11,836
$
— $
—
(4,614)
(4,389)
1,711
7,222
$
(2,678) $
(3,461)
5,353
(8,380)
11,836
(4,389)
(2,903)
4,544
Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the years ended
December 31, 2013, 2012 and 2011 , were as follows:
Unrealized gains on available-for-sale
securities
Total reclassifications out of accumulated
other comprehensive income
$
$
Amounts Reclassified from Other
Comprehensive Income
2013
2012
2011
Affected Line Item in the Statements of Income
2,293
(894)
934
(364)
486 Securities gains, net (Total reclassified amount before tax)
(189) Tax expense
1,399
$
570
$
297 Net reclassified amount
See “Note 4 – Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.
61
Note 2 -- Earnings Per Share
Basic net income per common share available to common stockholders is calculated as net income less preferred stock dividends divided by the weighted
average number of common shares outstanding. Diluted net income per common share available to common stockholders is computed using the weighted
average number of common shares outstanding, increased by the assumed conversion of the Company’s convertible preferred stock and the Company’s
stock options and restricted stock awarded, unless anti-dilutive.
The components of basic and diluted net income per common share available to common stockholders for the years ended December 31, 2013, 2012 and
2011 were as follows:
Basic Net Income per Common Share
Available to Common Stockholders:
Net income
Preferred stock dividends
Net income available to common stockholders
Weighted average common shares outstanding
Basic earnings per common share
Diluted Net Income per Common Share
Available to Common Stockholders:
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
Restricted stock awarded
Assumed conversion of preferred stock
Dilutive potential common shares
Diluted weighted average common shares outstanding
$
$
$
$
$
2013
2012
2011
14,722,000
$
14,025,000
$
11,372,000
(4,417,000)
(4,252,000)
(3,576,000)
10,305,000
$
9,773,000
$
7,796,000
5,934,628
6,023,289
6,042,015
1.74
$
1.62
$
1.29
10,305,000
$
9,773,000
$
7,796,000
—
—
—
10,305,000
$
9,773,000
$
7,796,000
5,934,628
6,023,289
6,042,015
2,090
8,184
—
10,274
5,944,902
4,473
116
—
4,589
10,515
1,741
—
12,256
6,027,878
6,054,271
Diluted earnings per common share
$
1.73
$
1.62
$
1.29
The following shares were not considered in computing diluted earnings per share for the years ended December 31, 2013, 2012 and 2011 because they
were anti-dilutive:
Stock options to purchase shares of common stock
130,500
108,125
202,970
Average dilutive potential common shares associated with convertible preferred stock
2,494,801
2,290,110
1,998,652
2013
2012
2011
Note 3 -- Cash and Due from Banks
Aggregate cash and due from bank balances of $1,583,000, $1,134,000 and $873,000 were maintained in satisfaction of statutory reserve requirements of
the Federal Reserve Bank at December 31, 2013, 2012 and 2011, respectively. At December 31, 2013, the Company’s cash accounts did not exceed the
federally insured limits.
62
Note 4 -- Investment Securities
The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type
at December 31, 2013 and December 31, 2012 were as follows (in thousands):
December 31, 2013
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total available-for-sale
December 31, 2012
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total available-for-sale
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Fair Value
$
197,805
$
137
$
(7,574) $
65,304
229,661
3,652
6,035
1,031
2,215
—
34
(1,773)
(4,275)
(3,461)
(67)
190,368
64,562
227,601
191
6,002
$
$
502,457
$
3,417
$
(17,150) $
488,724
180,851
$
1,321
$
(3) $
53,064
252,310
4,974
9,663
3,163
7,162
—
225
(20)
(12)
(4,389)
—
182,169
56,207
259,460
585
9,888
$
500,862
$
11,871
$
(4,424) $
508,309
Trust preferred securities at December 31, 2013, is one trust preferred pooled security issued by First Tennessee Financial (“FTN”). The unrealized loss of
this security, which has a maturity of twenty-four years, is primarily due to its long-term nature, a lack of demand or inactive market for the security, and
concerns regarding the underlying financial institutions that have issued the trust preferred security. See the heading “Trust Preferred Securities” below for
further information regarding this security.
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, 2013, 2012 and 2011 (in thousands):
Proceeds from sales
Gross gains
Gross losses
Income tax expense
2013
2012
2011
$
69,665
$
30,500
$
18,891
2,454
161
894
934
—
364
486
—
189
63
The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, at December 31, 2013
and the weighted average yield for each range of maturities (dollars in thousands):
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
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
One year or
less
After 1 through
5 years
After 5 through
10 years
After
ten years
Total
$
157,292
$
33,076
$
— $
— $
190,368
1,793
3,268
—
2,002
30,416
127,965
—
—
30,427
96,368
—
3,933
1,926
—
191
67
64,562
227,601
191
6,002
$
164,355
$
191,457
$
130,728
$
2,184
$
488,724
1.60%
1.64%
2.72%
3.15%
2.51%
3.09%
1.62%
2.32%
2.27%
2.61%
The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-
equivalent yields have been calculated using a 35% 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,
2013. Investment securities carried at approximately $321 million and $267 million at December 31, 2013 and 2012, respectively, were pledged to secure
public deposits and repurchase agreements and for other purposes as permitted or required by law.
The following table presents the aging of gross unrealized losses and fair value by investment category as of December 31, 2013 and 2012 (in thousands):
December 31, 2013
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
December 31, 2012
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
$
$
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or more
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
183,074
$
(7,574) $
— $
— $
183,074
$
29,986
131,125
—
3,933
(1,708)
(4,275)
—
(67)
808
13
191
—
(65)
—
(3,461)
—
30,794
131,138
191
3,933
(7,574)
(1,773)
(4,275)
(3,461)
(67)
348,118
$
(13,624) $
1,012
$
(3,526) $
349,130
$
(17,150)
10,997
$
(3) $
— $
— $
10,997
$
1,969
697
—
—
(20)
(12)
—
—
—
—
585
—
—
—
(4,389)
—
1,969
697
585
—
(3)
(20)
(12)
(4,389)
—
$
13,663
$
(35) $
585
$
(4,389) $
14,248
$
(4,424)
64
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At December 31, 2013 and December 31, 2012, 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, 2013 there were two Obligations of states and political subdivisions with a fair value of
$808,000 and unrealized losses of $65,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2012, there were no
Obligations of states and political subdivisions in a continuous unrealized loss position for twelve months or more.
Mortgage-backed Securities: GSE Residential. At December 31, 2013 there was one mortgage-backed security with a fair value of $13,000 and
unrealized losses of $109 in a continuous unrealized loss position for twelve months or more. At December 31, 2012, there were no mortgage-backed
securities in a continuous unrealized loss position for twelve months or more.
Trust Preferred Securities. At December 31, 2013, there were one trust preferred security with a fair value of $191,000 and unrealized losses of
$3,461,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2012, there were three trust preferred securities with a fair
value of $585,000 and unrealized losses of $4,389,000 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, the impending change to the
regulatory treatment of these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities. The
Company recorded no other-than-temporary impairment (OTTI) for these securities during 2013 or 2012. Because the Company does not intend to sell the
remaining security and it is not more-likely-than-not that the Company will be required to sell this securities before recovery of its amortized cost basis, which
may be maturity, the Company does not consider the remainder of the investment in this security to be other-than-temporarily impaired at December 31,
2013. However, future downgrades or additional deferrals and defaults in the security could result in additional OTTI and consequently, have a material
impact on future earnings.
On July 22, 2013, the Company sold its holdings in PreTSL I and PreTSL II and the net proceeds exceeded the aggregate book value of the securities by
approximately $1.4 million. On July 3, 2012, the Company’s holding in PreTSL VI was redeemed in full and the payment received exceeded the aggregate
book of the security by approximately $139,000. Following are the details for the remaining impaired trust preferred security remaining as of December 31,
2013 (in thousands):
Book
Value
Market Value
Unrealized
Gains (Losses)
Other-than-
temporary
Impairment
Recorded To-date
PreTSL XXVIII
$
3,652
$
191
$
(3,461) $
(1,111)
Other securities. At December 31, 2013 and 2012, 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, 2013 represents OTTI. However, given the continued disruption in
the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities
portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of
any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the
other-than-temporary impairment is identified.
Other-than-temporary Impairment
Upon acquisition of a security, the Company determines whether it is within the scope of the accounting guidance for investments in debt and equity
securities or whether it must be evaluated for impairment under the accounting guidance for beneficial interests in securitized financial assets
The Company conducts periodic reviews to evaluate its investment securities to determine whether OTTI has occurred. While all securities are considered,
the securities primarily impacted by OTTI evaluation are pooled trust preferred securities. For the pooled trust preferred security currently in the investment
portfolio, an extensive review is conducted to determine if any additional OTTI has occurred. The Company utilizes an independent third-party to perform the
OTTI evaluation. The Company's management reviews the assumption inputs and methodology with the third-party to obtain an understanding of them and
determine if they are appropriate for the evaluation. Economic models are used to project future cash flows for the security based on current assumptions for
discount rate, prepayments, default and deferral rates and recoveries. These assumptions are determined based on the structure of the issuance, the
specific collateral underlying the security, historical performance of trust preferred securities and general state of the economy. The OTTI test compares the
present value of the cash flows from quarter to quarter to determine if there has been an adverse change which could indicate additional OTTI.
The discount rate assumption used in the cash flow model is equal to the current yield used to accrete the beneficial interest. The Company’s current trust
preferred security investment has a floating rate coupon of 3-month LIBOR plus 90 basis points. Since the estimate of 3-month LIBOR is based on the
forward curve on the measurement date, and is therefore variable, the discount assumption for this security is a range of projected coupons over the
expected life of the security.
65
The Company considers the likelihood that issuers will prepay their securities which changes the amount of expected cash flows. Factors such as the
coupon rates of collateral, economic conditions and regulatory changes, such as the Dodd-Frank Act and Basel III, are considered.
The trust preferred security includes collateral issued by financial institutions and insurance companies. To identify bank issuers with a high risk of near term
default or deferral, a credit model developed by the third-party is utilized that scores each bank issuer based on 29 different ratios covering capital adequacy,
asset quality, earnings, liquidity, the Texas Ratio, and sensitivity to interest rates. To account for longer term bank default risk not captured by the credit
model, it is assumed that banks will default at a rate of 2% annually for the first two years of the cash flow projection, and 36 basis points in each year
thereafter. To project defaults for insurance issuers, each issuer’s credit rating is mapped to its idealized default rate, which is AM Best’s estimate of the
historical default rate for insurance companies with that rating.
Lastly, it is assumed that trust preferred securities issued by banks that have already failed will have no recoveries, and that banks projected to default will
have recoveries of 10%. Additionally, the 10% recovery assumption, incorporates the potential for cures by banks that are currently in deferral.
If the Company determines that a given pooled trust preferred security position will be subject to a write-down or loss, the Company records the expected
credit loss as a charge to earnings.
Credit Losses Recognized on Investments
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, 2013, 2012 and 2011 (in
thousands).
Credit losses on trust preferred securities held:
Beginning of period
Additions related to OTTI losses not previously recognized
Reductions due to sales / (recoveries)
Reductions due to change in intent or likelihood of sale
Additions related to increases in previously recognized OTTI losses
Reductions due to increases in expected cash flows
Accumulated Credit Losses as of December 31:
2013
2012
2011
$
3,989
$
4,116
$
3,230
—
(2,878)
—
—
—
—
(127)
—
—
—
—
—
—
886
—
End of period
$
1,111
$
3,989
$
4,116
Maturities of investment securities were as follows at December 31, 2013 (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
66
Amortized
Cost
Estimated
Fair Value
$
166,922
$
161,087
65,091
35,038
5,745
272,796
229,661
63,492
34,360
2,184
261,123
227,601
$
502,457
$
488,724
Note 5 -- Loans and Allowance for Loan Losses
Loans are stated at the principal amount outstanding net of unearned discounts, unearned income and allowance for loan losses. Unearned income
includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods
that approximated the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding. A
summary of loans at December 31, 2013 and 2012 follows (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
Gross loans
Less:
Net deferred loan fees, premiums and discounts
Allowance for loan losses
Net loans
2013
2012
$
25,321
$
109,376
184,158
50,174
357,726
726,755
64,055
168,227
14,579
9,094
982,710
420
13,249
$
969,041
$
31,341
86,256
186,205
44,863
317,321
665,986
60,948
160,193
16,264
8,206
911,597
744
11,776
899,077
Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or market
value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties. The balance of loans
held for sale, excluded from the balances above, were $514,000 and $212,000 at December 31, 2013 and 2012, respectively.
Most of the Company’s business activities are with customers located within central Illinois. At December 31, 2013, the Company’s loan portfolio included
$173.4 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $147.1 million was concentrated in other grain
farming. Total loans to borrowers whose businesses are directly related to agriculture increased $26.2 million from $147.2 million at December 31, 2012
while loans concentrated in other grain farming increased $22.7 million from $124.4 million at December 31, 2012. While the Company adheres to sound
underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on
crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and
potentially result in loan losses within the agricultural portfolio.
In addition, the Company has $50.6 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 $98.0 million of loans to lessors of non-residential buildings and $58.8 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.
67
Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund
accounts receivable that are secured by business assets other than real estate. These loans are generally written for one year or less. Also, equipment
financing is provided to businesses with these loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years.
Commercial loans are often accompanied by a personal guaranty of the principal owners of a business. Like commercial real estate loans, the underlying
cash flow of the business is the primary consideration in the underwriting process. The financial condition of commercial borrowers is monitored at least
annually with the type of financial information required determined by the size of the relationship. Measures employed by the Company for businesses with
higher risk profiles include the use of government-assisted lending programs through the Small Business Administration and U.S. Department of Agriculture.
Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and
harvest corn and soybeans and term loans to fund the purchase of equipment. Agricultural real estate loans are primarily comprised of loans for the
purchase of farmland. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for
each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically
written for one year and secured by the crop. Loan-to-value ratios on loans secured by farmland generally do not exceed 65% and have amortization periods
limited to twenty five years. Federal government-assistance lending programs through the Farm Service Agency are used to mitigate the level of credit risk
when deemed appropriate.
Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties
consisting of one-to-four units and home equity loans and lines of credit. The Company sells the vast majority of its long-term fixed rate residential real
estate loans to secondary market investors. The Company also releases the servicing of these loans upon sale. The Company retains all residential real
estate loans with balloon payment features. Balloon periods are limited to five years. Residential real estate loans are typically underwritten to conform to
industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit scores. Loans secured by first liens on
residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have amortization periods of twenty five years or
less. The Company does not originate subprime mortgage loans.
Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an
automobile or other living expenses. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio, employment
history, and collateral coverage. Typically, consumer loans are set up on monthly payments with amortization periods based on the type and age of the
collateral.
Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or equipment
purchases. Underwriting guidelines for these loans are consistent with those established for commercial loans with the additional repayment source of the
taxing authority of the municipality.
Allowance for 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.
68
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.
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 historical loss experience. 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 based on portfolio segment and impairment
method as of December 31, 2013, 2012 and 2011 (in thousands):
Commercial/
Commercial
Real Estate
Agricultural/
Agricultural
Real Estate
Residential
Real Estate
Consumer
Unallocated
Total
2013
Allowance for loan losses:
Balance, beginning of year
$
9,301
$
558
$
726
$
403
$
788
$
11,776
Provision charged to expense
Losses charged off
Recoveries
Balance, end of period
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans:
Ending balance
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
1,861
(764)
248
(30)
—
5
171
(141)
15
57
(223)
140
134
—
—
2,193
(1,128)
408
10,646
$
533
$
771
$
377
$
922
$
13,249
604
10,042
$
$
— $
533
$
— $
771
$
— $
377
$
— $
604
922
$
12,645
607,062
$
172,979
$
187,796
$
14,967
$
— $
982,804
5,145
601,917
$
$
— $
— $
— $
— $
5,145
172,979
$
187,796
$
14,967
$
— $
977,659
$
$
$
$
$
$
69
Commercial/
Commercial
Real Estate
Agricultural/
Agricultural
Real Estate
Residential
Real Estate
Consumer
Unallocated
Total
2012
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of period
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans:
Ending balance
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
2011
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:
Ending balance
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
8,791
$
546
$
1,979
(1,586)
117
(47)
(12)
71
$
636
580
(524)
34
9,301
$
558
$
726
$
457
8,844
$
$
54
504
$
$
— $
726
$
378
116
(249)
158
403
$
$
— $
403
$
769
$
19
—
—
11,120
2,647
(2,371)
380
788
$
11,776
— $
511
788
$
11,265
569,717
$
145,695
$
179,309
$
16,066
$
278
$
911,065
— $
— $
— $
6,564
179,309
$
16,066
$
278
$
904,501
$
$
$
5,334
564,383
$
$
1,230
144,465
8,307
$
2,309
(3,077)
1,252
404
205
(66)
3
$
440
546
(363)
13
392
122
(254)
118
378
$
$
— $
378
$
850
$
(81)
—
—
769
$
10,393
3,101
(3,760)
1,386
11,120
— $
575
769
$
10,545
8,791
$
546
$
636
$
575
8,216
$
$
— $
546
$
— $
636
$
505,693
$
130,595
$
185,151
$
16,270
$
22,365
$
860,074
4,719
500,974
$
$
1,149
129,446
$
$
— $
— $
— $
5,868
185,151
$
16,270
$
22,365
$
854,206
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.
70
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-homogeneous 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-worthiness and paying capacity of the obligor or of the
collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are
characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered pass rated loans. The following
tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2013 and 2012 (in
thousands):
Pass
Watch
Substandard
Doubtful
Total
Pass
Watch
Substandard
Doubtful
Total
Pass
Watch
Substandard
Doubtful
Total
Construction &
Land Development
2012
2013
Farm Loans
1-4 Family Residential
Properties
Multifamily Residential
Properties
2013
2012
2013
2012
2013
2012
$
23,839
$
27,217
$
108,262
$
82,516
$
182,593
$
183,880
$
50,174
$
44,863
—
1,482
—
2,135
1,989
—
231
912
—
2,662
1,093
—
637
1,531
—
424
2,194
—
—
—
—
—
—
—
$
25,321
$
31,341
$
109,405
$
86,271
$
184,761
$
186,498
$
50,174
$
44,863
Commercial Real Estate
(Nonfarm/Nonresidential)
2013
2012
Agricultural Loans
2012
2013
Commercial & Industrial
Loans
2013
2012
Consumer Loans
2012
2013
$
335,284
$
287,794
$
62,439
$
56,899
$
158,107
$
157,461
$
14,558
$
16,236
17,998
3,717
—
24,213
4,315
—
193
1,496
—
958
3,157
—
3,515
6,731
—
1,588
1,250
—
—
21
—
14
14
—
$
356,999
$
316,322
$
64,128
$
61,014
$
168,353
$
160,299
$
14,579
$
16,264
All Other Loans
Total Loans
2013
2012
2013
2012
$
9,084
$
8,193
$
944,340
$
865,059
—
—
—
—
—
—
22,574
15,890
—
31,994
14,012
—
$
9,084
$
8,193
$
982,804
$
911,065
71
The following table presents the Company’s loan portfolio aging analysis at December 31, 2013 and 2012 (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
December 31, 2013
Construction and land development
$
— $
— $
— $
— $
25,321
$
25,321
$
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, 2012
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
Impaired Loans
$
$
299
326
—
568
1,193
122
113
83
—
—
146
—
1,030
1,176
49
88
25
—
—
371
—
145
516
—
62
4
—
299
843
—
1,743
2,885
171
263
112
—
109,106
183,918
50,174
355,256
723,775
63,957
109,405
184,761
50,174
356,999
726,660
64,128
168,090
168,353
14,467
9,084
14,579
9,084
1,511
$
1,338
$
582
$
3,431
$
979,373
$
982,804
$
— $
592
1,351
—
262
2,205
—
413
119
—
53
—
40
—
911
1,004
—
275
24
—
$
— $
53
$
31,288
$
31,341
$
293
944
—
255
1,492
620
53
39
—
885
2,335
—
1,428
4,701
620
741
182
—
85,386
86,271
184,163
186,498
44,863
314,894
660,594
60,394
44,863
316,322
665,295
61,014
159,558
160,299
16,082
8,193
16,264
8,193
$
2,737
$
1,303
$
2,204
$
6,244
$
904,821
$
911,065
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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.
72
The following tables present impaired loans as of December 31, 2013 and 2012 (in thousands):
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
Total loans
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
2013
Unpaid
Principal
Balance
Recorded
Balance
Specific
Allowance
Recorded
Balance
2012
Unpaid
Principal
Balance
Specific
Allowance
$
614
$
614
$
76
$
1,114
$
1,529
$
—
—
—
1,096
1,710
—
275
—
—
—
—
—
1,096
1,710
—
275
—
—
—
—
—
301
377
—
227
—
—
—
636
—
—
1,750
310
—
—
—
—
723
—
—
2,252
310
—
—
—
295
—
162
—
—
457
54
—
—
—
$
$
$
$
1,985
$
1,985
$
604
$
2,060
$
2,562
$
511
869
$
1,727
$
— $
408
$
694
$
105
1,110
—
1,750
3,834
—
613
37
—
113
1,558
—
1,778
5,176
—
946
51
—
—
—
—
—
—
—
—
—
—
418
1,269
—
2,063
4,158
620
704
51
—
429
1,792
—
2,253
5,168
1,568
—
58
—
4,484
$
6,173
$
— $
5,533
$
6,794
$
1,483
$
2,341
$
76
$
1,522
$
2,223
$
105
1,110
—
2,846
5,544
—
888
37
—
113
1,558
—
2,874
6,886
—
1,221
51
—
—
—
—
301
377
—
227
—
—
418
1,905
—
2,063
5,908
930
704
51
—
429
2,515
—
2,253
7,420
1,878
—
58
—
—
—
—
—
—
—
—
—
—
—
—
295
—
162
—
—
457
54
—
—
—
$
6,469
$
8,158
$
604
$
7,593
$
9,356
$
511
73
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 average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2013, 2012
and 2011 (in thousands):
2013
2012
2011
Average
Investment
in Impaired
Loans
Interest
Income
Recognized
Average
Investment
in Impaired
Loans
Interest
Income
Recognized
Average
Investment
in Impaired
Loans
Interest
Income
Recognized
Construction and land development
$
1,565
$
— $
1,520
$
— $
841
$
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
107
1,248
—
2,895
5,815
16
1,240
47
—
$
7,118
$
—
5
—
3
8
1
10
12
—
31
421
1,948
—
2,100
5,989
1,071
755
56
—
$
7,871
$
—
7
—
—
7
—
—
15
—
22
532
1,755
—
2,688
5,816
673
1,199
10
—
$
7,698
$
—
—
—
—
22
22
—
14
—
—
36
The amount of interest income recognized by the Company within the periods stated above 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 $101,000 of 1-4 Family residential properties, $39,000 of commercial real estate, $182,000 of commercial and industrial and $26,000 of
consumer loans at December 31, 2013 and $6,000 of 1-4 Family residential properties and $14,000 of consumer loans at December 31, 2012. For the years
ended December 31, 2013, 2012 and 2011, 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 recorded balance of nonaccrual loans at December 31, 2013 and December 31, 2012 (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
2013
2012
$
1,483
$
105
1,009
—
2,807
5,404
—
706
11
—
1,522
418
1,899
—
2,063
5,902
930
704
37
—
$
6,121
$
7,573
74
The aggregate principal balances of nonaccrual, past due ninety days or more loans were $6.1 million and $7.6 million at December 31, 2013 and 2012,
respectively. Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $45,000, $173,000 and $239,000 in
2013, 2012 and 2011, respectively.
Troubled Debt Restructuring
The balance of troubled debt restructurings at December 31, 2013 and 2012 was $3,200,000 and $3,339,000, respectively. Approximately $431,000 and
$295,000 in specific reserves have been established with respect to these loans as of December 31, 2013 and 2012, respectively. 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 following table presents the Company’s recorded balance of troubled debt restructurings at December 31, 2013 and 2012 (in thousands).
Troubled debt restructurings:
Construction and land development
1-4 Family residential properties
Commercial real estate
Loans secured by real estate
Commercial and industrial loans
Consumer Loans
Total
Performing troubled debt restructurings:
1-4 Family residential properties
Commercial real estate
Loans secured by real estate
Commercial and industrial loans
Consumer Loans
Total
2013
2012
$
1,482
$
306
899
2,687
487
26
3,200
$
101
$
39
140
182
26
348
$
$
$
$
1,522
445
950
2,917
408
14
3,339
6
—
6
—
14
20
The following table presents loans modified as TDRs during the years ended December 31, 2013 and 2012 as a result of various modified loan factors (in
thousands):
December 31, 2013
December 31, 2012
Number of
Modifications
Recorded
Investment
Type of
Modifications
Number of
Modifications
Recorded
Investment
Type of
Modifications
1
5
1
7
2
4
$
284
(a)
(a)(b)(c)
(c)
251
39
574
211
(a)(b)(c)
14
(b)(c)
4
2
1
7
4
1
$
1,553
(a)(b)
94
289
(b)
(b)
1,936
185
(a)(b)(c)(d)
14
(c)
13
$
799
12
$
2,135
Construction and land development
1-4 Family residential properties
Commercial real estate
Loans secured by real estate
Commercial and industrial loans
Consumer Loans
Total
Type of modifications:
(a) Reduction of stated interest rate of loan
(b) Change in payment terms
(c) Extension of maturity date
(d) Permanent reduction of the recorded investment
A loan is considered to be in payment default once it is 90 days past due under the modified terms. There were no loans modified as troubled debt
restructurings during the prior twelve months that experienced defaults during the year ended December 31, 2013 and 2012.
75
Note 6 -- Premises and Equipment, Net
Premises and equipment at December 31, 2013 and 2012 consisted of:
Land
Buildings and improvements
Furniture and equipment
Leasehold improvements
Construction in progress
Subtotal
Accumulated depreciation and amortization
Total
2013
2012
$
5,966
$
28,962
16,601
3,138
62
54,729
26,151
$
28,578
$
5,966
28,797
15,898
3,094
45
53,800
24,130
29,670
Depreciation and amortization expense was $2.49 million, $2.53 million and $2.45 million for the years ended December 31, 2013, 2012 and 2011,
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, 2013 and 2012:
Goodwill not subject to amortization
Intangibles from branch acquisition
Core deposit intangibles
Customer list intangibles
2013
2012
Gross Carrying
Value
Accumulated
Amortization
Gross Carrying
Value
Accumulated
Amortization
$
$
29,513
$
3,760
$
29,513
$
3,015
8,986
1,904
3,015
6,499
1,904
3,015
8,986
1,904
3,760
3,015
5,825
1,904
43,418
$
15,178
$
43,418
$
14,504
Total amortization expense for the years ended December 31, 2013, 2012 and 2011 was as follows:
Intangibles from branch acquisitions
Core deposit intangibles
Customer list intangibles
2013
2012
2011
$
$
— $
50
$
674
—
706
17
201
743
190
674
$
773
$
1,134
Estimated amortization expense for each of the five succeeding years is shown in the table below:
For period ended 12/31/14
For period ended 12/31/15
For period ended 12/31/16
For period ended 12/31/17
For period ended 12/31/18
76
$
$
$
$
$
643
616
381
254
232
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, 2013 and 2012, 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, 2013 and 2012, deposits consisted of the following:
Demand deposits:
Non-interest bearing
Interest-bearing
Savings
Money market
Time deposits
Total deposits
2013
2012
$
235,448
$
291,035
279,227
253,255
228,651
263,838
259,330
290,909
252,711
207,277
$
1,287,616
$
1,274,065
Total interest expense on deposits for the years ended December 31, 2013, 2012 and 2011 was as follows:
2013
2012
2011
Interest-bearing demand
Savings
Money market
Time deposits
Total
$
$
102
452
693
1,456
2,703
$
$
195
$
1,186
1,248
2,214
4,843
$
332
1,481
1,993
2,919
6,725
As of December 31, 2013, 2012 and 2011, 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
2013
2012
2011
$
96,715
$
62,563
$
546
826
67,854
1,204
The following table shows the amount of maturities for all time deposits as of December 31, 2013:
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
$
159,419
33,683
15,819
10,177
9,430
123
$
228,651
In 2013 the Company maintained account relationships with various public entities throughout its market areas. three public entities had total balances of
$31.1 million in various checking accounts and time deposits as of December 31, 2013. These balances are subject to change depending upon the cash flow
needs of the public entity.
77
Note 9 -- Borrowings
As of December 31, 2013 and 2012 borrowings consisted of the following:
Securities sold under agreements to repurchase
Federal Home Loan Bank (FHLB) advances:
Fixed-term advances
Subordinated debentures
Total
Aggregate annual maturities of FHLB advances and subordinated debentures at December 31, 2013 are:
2014
2015
2016
2017
2018
Thereafter
2013
2012
119,187
$
113,484
20,000
20,620
5,000
20,620
159,807
$
139,104
$
$
$
$
10,000
5,000
5,000
—
—
20,620
40,620
FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. At December 31, 2013 the advances totaling $20 million were
as follows:
•
•
•
$10 million advance with a 3-month maturity, at .22%, due February 25, 2014
$5 million advance with a 2-year maturity, at .57%, due August 26, 2015
$5 million advance with a 10-year maturity, at 4.58%, due July 14, 2016, on year lockout, callable quarterly
Securities sold under agreements to repurchase have overnight maturities and a weighted average rate of .05%. 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,
2013) 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
2013
2012
2011
$
119,187
$
118,030
$
87,468
113,443
132,380
108,240
At December 31, 2013 and 2012, there was no outstanding loan balance on a revolving credit agreement with The Northern Trust Company. This loan was
renewed on April 21, 2013. The revolving credit agreement has a maximum available balance of $15 million with a term of one year from the date of closing.
The interest rate (2.5% at December 31, 2013) 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, 2013 and 2012.
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, 2013 and 2012 the rate was
3.09% and 3.19%, respectively. The Company used the proceeds of the offering for general corporate purposes.
78
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 (1.84% and 1.91% at December 31, 2013 and 2012). 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.
79
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 Board of Governors of the Federal Reserve System (“Federal Reserve System”), and First Mid Bank follows
similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency (“OCC”). Failure to meet minimum
capital requirements can initiate 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 a minimum total risk-
based capital ratio of 8%, a minimum Tier 1 risk-based capital ratio of 4% and a minimum leverage ratio of 3% for the most highly rated banks that do not
expect significant growth. All other institutions are required to maintain a minimum leverage ratio of 4%. Management believes that, as of December 31,
2013 and 2012, the Company and First Mid Bank met all capital adequacy requirements.
As of December 31, 2013 and 2012, 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 below. At December 31, 2013, there are no conditions or events since the most recent notification that
management believes have changed this categorization.
December 31, 2013
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, 2012
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
Actual
Required Minimum For
Capital Adequacy Purposes
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
170,344
15.58% $
161,650
14.89%
157,095
148,401
157,095
148,401
14.37%
13.67%
10.12%
9.62%
$
161,799
15.65% $
143,942
14.04%
150,023
132,166
150,023
132,166
14.51%
12.89%
9.66%
8.56%
87,472
86,830
43,736
43,415
62,069
61,737
82,693
82,047
41,346
41,024
62,093
61,771
> 8.00%
N/A
N/A
> 8.00
$
108,538
> 10.00%
> 4.00
> 4.00
> 4.00
> 4.00
N/A
N/A
65,123
> 6.00
N/A
N/A
77,171
> 5.00
> 8.00%
N/A
N/A
> 8.00
$
102,559
> 10.00%
> 4.00
> 4.00
> 4.00
> 4.00
N/A
N/A
61,535
> 6.00
N/A
N/A
77,213
> 5.00
80
Note 11 -- Disclosures of Fair Values of Financial Instruments
Fair value is 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. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a
hierarchy of three levels of inputs that may be used to measure fair value:
Level 1
Level 2
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.
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.
Available-for-Sale Securities. The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market
prices are available in an active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated by
using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-
based or independently sources market parameters, including but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative
loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. 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.
Fair value determinations for Level 3 measurements of securities are the responsibility of the Treasury function of the Company. The Company contracts
with a pricing specialist to generate fair value estimates on a monthly basis. The Treasury function of the Company challenges the reasonableness of the
assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United
States, analyzes the changes in fair value and compares these changes to internally developed expectations and monitors these changes for
appropriateness.
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, 2013 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 and will continue to be, as a result of the
Dodd-Frank Act’s elimination of trust preferred securities from Tier 1 capital for certain holding companies. There are currently very few market
participants who are willing and or able to transact for these securities. The market values for these securities 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, 2013,
• 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 trust preferred securities held by the Company 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.
81
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, 2013 and 2012 (in thousands):
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)
Fair Value
December 31, 2013
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
Trust preferred securities
Other securities
Total available-for-sale securities
December 31, 2012
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
Trust preferred securities
Other securities
$
190,368
$
— $
190,368
$
64,562
227,601
191
6,002
488,724
$
—
—
—
67
67
64,562
227,601
—
5,935
$
488,466
$
182,169
$
— $
182,169
$
$
$
56,207
259,460
585
9,888
—
—
—
60
60
56,207
259,460
—
9,828
$
507,664
$
—
—
—
191
—
191
—
—
—
585
—
585
Total available-for-sale securities
$
508,309
$
The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2013
and 2012 is summarized as follows (in thousands):
December 31, 2013
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
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
82
Available for Sale
Securities
Trust Preferred
Securities
$
$
$
585
—
—
—
928
—
—
(1,138)
(184)
191
—
December 31, 2012
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
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
$
$
$
Available-for-Sale Securities
Mortgage-
backed
Securities
Trust Preferred
Securities
Total
$
719
$
58
—
(58)
—
—
—
—
—
—
— $
—
—
127
517
—
—
—
(778)
585
$
777
—
(58)
127
517
—
—
—
(778)
585
— $
— $
—
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.
Management establishes a specific allowance for loans that have an estimated fair value that is below the carrying value. The total carrying amount of
loans for which a specific allowance has been established as of December 31, 2013 was $1,987,000 and a fair value of $1,383,000 resulting in specific
loss exposures of $604,000. As of December 31, 2012, the total carrying amount of loans for which a specific reserve had been established was
$3,192,000. These loans had a fair value of $2,681,000 which resulted in specific loss exposures of $511,000.
When there is little prospect of collecting 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 affected 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, 2013 was $568,000.
Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to
$172,000. The total carrying amount of other real estate owned as of December 31, 2012 was $1,187,000. Other real estate owned included in the total
carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $70,000.
83
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, 2013 and 2012 (in thousands):
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)
Fair Value
$
$
1,383
$
172
2,681
$
70
— $
—
— $
—
— $
—
— $
—
1,383
172
2,681
70
December 31, 2013
Impaired loans (collateral dependent)
Foreclosed assets held for sale
December 31, 2012
Impaired loans (collateral dependent)
Foreclosed assets held for sale
Sensitivity of Significant Unobservable Inputs
The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable
inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the
fair value measurement.
Trust Preferred Securities. The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities are
offered quotes and comparability adjustments. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower
(higher) fair value measurement. Generally, changes in either of those inputs will not affect the other input.
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other
than goodwill at December 31, 2013.
Fair Value
(in thousands)
191
Valuation
Technique
Discounted
cash flow
Unobservable Inputs
Discount rate
Range (Weighted Average)
15.5%
Constant prepayment rate (1)
Cumulative projected prepayments
Probability of default
Projected cures given deferral
Loss severity
1.3%
23.5%
0.2%
50.65%
96.1%
1,383
172
Third party
valuations
Third party
valuations
Discount to reflect realizable value
0% 40%
Discount to reflect realizable value
less estimated selling costs
0% 40%
(
(
20% )
35% )
Trust Preferred Securities
Impaired loans (collateral dependent)
Foreclosed assets held for sale
(1) Every five years
$
$
$
84
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other
than goodwill at December 31, 2012.
Fair Value
(in thousands)
585
Valuation
Technique
Discounted
cash flow
2,681
70
Third party
valuations
Third party
valuations
$
$
$
Unobservable Inputs
Discount rate
Range (Weighted Average)
9.3% - 22.1% ( 19.3% )
Constant prepayment rate (1)
1.3%
Cumulative projected prepayments
10.8% - 56.0% ( 20.8% )
Probability of default
Projected cures given deferral
0.7% -
1.9% ( 1.7% )
0.0% - 11.0% ( 2.0% )
Loss severity
92.4% - 96.8% ( 94.8% )
Discount to reflect realizable value
0% -
40% (
20% )
Discount to reflect realizable value
less estimated selling costs
0% -
40% (
35% )
Trust Preferred Securities
Impaired loans (collateral dependent)
Foreclosed assets held for sale
(1) Every five years
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, Interest Receivable, Federal Reserve and Federal Home Loan Bank Stock and Interest Payable
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.
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.
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.
Subordinated Debentures 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.
85
The following tables present estimated fair values of the Company’s financial instruments at December 31, 2013 and 2012 in accordance with FAS 107-1
and APB 28-1, codified with ASC 805 (in thousands):
December 31, 2013
Financial Assets
Cash and due from banks
Federal funds sold
Available-for-sale securities
Loans held for sale
Loans net of allowance for loan losses
Interest receivable
Federal Reserve Bank stock
Federal Home Loan Bank stock
Financial Liabilities
Deposits
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
$
64,605
$
64,605
$
64,605
$
497
488,724
514
969,041
6,614
1,522
3,391
497
488,724
514
964,253
6,614
1,522
3,391
497
67
—
—
—
—
—
— $
—
488,466
514
—
6,614
1,522
3,391
—
—
191
—
964,253
—
—
—
$
1,287,616
$
1,287,887
$
— $
1,058,965
$
228,922
Securities sold under agreements to repurchase
119,187
119,190
Interest payable
Federal Home Loan Bank borrowings
Junior subordinated debentures
277
20,000
20,620
277
20,530
12,041
—
—
—
—
119,190
277
20,530
12,041
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
—
—
—
—
—
—
—
585
—
908,281
—
—
—
62,213
$
62,213
$
— $
20,499
6,669
508,309
212
908,281
6,775
1,522
3,293
20,499
6,669
60
—
—
—
—
—
—
—
507,664
212
—
6,775
1,522
3,293
1,275,127
$
— $
1,066,788
$
208,339
113,490
341
5,719
11,386
—
—
—
—
113,490
341
5,719
11,386
—
—
—
—
December 31, 2012
Financial Assets
Cash and due from banks
Federal funds sold
Certificates of deposit investments
Available-for-sale securities
Loans held for sale
Loans net of allowance for loan losses
Interest receivable
Federal Reserve Bank stock
Federal Home Loan Bank stock
Financial Liabilities
Deposits
Securities sold under agreements to repurchase
Interest payable
Federal Home Loan Bank borrowings
Junior subordinated debentures
$
62,213
20,499
6,665
508,309
212
899,077
6,775
1,522
3,293
$
1,274,065
113,484
341
5,000
20,620
$
$
$
$
$
$
$
$
$
$
$
$
$
$
86
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, 2013, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately
$3,234,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $3,234,000 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 2013 and 2012 the Company issued 12,700 common shares and 6,048 common shares, respectively,
pursuant to the DCP.
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 vested over a four-year period and options granted to directors vested at the time they were issued. Prior to December 31, 2008, the
Company had awarded 59,500 shares as stock options under the SI Plan. During 2013, 2012 and 2011, the Company awarded 14,054 shares, 15,162
shares and 17,409 shares, respectively as 50% Stock Awards and 50% Stock Unit Awards under the LTIP of the SI Plan.
The fair value of options granted was estimated on the grant date using the Black-Scholes option-pricing model. Expected volatility was based on historical
volatility of the Company’s stock and other factors. The Company used historical data to estimate option exercises and employee termination within the
valuation model; separate groups of employees who had similar historical exercise behavior were considered separately for valuation purposes. The
expected term of options granted was derived from the output of the option valuation model and represented the period of time that options granted were
expected to be outstanding. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the
time of the grant. There were no options granted during 2013, 2012 or 2011.
The following table summarizes the compensation cost, net of forfeitures, related to stock-based compensation for the years ended December 31, 2013,
2012 and 2011:
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
2013
2012
2011
$
$
$
$
$
$
339
$
(118)
221
$
— $
—
— $
339
$
(118)
221
$
210
$
(73)
137
$
17
$
(6)
11
$
227
$
(79)
148
$
92
(32)
60
52
(1)
51
144
(33)
111
87
A summary of option activity under the SI Plan and the 1997 Stock Incentive Plan as of December 31, 2013, 2012 and 2011, and changes during the years
then ended is presented below:
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
2013
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
$24.88
$0.00
$20.67
$24.34
$26.20
$26.20
2.42
2.44
$
$
—
—
Shares
176,625
0
(39,373)
(8,502)
128,750
128,750
The total intrinsic value of options exercised during 2013 was $75,000. Stock options for 128,750 shares of common stock were not considered in computing
the aggregate intrinsic value of outstanding shares and exercisable shares for 2013 because they were anti-dilutive.
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
2012
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
$23.09
$0.00
$15.90
$24.00
$24.88
$24.95
2.81
2.69
$
$
89,061
89,061
Shares
228,140
0
(44,763)
(6,752)
176,625
170,000
The total intrinsic value of options exercised during 2012 was $332,000. Stock options for 108,125 shares of common stock were not considered in
computing the aggregate intrinsic value of outstanding shares and exercisable shares for 2012 because they were anti-dilutive.
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
2011
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
$22.50
$0.00
$10.67
$0.00
$23.09
$22.98
3.32
2.99
$
$
159,552
159,552
Shares
239,532
0
(11,392)
0
228,140
207,265
The total intrinsic value of options exercised during 2011 was $90,000. 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.
88
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,
2013, 2012 and 2011, and changes during the years then ended, is presented below:
2013
2012
2011
Weighted-
Average
Grant-Date
Fair Value
$2.51
$0
$3.47
$3.68
$0.00
Weighted-
Average
Grant-Date
Fair Value
$3.16
$0
$3.47
$0
$2.51
Weighted-
Average
Grant-Date
Fair Value
$3.29
$0
$3.47
$0.00
$3.16
Shares
35,125
0
(14,250)
0
20,875
Shares
20,875
0
(14,250)
0
6,625
Shares
6,625
0
(6,375)
(250)
0
Unvested, beginning of year
Granted
Vested
Forfeited
Unvested, end of year
As of December 31, 2013, 2012 and 2011, there was $0, $0 and $17,000, respectively, of total unrecognized compensation cost related to unvested options
granted under the SI Plan and the 1997 Stock Incentive Plan. The total fair value of shares subject to options that vested during the years ended December
31, 2013, 2012 and 2011, was $17,000, $49,000, and $49,000, respectively . The following table summarizes information about stock options under the SI
Plan outstanding at December 31, 2013:
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
$22.50 to $24.50
$24.50 to $26.50
Above $26.50
25,500
29,000
74,250
128,750
4.96
3.95
0.95
2.44
$23.00
$26.10
$27.33
$26.20
25,500
29,000
74,250
128,750
$23.00
$26.10
$27.33
$26.20
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 years ended December 31, 2013, 2012 and 2011:
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
Fair value of shares vested
2013
2012
2011
Weighted-avg
Grant-date Fair
Value
$22.16
$23.46
$20.01
$0.00
$24.16
Weighted-avg
Grant-date
Fair Value
$18.70
$25.50
$21.84
$21.87
$22.16
Shares
15,096
15,162
(4,179)
(742)
25,337
Shares
0
17,409
(2,313)
0
15,096
Weighted-avg
Grant-date
Fair Value
$0.00
$18.70
$18.70
$0.00
$18.70
Shares
25,337
14,054
(14,592)
0
24,799
$
329,721
$
91,259
$
42,675
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, 2013, 2012 and 2011, there was $470,000, $400,000, and $216,000, respectively, of total unrecognized
89
compensation cost related to unvested stock and stock unit awards under the SI. That cost is expected to be recognized over the remaining three-year
period.
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 $1,029,000, $1,070,000 and
$930,000 in 2013, 2012 and 2011, 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 senior officer that retired December 31, 2013. Total expense
under these two agreements amounted to $17,000, $35,000 and $55,000 in 2013, 2012 and 2011, respectively. The current liability recorded for these two
agreements was $871,000 and $904,000, as of December 31, 2013 and 2012, respectively.
Note 15 -- Income Taxes
The components of federal and state income tax expense for the years ended December 31, 2013, 2012 and 2011 were as follows:
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Total
2013
2012
2011
$
5,899
$
6,247
$
1,976
7,875
750
221
971
1,933
8,180
219
11
230
$
8,846
$
8,410
$
5,558
1,641
7,199
(435)
(235)
(670)
6,529
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 2013, 2012 and 2011, 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
2013
2012
2011
$
8,249
$
7,852
$
6,265
(877)
9
1,429
36
—
(761)
14
1,264
41
—
$
8,846
$
8,410
$
(618)
16
914
52
(100)
6,529
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 2013, 2012 and 2011
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 2010.
90
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, 2013
and 2012 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
Deferred loan costs
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
2013
2012
$
5,348
$
5,353
1,070
351
255
31
449
—
—
407
13,264
110
3,004
258
285
731
66
33
—
4,487
$
8,777
$
4,753
—
1,014
365
192
93
1,610
46
96
346
8,515
—
2,534
260
285
786
168
87
2,903
7,023
1,492
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, 2013 and 2012 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, 2013. As of December 31, 2013, approximately $40.4 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.
91
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, 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.
The off-balance sheet financial instruments whose contract amounts represent credit risk at December 31, 2013 and 2012 were as follows (in thousands):
Unused commitments and lines of credit:
Commercial real estate
Commercial operating
Home equity
Other
Total
Standby letters of credit
2013
2012
$
$
$
23,770
$
139,395
24,071
52,251
239,487
4,732
$
$
27,800
132,040
25,255
46,430
231,525
3,351
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 lines 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, 2013 and 2012. The Company's
deferred revenue under standby letters of credit 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 $24,539,000 and
$21,638,000 at December 31, 2013 and 2012, respectively. Activity during 2013 and 2012 was as follows:
Beginning balance
New loans
Loan repayments
Ending balance
2013
2012
$
$
21,638
$
9,380
(6,479)
24,539
$
21,220
8,199
(7,781)
21,638
Deposits from related parties held by First Mid Bank at December 31, 2013 and 2012 totaled $49,435,000 and $41,904,000, respectively.
92
Note 19 -- Leases
The Company has several noncancellable operating leases, primarily for property rental of banking buildings. These leases are for terms from one year to
fifteen years and generally contain renewal options for periods ranging from one year to five years. Rental expense for these leases was $1,297,000,
$1,293,000 and $1,331,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Future minimum lease payments under operating leases
are:
2014
2015
2016
2017
2018
Thereafter
Total minimum lease payments
Note 20 -- 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
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
$
$
$
Operating
Leases
$
1,210
506
505
275
275
757
$
3,528
December 31,
2013
2012
2,645
$
2,935
164,311
2,584
11,658
3,012
162,674
2,415
172,475
$
179,759
1,104
$
20,620
1,370
23,094
149,381
1,104
20,620
1,348
23,072
156,687
179,759
Total Liabilities and Stockholders’ equity
$
172,475
$
93
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Income and Comprehensive Income
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
Comprehensive income
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Cash Flows
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 in other assets
Increase in other liabilities
Net cash provided by (used in) operating activities
Cash flows from financing activities:
Repayment of short-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
94
Years ended December 31,
2013
2012
2011
$
1,438
$
1,438
$
64
1,502
2,233
(731)
876
145
14,577
14,722
1,798
$
$
64
1,502
2,519
(1,017)
990
(27)
14,052
14,025
15,421
$
$
$
$
938
40
978
2,414
(1,436)
1,005
(431)
11,803
11,372
16,586
Years ended December 31,
2013
2012
2011
$
14,722
$
14,025
$
11,372
116
1,438
(14,577)
(1,512)
180
367
—
—
—
1,303
(4,619)
(4,050)
(2,014)
(9,380)
(9,013)
11,658
114
1,438
(14,052)
(1,436)
319
408
(8,250)
—
8,250
1,255
(3,912)
(3,788)
(2,843)
(9,288)
(8,880)
20,538
$
2,645
$
11,658
$
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
20,538
Note 21 -- Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the two years ended December 31, 2013 and 2012:
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 2013
March 31
June 30
September 30
December 31
$
13,202
$
13,206
$
13,446
$
13,605
998
12,204
480
11,724
4,550
10,612
5,662
2,134
3,528
1,104
865
12,341
252
12,089
4,714
10,918
5,885
2,220
3,665
1,105
824
12,622
975
11,647
5,697
11,082
6,262
2,352
3,910
1,104
848
12,757
486
12,271
4,380
10,892
5,759
2,140
3,619
1,104
2,515
$0.43
$0.42
Net income available to common stockholders
$
2,424
$
2,560
$
2,806
$
Basic earnings per common share
Diluted earnings per common share
$0.41
$0.41
$0.43
$0.43
$0.47
$0.47
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 2012
March 31
June 30
September 30
December 31
13,903
1,214
12,689
896
11,793
4,710
10,877
5,626
2,117
3,509
1,104
2,405
0.40
0.40
$
13,948
$
13,958
$
13,958
$
1,895
12,053
615
11,438
4,580
10,617
5,401
2,011
3,390
939
2,451
0.41
0.41
$
$
$
1,700
12,258
416
11,842
4,497
10,782
5,557
2,078
3,479
1,105
2,374
0.39
0.39
$
$
$
1,348
12,610
720
11,890
4,523
10,562
5,851
2,204
3,647
1,104
2,543
0.42
0.42
$
$
$
$
$
$
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 the accompanying consolidated balance sheets of First Mid-Illinois Bancshares, Inc. as of December 31, 2013 and 2012 and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period
ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2013, 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, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 6, 2014 expressed an unqualified opinion
on the effectiveness of the Company’s internal control over financial reporting.
Decatur, Illinois
March 6, 2014
96
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, 2013. 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, 2013, 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, 2013 based on the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control—Integrated Framework (1992).” Based on the
assessment, management determined that, as of December 31, 2013, 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, 2013 has been
audited by BKD, LLP, an independent registered public accounting firm, as stated in their report following.
March 6, 2014
Joseph R. Dively
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 2013 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
97
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, 2013, based on criteria established in
Internal Control – Integrated Framework (1992) 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,
2013, based on criteria established in Internal Control – Integrated Framework (1992) 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, 2014 expressed an unqualified opinion thereon.
Decatur, Illinois
March 6, 2014
98
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
2014 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 2014 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
2014 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 2014
Annual Meeting of the Company’s shareholders under the caption “Corporate Governance Matters.”
The Company has adopted a code of conduct for directors, officers, and employees including senior financial management of the Company. This code of
conduct is posted on the Company’s website. In the event that the Company amends or waives any provisions of this code of conduct, 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 2014 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)
Total
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)
—
128,750 (2)
—
128,750
$
$
—
26.20 (3)
—
26.20
379,706 (1)
196,739 (4)
—
576,445
(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.
99
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 Plan 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 2014 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 2014 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 2014 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, 2013 and 2012
Consolidated Statements of Income -- For the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income -- For the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Changes in Stockholders’ Equity -- For the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2013, 2012 and 2011.
•
•
•
•
•
(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.
100
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SIGNATURES
FIRST MID-ILLINOIS BANCSHARES, INC.
(Registrant)
Date: March 6, 2014
Joseph R. Dively
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 2014, by the following
persons on behalf of the Company and in the capacities listed.
Signature and Title
Joseph R. Dively, 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)
Holly A. Bailey, Director
Steven L. Grissom, Director
Benjamin I. Lumpkin, Director
Gary W. Melvin, Director
William S. Rowland, Director
Ray A. Sparks, Director
101
Exhibit
Number
3.1
3.2
3.3
3.4
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.9
Exhibit Index to Annual Report on Form 10-K
Description and Filing or Incorporation Reference
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.
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.
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.
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.
Rights Agreement, dated as of September 22, 2009, between First Mid-Illinois Bancshares, Inc. and Computershares Trust Company, N.A.,
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.
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.
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.
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.
Amended and Restated Employment Agreement between the Company and Joseph R. Dively
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 October 24, 2013.
Employment Agreement between the Company and John W. Hedges
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 April 27, 2011.
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 22,2012.
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 22, 2012.
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 22, 2012.
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 March 2, 2012.
10.10 Employment Agreement between the Company and Christopher L. Slabach
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 18,
2013.
10.11 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.
102
Exhibit
Number
10.12
Exhibit Index to Annual Report on Form 10-K
Description and Filing or Incorporation Reference
2007 Stock Incentive Plan
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.
10.13
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.
10.14
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.
10.15
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.
10.16
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.
10.17
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.
10.18 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.
10.19
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.
10.2
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.
10.21 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
21.1
23.1
31.1
31.2
32.1
32.2
Statement re: Computation of Earnings Per Share
(Filed herewith)
Subsidiaries of the Company
(Filed herewith)
Consent of BKD LLP
(Filed herewith)
Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
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)
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)
103
Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Joseph R. Dively, certify that:
1. I have reviewed this annual report on Form 10-K of First Mid-Illinois Bancshares, Inc.;
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 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, 2014
By:
Joseph R. Dively
President and Chief Executive Officer
Certification pursuant to section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Michael L. Taylor, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of First Mid-Illinois Bancshares, Inc.;
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;
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;
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 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, 2014
By:
Michael L. Taylor
Chief Financial Officer
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, 2013 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph R. Dively, 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, 2014
Joseph R. Dively
President and Chief Executive Officer
Exhibit 32.2
Certification pursuant to
18 U.S.C. section 1350,
as adopted pursuant to
In connection with the Annual Report of First Mid-Illinois Bancshares, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2013 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael L. Taylor, 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, 2014
Michael L. Taylor
Chief Financial Officer
B A N K I N G C E N T E R S
A LT A M O N T
101 West Washington, 62411 • (618) 483-5151
A R C O L A
249 West Springfield Road, 61910 • (217) 268-5700
B A R T O N V I L L E
1101 West Garfield Avenue, 61607 • (309) 697-4911
B L O O M I N G T O N
201 North Prospect Road, 61704 • (309) 664-7444
C H A M P A I G N
2229 South Neil Street, 61820 • (217) 359-9837
913A West Marketview, 61822 • (217) 378-8023
C H A R L E S T O N
701 Sixth Street, 61920 • (217) 345-8325
500 West Lincoln Avenue, 61920 • (217) 345-3977
D E C A T U R
100 South Water Street, 62523 • (217) 423-7700
3101 North Water Street, 62526 • (217) 872-1400
1688 South Baltimore, 62521 • (217) 423-4000
E F F I N G H A M
902 North Keller Drive, 62401 • (217) 342-6111
G A L E S B U R G
101 E. Main Street, 61401 • (309) 343-9181
1535 N. Henderson Street, 61401 • (309) 344-1203
H I G H L A N D
12616 Route 143, 62249 • (618) 654-1111
1301 Broadway, 62249 • (618) 651-1111
K N O X V I L L E
331 E. Main Street, 61448 • (309) 289-2331
M A H O M E T
502 East Oak Street, 61853 • (217) 586-3450
M A N S F I E L D
1 Jefferson Street, 61854 • (217) 489-2271
M A R Y V I L L E
2930 North Center Street, 62062 • (618) 288-5500
M A T T O O N
1515 Charleston Avenue, 61938 • (217) 258-0653
333 Broadway East, 61938 • (217) 258-0614
1500 Lafayette Avenue, 61938 • (217) 258-0474
M O N T I C E L L O
100 West Washington, 61856 • (217) 762-2111
219 West Center Street, 61856 • (217) 762-2101
N E O G A
102 East Sixth Street, 62447 • (217) 895-2226
P E O R I A
230 S.W. Adams Street, Suite 100, 61602 • (309) 637-7500
1021 West Bird Boulevard, 61615 • (309) 691-8650
3037 North Sterling, 61604 • (309) 685-3200
GALESBURG
KNOXVILLE
BARTONVILLE
PEORIA
BLOOMINGTON
MANSFIELD
WELDON
MAHOMET
URBANA
QUINCY
MONTICELLO
CHAMPAIGN
DECATUR
SULLIVAN
TUSCOLA
ARCOLA
TAYLORVILLE
MATTOON
CHARLESTON
NEOGA
ALTAMONT
EFFINGHAM
MARYVILLE
HIGHLAND
POCAHONTAS
P O C A H O N T A S
103 Park Street, 62275 • (618) 669-2277
Q U I N C Y
636 Hampshire Street, 62301 • (217) 223-4983
3233 Broadway, 62301 • (217) 224-5700
S U L L I V A N
200 South Hamilton, 61951 • (217) 728-4311
T A Y L O R V I L L E
200 North Main, 62568 • (217) 824-9855
T U S C O L A
410 South Main Street, 61953 • (217) 253-3344
U R B A N A
601 South Vine Street, 61801 • (217) 367-8451
W E L D O N
490 Maple, 61882 • (217) 736-2294
F I R S T M I D . C O M
1 4 2 1 C H A R L E S T O N A V E N U E | M A T T O O N ,
I L
6 1 9 3 8