C E L E B R A T I N G 1 5 0 Y E A R S
C O M M I T M E N T
T O O U R
C O M M U N I T I E S
th
ANNIVERSARY
2015 ANNUAL REPORT
Cor porate Profile
Stockh ol de r I nfo rma tio n
First Mid-Illinois Bancshares, Inc. is
the parent company of First Mid-
Illinois Bank & Trust, N.A. (“First
Mid Bank”), Mid-Illinois Data
Services, Inc. and First Mid Insurance
Group. Our mission is to fulfill the
financial needs of our communities
with exceptional personal service,
professionalism and integrity, and
deliver meaningful value and results
for customers and shareholders.
First Mid Bank was first chartered
in 1865 and has since grown into a
more than $2.1 billion community-
focused organization that provides
financial services through a network
of 46 banking centers in 33 Illinois
communities. Our talented team is
comprised of over 500 men and women
who take great pride in First Mid Bank
and the Company, their work and
their ability to serve our customers.
More information about the
Company is available on our website at
www.firstmid.com. Our stock is traded
in The NASDAQ Stock Market LLC
under the ticker symbol “FMBH.”
This document contains forward looking
statements. For a discussion of factors that could
cause actual results to differ materially from
those contained in such statements, please see
“Risk Factors” and “Management’s Discussion
and Analysis of Financial Condition of Results of
Operations” in our annual report on Form 10-K
included herein, and our other filings with the
Securities and Exchange Commission.
DIVIDEND REINVESTMENT PLAN TRANSFER
AND DIVIDEND PAYING AGENT
For information concerning the Company’s Dividend Reinvestment Plan or for stockholder
inquiries concerning dividend checks or their stockholder records, contact:
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
Raymond James
222 S. Riverside Plaza
7th Floor
Chicago, IL 60606
800-800-4693
Hovde Group
3400 Peachtree Road, NE, Suite 1035
Atlanta, GA 30326
866-971-0961
ANNUAL MEETING
OF STOCKHOLDERS
The annual meeting of stockholders
will be Wednesday, April 27, 2016,
at 4:00 p.m. in the lobby of
First Mid-Illinois Bank & Trust,
1515 Charleston Avenue,
Mattoon, Illinois.
REGULAR MAIL
Computershare
P.O. Box 30170
College Station , TX 77842-3170
PRIMARY MARKET MAKERS
FIG Partners, LLC
1175 Peachtree St., NE 100
Colony Square, Suite 2250
Atlanta, GA 30361
866-344-2657
Boenning & Scattergood
9922 Brewster Lane
Powell, OH 43065
866-326-8113
FORM 10-K
A copy of the 2015 Annual Report on
Form 10-K with all exhibits filed with the
Securities and Exchange Commission
(SEC) is available, free of charge, at www.
firstmid.com by clicking on “Investor
Relations” and then on “SEC Filings.”
All periodic and current reports of First
Mid-Illinois Bancshares, Inc. can be
accessed through this website as soon
as reasonably practicable after these
materials are filed with the SEC.
A copy may also be obtained by
sending a written request to:
Mr. Aaron Holt
First Mid-Illinois Bancshares, Inc.
1421 Charleston Avenue
P.O. Box 499
Mattoon, Illinois, 61938
or by email to: aholt@firstmid.com
Our Commu nities
ALTAMONT
ARCOLA
BARTONVILLE
CARBONDALE
CARMI
CARTERVILLE
CHAMPAIGN
CHARLESTON
DE SOTO
DECATUR
EFFINGHAM
GALESBURG
HARRISBURG
HIGHLAND
KNOXVILLE
LAWRENCEVILLE
MAHOMET
MANSFIELD
MARION
MARYVILLE
MATTOON
MONTICELLO
MT. CARMEL
MT. VERNON
MURPHYSBORO
NEOGA
PEORIA
QUINCY
SULLIVAN
TAYLORVILLE
TUSCOLA
URBANA
WELDON
Five-Year Financial Data
(Dollars in thousands, except share data)
Selected Income Statement Data:
2015
2014
2013
2012
2011
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
$59,251
$54,734
$53,459
$55,767
$56,772
3,499
55,752
1,318
54.434
20,544
49,248
25,730
9,218
16,512
2,200
3,252
3,535
6,157
8,504
51,482
49,924
49,610
48,268
629
2,193
2,647
3,101
50,853
47,731
46,963
45,167
18,369
19,341
18,310
15,787
44,507
43,504
42,838
43,053
24,715
23,568
22,435
17,901
9,254
8,846
8,410
6,529
15,461
14,722
14,025
11,372
4,152
4,417
4,252
3,576
Net income available to common stockholders
$14,312
$11,309
$10,305
$9,773
$7,796
Selected Balance Sheet Data:
Assets
Cash and cash equivalents
$115,784
$51,730
$65,102
$82,712
$73,102
Certificates of deposit investments
25,000
—
—
6,665
13,231
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
604,056
431,506
488,724
508,309
478,967
968
1,958
514
212
1,046
1,266,345
1,046,766
969,041
899,077
847,908
102,346
75,143
82,117
81,057
86,702
$2,114,499
$1,607,103 $1,605,498 $1,578,032 $1,500,956
$1,732,568
$1,272,077 $1,287,616 $1,274,065 $1,170,734
169,462
162,489
159,807
139,104
181,000
7,460
7,621
8,694
8,176
8,255
1,909,490
1,442,187
1,456,117
1,421,345
1,359,989
205,009
164,916
149,381
156,687
140,967
Total liabilities and stockholders’ equity
$2,114,499
$1,607,103
$1,605,498 $1,578,032 $1,500,956
Dividends to preferred stockholders
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
$2,200
$4,556
0.59
1.84
1.81
21.01
$4,152
$4,417
$4,252
$3,576
$3,540
$2,713
$3,787
$2,304
0.55
1.88
1.85
0.46
1.74
1.73
0.63
1.62
1.62
0.38
1.29
1.29
19.55
16.54
17.53
16.18
2015 Annual Report | 1 |
First Mid-Illinois Bancshares, Inc.
A Message from the Chairman
In 2015, we completed our 150th
With a 150-year history of serving
of acquisition costs in 2015. Diluted
year in business. We had the
local communities, I am pleased
earnings per share were $1.81
opportunity to reflect on our
to report that 2015 was one of the
per share for 2015 compared to
commitment to our communities
best years ever for First Mid-
$1.85 for 2014 as common shares
and our role as a community bank.
Illinois Bancshares, Inc. Our net
outstanding increased with the
Investing in the communities we
income finished at an all-time
successful capital raise completed
serve has long been a hallmark
high; we completed the Southern
in June. The financial results for
of First Mid and is embedded in
Illinois acquisition that increased
2015 include the acquisition of 12
our values; what is important to
our balance sheet assets to over
Southern Illinois banking centers
our customers is important to us.
$2 billion and expanded
from Old National Bancorp and the
As a community bank, we play
our banking network to 33
results from operating the centers
a vital role as a primary lender
communities; we completed
from August 14, 2015 through
to consumers and to small
an acquisition to expand our
year-end. In addition, the company
businesses that create more
insurance product offerings; we
acquired the Illiana Insurance
new jobs than any other sector
celebrated our 150th anniversary;
Agency on December 1, 2015 and our
in our economy. The personal
and, we’re making an impact
2015 financial statements include
relationships we have with
with steps taken to advance
Illiana’s December results. The
our customers, as part of the
First Mid’s investment profile.
agency is focused on senior care
same community, provide
insurance and, while relatively
opportunities that are mutually
Financial results for First Mid-Illinois
small compared to our overall size,
beneficial. We’re proud to
Bancshares, Inc. continue to be solid
provides a strategic fit between
be making a difference as a
with higher earnings, continued
our traditional insurance and our
community bank, with
excellent asset quality ratios, and
wealth management solutions.
employees who spend hundreds
strong regulatory capital ratios. Net
of hours volunteering their time
income for 2015 was $16,512,000
Our net income during 2015
and serving through leadership
compared to $15,461,000 for 2014.
increased due to improvement in
roles in the communities
they care so much about.
Net income was higher than last
several areas, including greater
year despite incurring $1.5 million
net interest income with growth
As part of our 150th
Celebration, First Mid
donated money to the
public school districts in
our banking communities.
| 2 | 2015 Annual Report
First Mid-Illinois Bancshares, Inc.
Year-End Assets
2006-2015 (Dollars in Thousands)
$2,250,000
$2,000,000
$1,750,000
$1,500,000
$1,250,000
$1,000,000
$750,000
$500,000
$250,000
$0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
First Mid-Illinois Bank & Trust Assets
Trust & Wealth Management Assets
Year-End
Market Price of Stock
FMBH stock price on December 31.
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$27.20
$26.05
$22.20
$17.50
$17.22
$18.45
$22.75
$22.00
$18.55
$26.00
in loans over the past year and
interest income. Our deposit balances
$0
$10
$20
$30
the increase in assets from the
also increased from $1.27 billion
acquisition, increases in revenues
on December 31, 2014 to
from electronic services and
$1.73 billion on December 31, 2015,
insurance, and growth in
deposit service charges.
with $453 million coming from
the Southern Illinois acquisition.
The additional cash from the
Our net interest income for 2015
Southern Illinois acquisition
totaled $55.8 million compared
elevated our federal funds sold
to $51.5 million for the same
and interest-bearing balances at
period last year. Loan balances
banks which reduced our earning
increased over the past year with
asset yields and resulted in a
total loans at $1.28 billion as of
decline in our net interest margin.
December 31, 2015 compared
The net interest margin on
to $1.06 billion last December.
a tax equivalent basis for 2015
$156 million in loans were
was 3.37% compared to 3.53%
added with the Southern Illinois
for the same period last year.
acquisition and we also increased
commercial operating loans in our
Our 2015 provision for loan losses
legacy market area. In addition,
increased to $1,318,000 compared
investment balances increased
to $629,000 for 2014. Provision
as we added securities to
expense increased with the
invest the cash received from the
growth in the loan portfolio
Southern Illinois acquisition. The
and higher net charge-offs in
growth in loans and investments in
2015. 2015 net charge-offs were
2015 increased the level of earning
$424,000 compared to $196,000
assets resulting in the increase in net
for the same period last year. While
Dividends Paid
Per Common Share
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$.35
$.36
$.38
$.38
$.38
$.38
$.63
$.46
$.55
$.59
$.00
$.25
$.50
$.75
2015 Annual Report | 3 |
First Mid-Illinois Bancshares, Inc.
Phillip the Pig, our
Kids’ First mascot,
was seen in parades,
at sporting events and
community celebrations
throughout the year.
net charge-offs were higher than
on deposits were $417,000
during the year. Our book value
last year, they remain quite low
higher for 2015 than 2014 with
per share increased from $19.55
from a historical industry
the addition of the Southern
at December 31, 2014 to
standpoint and very low for a
Illinois deposits. Insurance
$21.01 on December 31, 2015
$1.3 billion loan portfolio. Also,
revenues also increased by $311,000
while our tangible book value
overall asset quality remains very
with growth in revenues from
per share was $15.09 at December
strong as our total nonperforming
our legacy insurance group
loans and other real estate owned
and one month of revenues
31, 2015 compared to $15.63
last year-end as this ratio
to total assets were .21% as
of December 31, 2015 and
compares well to peer
banks. Total non-performing
from the acquired Illiana agency.
includes the impact of the
Trust and brokerage revenues
goodwill and intangibles added
also increased from 2014.
from the acquisitions.
loans and other real estate owned
Operating expenses were
In the 2014 Fourth Quarter
were $4.5 million at December
$49.2 million in 2015 compared
Quarterly Report to Stockholders,
31, 2015 compared to $4.8 million
to $44.5 million in 2014. The
I commented about our stock
at December 31, 2014. We also
operating expenses of the new
performance and the efforts we
have a strong coverage ratio of the
branch locations are included
were undertaking to enhance the
allowance for loan losses to the
from August 14 and acquisition
investment profile of First Mid
level of nonperforming loans of
costs of $1.5 million.
363% as of December 31, 2015.
stock. I would like to reiterate
that our focus remains on
As mentioned, our four regulatory
increasing long-term shareholder
Non-interest income in 2015
capital ratios remained strong
value. We continue to strive
was $20.5 million compared to
as of December 31, 2015 and
to produce strong financial
$18.4 million for 2014. ATM and
in excess of the regulatory
results, increase the visibility
debit card fees were $761,000 higher
minimums to be considered
of First Mid stock by presenting
than last year with the addition
well-capitalized. Each of the
at investor conferences and
of the Southern Illinois locations
capital ratios declined modestly
welcoming analyst coverage,
and an increase in electronic
from year-end 2014 due to the
benefit from the visibility
transactions. Service charges
completion of the two acquisitions
provided by our NASDAQ listing,
| 4 | 2015 Annual Report
First Mid-Illinois Bancshares, Inc.
Comparison of 5 Year Cumulative Total Return*
Among First Mid-Illinois Bancshares, Inc., the S&P 500 Index, and the NASDAQ Bank Index
$190
$175
$160
$145
$130
$115
$100
$85
First Mid-Illinois Bancshares, Inc.
S&P 500
NASDAQ Bank
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
$100.00 $ 109.19
$100.00 $ 102.11
$100.00 $ 89.50
$ 137.15 $ 135.35
$ 118.45 $ 156.82
$ 106.23 $ 150.55
$ 117.22
$ 178.28
$ 157.95
$ 168.87
$ 180.75
$ 171.92
* $100 invested on 12/31/10 in stock or index, including reinvestment of
dividends. Fiscal year ending December 31.
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Source: SNL Financial LC, Charlottesville, VA. ©2016
and maintain a competitive
was important and the Board
colleagues who joined us through our
dividend. The market price of
of Directors elected to increase
acquisitions. They make our team,
FMBH stock increased to
the dividend on the common
footprint and banking franchise
$26.00 at December 31, 2015 from
stock in 2015 to $.59 per share
stronger. I am also thankful for your
$18.55 last year-end. I am pleased
from $.55 per share in 2014.
continued support of First Mid-
with the positive momentum
Illinois Bancshares, Inc. and I look
as the stock is now trading
In conclusion, 2015 was another
forward to a great 2016 and beyond.
closer to peer averages on an earnings
good year for First Mid. I am
and tangible book value basis. We
appreciative of the dedication
Sincerely,
continue to focus on producing
and professionalism that our
strong financial results that will
team demonstrated this year and
provide benefit over the long-
the unceasing commitment to our
term. Also, I mentioned that
customers and our communities.
maintaining a competitive dividend
We welcomed over 100 new
Joseph R. Dively
Chairman, President
and Chief Executive Officer
In November we
consolidated our Monticello
banking centers into
one newly constructed
location, reaffirming
our commitment to
the community.
2015 Annual Report | 5 |
First Mid-Illinois Bancshares, Inc.
Giving Back
Investing in the communities we serve has
long been a hallmark of First Mid and is
embedded in our values; what is important
to our customers is important to us.
| 6 | 2015 Annual Report
First Mid-Illinois Bancshares, Inc.
outs • Bagelfest • Big Brothers / Big Sisters • Cumberland County 4-H Kids • Tuscola FFA •arleston FOP Shop with a Cop • Champaign West Rotary • Effingham K of C • • Kirby Hospital ation • Altamont Schuetzenfest • Arcola Food Pantry • • Peoria Crime Christian County Senior Center • Decatur Celebration • Blue Ridge Library Maryville Easter Egg Hunt • Mahomet Diamond Dogs Baseball • Clinton Community YMCA County Senior Center • Galesburg Railroad Museum • Knights Exchange Club of Quincy • • Harrisburg Medical Center Foundation • Camp New Hope • United Way Highland Band Parents • EIU Spring Fling • Knoxville FFA The Granada • CQuincy Symphony Orchestra • Piatt County Extension * Deland Weldon Post Prom • One Stop Community Christmas • Sullivan Rotary Golden CircleHospice of Southern Illinois • Angel of Hope • • JC Jets • R Highland Schweizerfest • CASA • Slice of Life • Lions Club • • Sangamon River Music Festival • Girl Scouts • Carmi Shrinersemy • Teen Challenge • Farmer City Fair Assoc. • Trojan BoosterSoutheastern Illinois Community Foundation • St. Jude Child • Crittenton Center • Leaps of Love • W on Lightworks • le Downtown Revitalization • Salvation Army • erce • HOPE • Mid-Summer Arts Faire • Bond County Senior Center • Sod Busters • sters • Peace Meals • Tuscola Economic Development Lifelinks • Boy Lincoln Trails Council • Journal Star Christmas Fund • Project Linus • •Broomcorn Festival • Sacred Heart Picnic • SCORE • Farmer City SAL • Wabash Valley Arts Council • Quincy YMCA • Sullivan FFA Carnegie LibraryKnox County Humane Society • Mattoon Food Pantry • SIU Foundation Crab Orchard HScoln Trails Council • De Soto Fall Festival • Lake Land College Foundation Race for the Cure• Arcola Band Boosters • Coles County Habitat for Humanity • Kiwanis ion • Head StartPresence Covenant Foundation • Knox Symphony Orchestra • Special Olympics DeWitt County 4-H • Effingham County Fairgrounds Project • Monticello Athletic Boosters • Highland Jaycees • Prairie PlayersChristie Clinic Marathon • Galesburg Community Foundation • Wabash Valley College Foundation Marching Bulldogs • Douglas Hart Nature Center • Sullivan American Legion • Drost Park Khoury League • Highland Easter EggDecatur & Macon County Animal Shelter • Mansfield Homecoming • Neoga Days • SBL Festival of Trees • • Piatt County Farm Bureau • American Cancer Society • Sullivan Ambucs • ation • ERBA • CharlestoSt. Anthony • Highland Area Community Foundation • American Legion Baseball NAACP • After Shock SoftClub • Saline County CEO • Mattoon YMCA • Don Myer Boys & Girls Club • Effingham Neoga Partnership for Progress• Champaign County Economic Foundation • Macon County Conservation • DARE • • CCAR • Decatur Area Arts Council • Friends of St. Joseph’s Hospital • Blue Ridge FFA • Mt. Carmel Christmas Festival Carner Mills High School • Circle GAlzheimer’s Association • Costa Catholic Academy • Red Bland Little League • Monticello Rotary • • Effingham County Fairgrounds • Children’s Miracle Network • Eastern Illinois Athletics • Mattoon Project Graduation • Highland FFA • • Parkland College Scholarships • U of I Extension • Homestead Harvest • Mahomet Village Parks & Recreation • Galesburg Rescue Mission • Newspapers in Education • Carbonerce • International Student Festival • JWCC Foundation • Peoria Downtown Development • SBLHC Foundation ch • Little Theatre on the Square • Mahomet Seymour Schools Foundation • Altamont Youth Sports • Neoga Christmas Food Tree • Sullivan Sports Boosters Douglas County Museum • Coles CExchange Club • Coles County Council on Aging • Illinois FFA • Lutheran Care Center • Silver Creek Rotary • University of Illinois IFund • PACE • Knoxville ComKnox County Area Partnership Foundation • For Kid’s Sake • City of Quincy 175th Anniversary • Neighborhood House • American Red Cross • Mansfield Food Pantry•Highland Rotary • Shoreline Classic • Arcola Firefighters • Lakeview College of Nursing • Coles County 4H • Arcola Recreation • American Legion Boys State • Moultrie County Historica Ronald McDonald House • Sullivan Chamber & Economic Development • MDA • Mattoon Lightworks • Monticello Main Street • Arcola VFW • Highland Pierron Fire Department • GreatMattoon Community Food Center • Tuscola Little League • Charleston Police Department K-9 • Madison County 4H • Mahomet Area Youth Club • National Stearman • Quincy Notre Dame • Lights Fantastic • Mt. Carmel Area Economic Alliance • Knox County YMCA • Jr. Achievement • Champaign County Farm Bureau • Highland Youth Baseball • Effingham Artisan Fair • 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, 2015
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:
Common stock, par value $4.00 per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 $107,610,277. 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 4, 2016, 8,456,302 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 2016 Annual Meeting of Shareholders to be held on April 27, 2016 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
14
16
17
17
17
18
20
21
48
50
102
102
104
104
104
104
105
105
105
106
107
PART I
ITEM 1.
BUSINESS
Company and Subsidiaries
First Mid-Illinois Bancshares, Inc. (the “Company”) is a financial holding company. The Company is engaged in the business of banking through its wholly
owned subsidiary, First Mid-Illinois Bank & Trust, N.A. (“First Mid Bank”). The Company provides data processing services to affiliates through another
wholly owned subsidiary, Mid-Illinois Data Services, Inc. (“MIDS”). The Company offers insurance products and services to customers through its wholly
owned subsidiary, The Checkley Agency, Inc. doing business as First Mid Insurance Group (“First Mid Insurance”). The Company also wholly owns two
statutory business trusts, First Mid-Illinois Statutory Trust I (“Trust I”), and First Mid-Illinois Statutory Trust II (“Trust II”), both unconsolidated subsidiaries of
the Company.
The Company, a Delaware corporation, was incorporated on September 8, 1981, and pursuant to the approval of the Board of Governors of the Federal
Reserve System (the “Federal Reserve Board”) became the holding company owning all of the outstanding stock of First National Bank, Mattoon (“First
National”) on June 1, 1982. First National changed its name to First Mid-Illinois Bank & Trust, N.A. in 1992. The Company acquired all of the outstanding
stock of a number of community banks or thrift institutions on the following dates, and subsequently combined their operations with those of the Company:
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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 (2000); de novo branches in Champaign, Illinois and Maryville, Illinois (2002), a de novo
branch in Highland, Illinois (2005) de novo branches in Decatur, Illinois and Champaign, Illinois (2009), and a de novo branch in Decatur, Illinois (2013).
In 2002, the Company acquired all of the outstanding stock of First Mid Insurance, an insurance agency located in Mattoon.
On September 10, 2010, First Mid Bank acquired 10 Illinois branches (the “Branches”) from First Bank, a Missouri state chartered bank, located in
Bartonville, Bloomington, Galesburg, Knoxville, Peoria and Quincy, Illinois.
On August 14, 2015 First Mid Bank acquired 12 Illinois branch offices (the "ONB Branches") of Old National Bank in Southern Illinois, a national banking
association having its principal office in Evansville, Indiana, located in Lawrenceville, Mt Carmel, Mt Vernon, Carmi, De Soto, Murphysboro, Marion,
Harrisburg, Carterville and Carbondale, Illinois.
On December 1, 2015 FIrst Mid Insurance acquired Illiana Insurance Agency, LTD ("Illiana"), an insurance agency based in Philo, Illinois.
Employees
The Company, MIDS, First Mid Insurance and First Mid Bank, collectively, employed 513 people on a full-time equivalent basis as of December 31,
2015. 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 experience, 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, health, life
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 fulfill the financial needs of our communities with exceptional personal service, professionalism
and integrity, and deliver meaningful value and results for customers and shareholders.
Achieve 2020. Achieve 2020 is a strategic plan that was developed in 2015. 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, modified and adopted by the Board of Directors and
communicated to employees. The Achieve 2020 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. Achieve 2020 is comprised of broad strategies that impact
growth, customers, employees, and 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 strategic 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 and measured
between the business lines and is facilitated by an on-line application.
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 $321 million at December 31, 2011 to $409 million at December 31, 2015. Approximately 62% of the Company’s total revenues were derived
from lending activities in the fiscal year ended December 31, 2015. 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, and investment 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 building
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 that
continually improve customer satisfaction and loyalty.
Employee Strategy. The Company strives for employee engagement at all levels of the organization. The judgments, experiences and capabilities of these
employees are used to create an environment where meeting the needs of our customer, communities and stockholders is always a priority.
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.
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Shareholder Strategy. The Company strives to provide a competitive dividend as well as the opportunity for stock price appreciation.
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 oversight 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, must approve all underwriting decisions in excess of $4 million and up to $15 million. The full Board of Directors must approve all
underwriting decisions in excess of $15 million. 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 $1.4 million (0.15% of total loans) over the past five years. Nonperforming loans were
$4.0 million (0.31% of total loans) at December 31, 2015. 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, from various departments, 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 2015, the Company’s net interest margin decreased to 3.27%
from 3.43% in 2014 primarily due to the additional cash received from the ONB acquisition that increased lower yielding interest-bearing balances at banks.
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, on-line services and pricing of services, including
interest rates paid on deposits, interest rates charged on loans, and fees charged for fiduciary and other banking services.
During 2015, First Mid Bank operated facilities in the Illinois counties of Adams, Champaign, Christian, Coles, Cumberland, Dewitt, Douglas, Effingham,
Jackson, Jefferson, Knox, Lawrence, Macon, Madison, Moultrie, Peoria, Piatt, Saline, Wabash, White and Williamson. Each facility primarily serves the
community in which it is located. First Mid Bank served thirty-three different communities with forty-six separate locations in 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.
Rights Agreement
On January 21, 2015, the Company entered into an Amendment No. 1 to the Rights Agreement (the "Rights Agreement"), dated as of September 22, 2009, by
and between the Company and Computershare Trust Company, N.A., as rights agent. This amendment accelerated the expiration of the Company's common
stock purchase rights (the “Rights”) from 5:00 p.m., Mattoon, Illinois time, on September 22, 2019, to 5:00 p.m., Mattoon, Illinois time, on January 21, 2015,
and had the effect of terminating the Rights Agreement on that date. At the time of the termination of the Rights Agreement, all of the Rights distributed to
holders of the Company's common stock pursuant to the Rights Agreement expired.
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Branch Purchase and Assumption
On January 30, 2015, First Mid Bank, a wholly-owned subsidiary of the Company, entered into a Purchase and Assumption Agreement (the “Purchase
Agreement”) with Old National Bank, a national banking association having its principal office in Evansville, Indiana, pursuant to which First Mid Bank
purchased certain assets and assume certain liabilities of 12 branch offices of Old National Bank in Southern Illinois (the “ONB Branches”). Pursuant to the
terms of the Purchase Agreement, First Mid Bank agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real property,
furniture, and other fixed operating assets associated with the ONB Branches. The book value of loan and deposit balances assumed was approximately
$156 million and $453 million, respectively. First Mid Bank also agreed to assume certain leases, and entered into certain subleases, relating to the ONB
Branches. The completion of the Purchase was subject to regulatory approval required by the Office of the Comptroller of the Currency and normal
customary closing conditions, including First Mid Bank, in conjunction with the Company, obtaining financing in connection with the acquisition. Following
satisfaction of these conditions, First Mid Bank and Old National Bank closed the acquisition on August 14, 2015.
Capital Raise
On June 18, 2015, the Company entered into a securities purchase agreement with a limited number of institutional investors to sell, and accepted from
certain other accredited investors, including certain directors of the Company, subscriptions for, an aggregate total of 1,392,859 newly issued shares of the
Company's common stock at a purchase price of $21.00 per share, for an aggregate gross purchase price of approximately $29,250,039 (the "Offering").
The Offering closed on June 19, 2015. The Company used the net proceeds of the Offering to provide capital support for the purchase of the ONB Branches
and for general corporate purposes.
Acquisition of Illiana
On December 1, 2015, First Mid Insurance Group, a wholly-owned subsidiary of the Company, acquired substantially all of the assets of Illiana, a health plan
and life insurance and annuities business.
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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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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 included new risk-based capital and leverage ratios, which are being phased in from 2015 to
2019, and refined 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 were: (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 established 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 will 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 made three changes to the proposed rule of June 2012 that impacted the Company. First, the proposed rule 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 allowed 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. The Company has made this election
Second, the proposed rule 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, retained the existing treatment for
residential mortgage exposures under the general risk-based capital rules.
Third, the proposed rule 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 4%. For purposes of these capital standards, Tier 1
capital consists primarily of permanent stockholders’ equity, which includes 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, 2015, the Company had regulatory capital, calculated on a consolidated basis, in excess of the Federal Reserve Board’s minimum
requirements, and its capital ratios exceeded those required for categorization as well-capitalized under the capital adequacy guidelines established by bank
regulatory agencies with a total risk-based capital ratio of 14.25%, a Tier 1 risk-based ratio of 13.23% and a leverage ratio of 9.20%.
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 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 $809,000, $717,000 and $743,000 for this assessment during 2015, 2014 and 2013, respectively. The increase in
this assessment was primarily due to an increase in quarterly average assets.
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 $95,000, $87,000 and $89,000 during 2015, 2014 and
2013, respectively, for this assessment.
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, 2015,
2014, and 2013 First Mid Bank paid supervisory fees to the OCC totaling $352,000, $342,000, and $333,000, respectively.
10
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 4%, 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, 2015, 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 13.75%, a Tier 1 risk-based ratio of 12.73% and a leverage ratio of 8.83%.
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, 2015. As of December 31, 2015, approximately $35.2 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.
11
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.
12
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 (56)
Chairman of the Board of Directors, President and Chief Executive Officer
Michael L. Taylor (47)
Senior Executive Vice President and Chief Financial Officer
John W. Hedges (67)
Senior Executive Vice President
Laurel G. Allenbaugh (55)
Executive Vice President
Eric S. McRae (50)
Executive Vice President
Bradley L. Beesley (44)
Executive Vice President
Christopher L. Slabach (53)
Senior Vice President
Clay M. Dean (41)
Senior Vice President
Amanda D. Lewis (36)
Senior Vice President
Joseph R. Dively, age 56, 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 47, has been Senior Executive Vice President since 2014 and Chief Financial Officer of the Company since 2000. He served as
Executive Vice President from from 2007 to 2014 and as Vice President from 2000 to 2007. He was with AMCORE Bank in Rockford, Illinois from 1996 to
2000.
John W. Hedges, age 67, has been Senior Executive Vice President of the Company 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 55, has been Executive Vice President of the Company and Executive Vice President, Chief Operations & IT Officer of First Mid
Bank 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 50, 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.
Bradley L. Beesley, age 44, has been Executive Vice President of the Company and Chief Trust & Wealth Management Officer of First Mid Bank since March
2015. He served as Senior Vice President from May 2007 to March 2015.
Christopher L. Slabach, age 53, has been Senior Vice President of the Company since 2007 and Senior Vice President, Chief Risk Officer of First Mid Bank
since 2008. He served as Vice President, Audit of the Company from 1998 to 2007.
Clay M. Dean, age 41, has been Senior Vice President of the Company since 2010 and Senior Vice President and Chief Insurance Services Officer of the
First Mid Bank and Chief Executive Officer of First Mid Insurance since September 2014. He served as Senior Vice President, Chief Deposit Services Officer
of First Mid Bank from November 2012 to September 2014 and as Senior Vice President, Director of Treasury Management of First Mid Bank from 2010 to
2012.
Amanda D. Lewis, age 36, has been Senior Vice President of the Company and Senior Vice President, Chief Deposit Services Officer of First Mid Bank
since September 2014. She served as Vice President, Director of Marketing from 2001 until September 2014.
13
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
again 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, 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. Although the housing, capital and credit markets have materially improved since the
declines beginning in 2007, future declines could adversely affect the Company's business.
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.)
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. As seen starting in
the middle of 2007, significant turmoil and volatility in worldwide financial markets can result 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. These types
of situations 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 $848 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, 2015. 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.
14
Deterioration in the real estate market could lead to 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.”
A failure in or breach of the company's operational or security systems, or those of it's third party service providers, including as a result of
cyber-attacks, could disrupt the company's business, result in unintentional disclosure or misuse of confidential or proprietary information,
damage the company's reputation, increase our costs and cause losses. As a financial institution, the company's operations rely heavily on the secure
processing, storage and transmission of confidential and other information on it's computer systems and networks. Any failure, interruption or breach in
security or operational integrity of these systems could result in failures or disruptions in the company's online banking system, customer relationship
management, general ledger, deposit and loan servicing and other systems. The security and integrity of these systems could be threatened by a variety of
interruptions or information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity or attempted theft of
financial assets. Management cannot assert that any such failures, interruption or security breaches will not occur, or if they do occur that they will be
adequately addressed. While certain protective policies and procedures are in place, the nature and sophistication of the threats continue to evolve. The
Company may be required to expend significant additional resources in the future to modify and enhance these protective measures.
Additionally, the company faces the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate its
business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an
attack on, or breach of, its operational systems. Any failures, interruptions or security breaches in the company's information systems could damage its
reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not
covered by insurance.
If the Company’s stock price declines from levels at December 31, 2015, 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, 2015. 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 C Preferred Stock impacts net income available to common stockholders and earnings per share. As long as shares of the Series C
Preferred Stock is outstanding, no dividends may be paid on the Company’s common stock unless all dividends on the Series C Preferred Stock have been
paid in full. The dividends declared on the Series C Preferred Stock reduce the net income available to common stockholders and earnings per share.
Holders of Series C Preferred Stock have rights that are senior to those of common stockholders. The Series C Preferred Stock is senior to the
shares of common stock and holders of the Series C Preferred Stock have certain rights and preferences that are senior to holders of common stock. The
Series C Preferred Stock will rank senior to the common stock and all other equity securities designated as ranking junior to the Series C Preferred Stock. So
long as any shares of the 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.
15
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 C Preferred Stock for all prior dividend periods. The Series C Preferred Stock is 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, bank branches and other businesses. 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, bank branches or businesses
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.
16
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 First Mid Insurance, MIDS or its data processing and by First Mid Bank for back room
operations. First Mid Bank also conducts business through numerous facilities, owned and leased, located in twenty-three counties throughout Illinois. Of
the forty-five other banking offices operated by First Mid Bank, twenty-four are owned and twenty-one are leased from non-affiliated third parties.
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, 2015 was
$31.3 million.
ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
17
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 566 shareholders of record as of December 31, 2015 and is included for quotation on the
NASDAQ Stock Market, LLC.
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
2015
2014
4th
3rd
2nd
1st
4th
3rd
2nd
1st
$26.50
22.50
21.97
21.10
$22.00
22.00
23.80
23.50
$21.05
21.00
19.35
17.51
$16.90
19.05
19.05
21.00
The Board of Directors of the Company declared cash dividends semi-annually during the two years ended December 31, 2015 and 2014. 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
10/27/2015
04/29/2015
10/28/2014
04/30/2014
12/07/2015
06/08/2015
12/08/2014
06/06/2014
Dividend
Per Share
$0.29
0.30
0.29
0.26
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.
18
The following table summarizes share repurchase activity for the fourth quarter of 2015:
Period
October 1, 2015 – October 31, 2015
November 1, 2015 – November 30, 2015
December 1, 2015 – December 31, 2015
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
—
—
1,101
$
1,101
—
—
22.54
$22.54
—
—
1,101
1,101
$7,198,000
7,198,000
7,173,000
$7,173,000
Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately
$76.7 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.
On October 28, 2014, repurchases of $5 million additional shares of the Company's common stock.
19
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
Tangible Book Value per common share
Capital Ratios
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Common equity tier 1 ratio
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
Net loans, including loans held for sale
Total deposits
Total equity
Average Balances
Total assets
Net loans, including loans held for sale
Total deposits
Total equity
2015
2014
2013
2012
2011
$
59,251
$
54,734
$
53,459
$
55,767
$
56,772
$
$
$
$
3,499
55,752
1,318
20,544
49,248
25,730
9,218
16,512
2,200
14,312
1.84
1.81
0.59
21.01
15.09
14.25%
13.23%
9.92%
9.20%
3.27%
0.91%
8.97%
32.07%
10.34%
1.14%
$
$
3,252
51,482
629
18,369
44,507
24,715
9,254
15,461
4,152
11,309
1.88
1.85
0.55
19.55
15.63
15.60%
14.42%
10.32%
10.52%
3.43%
0.97%
10.34%
29.26%
9.94%
1.29%
$
$
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
11.75
15.58%
14.37%
7.78%
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
12.68
15.65%
14.51%
7.54%
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
11.24
14.48%
13.37%
7.00%
8.99%
3.45%
0.76%
8.36%
31.01%
8.88%
1.29%
$
2,114,499
$
1,607,103
$
1,605,498
$
1,578,032
$
1,500,956
1,267,313
1,732,568
205,009
1,048,724
1,272,077
164,916
969,555
899,289
848,954
1,287,616
1,274,065
1,170,734
149,381
156,687
140,967
$
1,807,998
$
1,593,227
$
1,568,638
$
1,543,453
$
1,502,794
1,112,413
1,455,047
186,898
20
1,008,980
1,293,621
158,364
912,452
855,335
796,520
1,283,599
1,236,598
1,212,206
153,922
150,578
133,444
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, 2015, 2014 and 2013. 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, 2015, 2014 and 2013
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 $16.5 million, $15.5 million, and $14.7 million and diluted earnings per share were $1.81, $1.85, and $1.73 for the years ended December
31, 2015, 2014 and 2013, respectively. The increase in net income in 2015 was primarily the result of an increase in net interest income due to growth in
loan balances and sustained low funding costs, a reduction in provision for loan losses given lower non-performing assets and net charge-offs, while the
decrease in earnings per share was due to the increase in common shares following the capital raise completed in the second quarter of 2015. The following
table shows the Company’s annualized performance ratios for the years ended December 31, 2015, 2014 and 2013:
Return on average assets
Return on average common equity
Average common equity to average assets
2015
2014
2013
0.91%
8.97%
10.34%
0.97%
10.34%
9.94%
0.94%
10.11%
9.81%
Total assets at December 31, 2015, 2014 and 2013 were $2.11 billion, $1.61 billion, and $1.61 billion, respectively. Net loan balances increased to $1.27
billion at December 31, 2015, from $1.05 billion at December 31, 2014, from $970 million at December 31, 2013. Of the increase in 2015, $152 million was
due to loans acquired in the Old National Bank purchase, In addition, $48.7 million or 22% was due to increases in commercial and industrial loans and
$20.7 million or 9% was due to increases in loans secured by real estate. Of the increase in 2014, $55.4 million or 32.9% was due to increases in
commercial and industrial loans and $19.8 million or 2.7% was due to increases in loans secured by real estate. Of the increase in 2013, $61.4 million or
86% was due to increases in loans secured by real estate.
Total deposit balances increased to $1.73 billion at December 31, 2015 from $1.27 billion at December 31, 2014 and from $1.29 billion at December 31,
2013. The increase in 2015 was primarily the result of the acquisition of the ONB Branches during third quarter of 2015 that included $454 million in
deposits . The decline in 2014 was due to declines in non-interest bearing deposits and higher rate CDs that matured and were not replaced offset by an
increase in interest bearing deposits.
Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.27% for 2015, 3.43% for 2014 and 3.38% for 2013.
The decrease during 2015 was primarily due to the decline in earning asset yields from the higher amount of interest bearing deposits or short-term liquidity
from the acquisition and declines in loan yields. The increase during 2014 was primarily due to the growth in loan balances.
Net interest income increased to $55.8 million in 2015 from $51.5 million in 2014 and $49.9 million in 2013. 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.
21
Non-interest income increased to $20.5 million in 2015 compared to $18.4 million in 2014 and $19.3 million in 2013. ATM revenue increased by $761,000 or
19.4%, and service charge income increased $417,000 or 7.9% primarily due to increased transactions following the Old National Bank Branch acquisition,
Mortgage banking income increased $158,000 or 26.5% as refinance activity and new purchase activity has increased due to lower mortgage rates.
Additionally, trust, brokerage & insurance commissions increased $762,000 or 12%. The primary reason for the decrease of $.9 million or 5% from 2013 to
2014 was less gains on sales of securities and a decline in mortgage banking income as refinance and new purchase activity has slowed, offset by increases
in revenue from brokerage and insurance commissions and deposit account service charges.
Non-interest expenses increased $4,741,000, to $49.2 million in 2015 compared to $44.5 million in 2014, and $43.5 million in 2013. The increase during
2015 was primarily due to expenses incurred of $1.4 million to acquire the twelve ONB Branches and expenses for the operation of the branches from
acquisition in August through year-end. In addition, salaries & benefits expense increased $1.6 million or 6.3%, and occupancy & equipment expense
increased $796,000 or 9.5%. The increase during 2014 of 2.3% was primarily due to an increase in salary and benefits expense as a result of higher officer
salary and insurance costs.
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
2015 vs 2014
2014 vs 2013
$
$
4,270
$
(689)
2,175
(4,741)
36
1,051
$
1,558
1,564
(972)
(1,003)
(408)
739
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $4.0 million at December 31, 2015 compared to $4.5 million
at December 31, 2014, and $6.5 million at December 31, 2013. The decrease in 2015 and 2014 was the result of loans that paid off or became current
during the year and loans transferred to other real estate owned. Other real estate owned balances totaled $477,000 at December 31, 2014 compared to
$263,000 at December 31, 2014, and $568,000 at December 31, 2013. The increase in 2015 was due to more properties being transferred in than sold
during the year. The Company’s provision for loan losses was $1.3 million for 2015, compared to $629,000 for 2014, and $2.2 million for 2013. At December
31, 2015, loans secured by both commercial and residential real estate comprised 66%, 70%, and 74% of the loan portfolio for 2015, 2014, and 2013,
respectively.
The Company also held an investment in one trust preferred security with a fair value of $1.9 million and unrealized losses of $1.2 million compared to a fair
value of $364,000 and unrealized losses of $2.9 million at December 31, 2014. During 2015 and 2014 the Company did not record any additional
impairment charges for these securities. 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, 2015, 2014, and 2013 was 13.23%, 14.42%, and 14.37%, respectively. The
Company’s total capital to risk weighted assets ratio at December 31, 2015, 2014, and 2013 was 14.25%, 15.60% ,and 15.58%, respectively. The primary
reason for the decrease in these ratios was completion of the acquisition of twelve ONB Branches which increased risk-weighted assets by approximately $227
million offset by completion of private placement capital raise completed during the second quarter of 2015 which resulted in an increase in common stockholder's
equity of approximately $29.3 million. The increase in these ratios during 2014 was primarily the result of an increase in retained earnings from current year
net income and slightly lower preferred dividends due to the conversion of Series B Preferred Stock. 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. (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, 2015, 2014 and 2013 were $298.3 million, $242.8 million, and $244.2 million, respectively. See Note 17 – “Commitments and Contingent Liabilities”
herein for further information.
22
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.
23
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 2015 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.
24
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, 2015
Year Ended
December 31, 2014
Year Ended
December 31, 2013
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
ASSETS
Interest-bearing deposits
$
78,605 $
Federal funds sold
Certificates of deposit investments
493
5,118
199
—
44
0.25% $
32,379 $
0.10%
0.86%
495
—
83
1
—
7,499
2,352
44,799
54,734
0.26% $
13,633 $
0.10%
—%
2.00%
3.38%
4.38%
6,923
2,554
466,031
61,127
924,900
3.65% 1,475,168
33
6
14
9,153
2,069
42,184
53,459
0.24%
0.09%
0.55%
1.96%
3.38%
4.56%
3.62%
7,741
2,807
48,460
59,251
1.93%
3.18%
374,285
69,614
4.30% 1,022,605
3.49% 1,499,378
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
400,423
88,194
1,126,479
1,699,312
39,296
28,883
54,573
(14,066)
34,782
27,892
44,800
(13,625)
30,397
29,089
46,432
(12,448)
Total assets
$ 1,807,998
$ 1,593,227
$ 1,568,638
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits, interest-bearing $
669,442
Savings deposits
Time deposits
Securities sold under agreements
to repurchase
FHLB advances
Federal funds purchased
Subordinated debentures
Other debt
298,594
219,836
113,748
23,164
142
20,620
471
722
398
1,162
62
616
—
526
13
0.11% $
559,168
0.13%
0.53%
281,185
229,763
0.05%
2.66%
—%
2.55%
2.66%
97,478
14,575
16
20,620
101
689
375
1,287
47
339
—
514
1
0.12% $
544,157
0.13%
0.56%
294,615
207,454
0.05%
2.33%
0.52%
2.49%
1.22%
87,468
13,258
1,463
20,620
—
795
452
1,456
46
254
9
523
—
Total interest-bearing liabilities
1,346,017
3,499
0.26% 1,202,906
3,252
0.27% 1,169,035
3,535
Demand deposits
Other liabilities
Stockholders’ equity
267,175
7,908
186,898
223,505
8,452
158,364
237,373
8,308
153,922
Total liabilities & equity
$ 1,807,998
$ 1,593,227
$ 1,568,638
$
55,752
$
51,482
$
49,924
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.
3.38%
0.05%
3.43%
3.23%
0.04%
3.27%
25
0.15%
0.15%
0.70%
0.05%
1.91%
0.62%
2.54%
—%
0.30%
3.32%
0.06%
3.38%
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):
2015 Compared to 2014
Increase – (Decrease)
2014 Compared to 2013
Increase – (Decrease)
Total
Change
Volume (1)
Rate (1)
Total
Change
Volume (1)
Rate (1)
$
116
$
119
$
(3) $
50
$
47
$
(1)
44
242
455
3,661
4,517
33
23
(125)
15
277
—
12
12
247
(1)
44
510
598
4,490
5,760
102
23
(56)
15
223
—
—
10
317
—
—
(268)
(143)
(829)
(1,243)
(69)
—
(69)
—
54
—
12
2
(5)
(14)
(1,654)
283
2,615
1,275
(106)
(77)
(169)
1
85
(9)
(9)
1
(70)
(283)
(6)
(7)
(1,836)
287
4,328
2,813
27
(19)
144
1
26
(8)
—
(326)
(155)
3
1
(7)
182
(4)
(1,713)
(1,538)
(133)
(58)
(313)
—
59
(1)
(9)
327
(128)
$
4,270
$
5,443
$
(1,173) $
1,558
$
2,968
$
(1,410)
Earning Assets:
Interest-bearing deposits
Federal funds sold
Certificates of deposit investments
Investment securities:
Taxable
Tax-exempt (2)
Loans (3)
Total interest income
Interest-Bearing Liabilities:
Deposits:
Demand deposits, interest-bearing
Savings deposits
Time deposits
Securities sold under agreements
to repurchase
FHLB advances
Federal funds purchased
Subordinated debentures
Other debt
Total interest expense
Net interest income
(1) Changes attributable to the combined impact of volume and rate have been allocated
proportionately to the change due to volume and the change due to rate.
(2) The tax-exempt income is not recorded on a tax equivalent basis.
(3) Nonaccrual loans are not material and have been included in the average balances.
Net interest income increased $4.3 million or 8.3% in 2015 compared to an increase of $1.6 million or 3.1% in 2014. Net interest income increased primarily
due to assets added in the acquisition of twelve ONB Branches and the growth in average earning assets. The net interest margin decreased primarily due
to the decline in earning asset yield from the higher amount of interest bearing deposits or short-term liquidity from the acquisition and declines in loan and
investment yields. The increase in 2014 is primarily due to growth in average earning assets and an increase in net interest margin. The net interest margin
increased due to the shift in balances of investment securities to higher-yielding loans, an increase in yield on investments and the reduction in deposit
costs.
In 2015 average earning assets increased by $199.9 million, or 13.3%, and average interest-bearing liabilities increased by $143.1 million or 11.9%. In
2014, average earning assets increased by $24.2 million or 1.6% and average interest-bearing liabilities increased $33.9 million or 2.9% compared with
2013. Changes in average balances are shown below:
• Average interest-bearing deposits held by the Company increased $46.2 million or 142.8% in 2015 compared to 2014. In 2014, average interest-bearing
deposits held by the Company increased $18.7 million or 137.5% compared to 2013.
• Average federal funds sold decreased $2,000 or 0.4% in 2015 compared to 2014. In 2014, average federal funds sold decreased $6.4 million or 92.8%
compared to 2013.
26
• Average certificates of deposit investments increased $5.1 million or 100.0% in 2015 compared to 2014. In 2014, average certificates of deposit investments
decreased $2.6 million or 100.0% compared to 2013.
• Average loans increased by $103.9 million or 10.2% in 2015 compared to 2014. In 2014, average loans increased by $97.7 million or 10.6% compared
to 2013.
• Average securities increased by $44.7 million or 10.1% in 2015 compared to 2014. In 2014, average securities decreased by $83.3 million or 15.8%
compared to 2013.
• Average deposits increased by $117.8 million or 11.0% in 2015 compared to 2014. In 2014, average deposits increased by $23.9 million or 2.3% compared
to 2013.
• Average securities sold under agreements to repurchase increased by $16.3 million or 16.7% in 2015 compared to 2014. In 2014, average securities
sold under agreements to repurchase increased by $10.0 million or 11.4% compared to 2013.
• Average borrowings and other debt increased by $9.1 million or 25.7% in 2015 compared to 2014. In 2014, average borrowings and other debt decreased
by $29,000 or 0.1% compared to 2013.
• The federal funds rate remained at a range of .25% to .30% at December 31, 2015, 2014 and 2013.
• Net interest margin decreased to 3.27% compared to 3.43% in 2014 and 3.38% in 2013. Asset yields decreased by 16 basis points in 2015, and interest-
bearing liabilities decreased by 1 basis point.
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 35% (referred to as the tax equivalent adjustment). The tax equivalent basis adjustments to net interest income for 2015, 2014
and 2013 were $1,674,000, $1,435,000, and $1,316,000, respectively. The net yield on interest-earning assets on a tax equivalent basis was 3.37% in 2015,
3.53% in 2014 and 3.47% in 2013.
Provision for Loan Losses
The provision for loan losses in 2015 was $1,318,000 compared to $629,000 in 2014 and $2,193,000 in 2013. Nonperforming loans decreased to
$4,013,000 at December 31, 2015 from $4,540,000 at December 31, 2014 and $6,469,000 at December 31, 2013. The increase in provision expense in
2015 was the result of an increase in net charge offs and an increase in loan balances. Net charge-offs were $424,000 during 2015, $196,000 during 2014
and $720,000 during 2013. 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
Mortgage banking
ATM / debit card revenue
Other
Total other income
2015
2014
2013
2015
2014
$ Change From Prior Year
$
3,746
$
3,571
$
3,565
$
175
$
1,315
2,107
5,681
452
754
4,676
1,813
1,039
1,796
5,264
715
596
3,915
1,473
833
1,638
4,865
2,293
935
3,772
1,440
276
311
417
(263)
158
761
340
$
20,544
$
18,369
$
19,341
$
2,175
$
6
206
158
399
(1,578)
(339)
143
33
(972)
27
Total non-interest income increased to $20.5 million in 2015 compared to $18.4 million in 2014 and $19.3 million in 2013. The primary reasons for the more
significant year-to-year changes in other income components are as follows:
• Trust revenues increased $175,000 or 4.9% in 2015 to $3,746,000 from $3,571,000 in 2014 and $3,565,000 in 2013. The increases during 2015 and
2014 were primarily due to increases in market value related fees. Trust assets were $794.0 million at December 31, 2015 compared to $757.3 million
at December 31, 2014 and $722.9 million at December 31, 2013.
• Revenue from brokerage increased $276,000 or 26.6% to $1,315,000 in 2015 from $1,039,000 in 2014 and $833,000 in 2013 due to an increase in
the number of brokerage accounts from new business development efforts.
• Insurance commissions increased $311,000 or 17.3% to $2,107,000 in 2015 from $1,796,000 in 2014 compared to $1,638,000 in 2013. The increase
from 2014 to 2015 was due to an increase in contingency income received from carriers based on claims experience and an increase in commission
and fee income received. The increase from 2013 to 2014 was due to an increase in contingency income received from carriers based on claims
experience.
• Fees from service charges increased $417,000 or 7.9% to $5,681,000 in 2015 from $5,264,000 in 2014 and $4,865,000 in 2013. The increase from
2014 to 2015 was primarily due to additional income from the ONB branches acquired in the third quarter of 2015. The increase from 2013 to 2014 was
primarily due to an increase in overdraft fees and transaction service charges.
• Net securities gains in 2015 were $452,000 down $263,000 or (36.8)% from $715,000 in 2014 and $2,293,000 in 2013. The decline in 2015 was due
to market conditions and balance sheet position. The decline in security gains from 2013 to 2014 was primarily due to the sale of two trust preferred
securities that resulted in net security gains of $1.4 million.
• Mortgage banking income increased $158,000 or 26.5% to $754,000 in 2015 from $596,000 in 2014 and $935,000 in 2013. The increase during 2015
was due to a increase in the volume of loans originated and sold by First Mid Bank. Loans sold balances are as follows:
$57 million (representing 457 loans) in 2015
$44 million (representing 368 loans) in 2014
$65 million (representing 552 loans) in 2013
First Mid Bank generally releases the servicing rights on loans sold into the secondary market.
• Revenue from ATMs and debit cards increased $761,000 or 19.4% to $4,676,000 in 2015 from $3,915,000 in 2014 compared to $3,772,000 in 2013.
The increase from 2014 to 2015 was due to the ONB Branches acquired during the third quarter of 2015 and an increase in electronic transactions and
incentives received from VISA. The increase from 2013 to 2014 was primarily due to in increase in electronic transactions and incentives received from
VISA.
• Other income increased $340,000 or 23.1% in 2015 to $1,813,000 from $1,473,000 in 2014 compared to $1,440,000 in 2013. The increase from 2014
to 2015 was due to income from the ONB branches acquired during the third quarter of 2015 and an increase in merchant card processing fees. The
increase from 2013 to 2014 was primarily due to an increase in merchant card processing fees.
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):
$ Change From Prior Year
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
2015
2014
2013
2015
2014
$
26,337
$
24,771
$
24,128
$
1,566
$
9,143
8,347
8,223
19
904
891
681
2,474
1,092
7,707
23
804
643
646
2,333
1,015
5,925
163
832
674
603
2,070
1,221
5,590
796
(4)
100
248
35
141
77
1,782
643
124
(140)
(28)
(31)
43
263
(206)
335
$
49,248
$
44,507
$
43,504
$
4,741
$
1,003
28
Total non-interest expense increased to $49.2 million in 2015 from $44.5 million in 2014 and $43.5 million in 2013. 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 $1,566,000 or 6.3% to $26.3 million from $24.8 million in 2014, and
$24.1 million in 2013. The increase was due to the addition of 84 employees with the acquisition of twelve ONB branches and merit increases for continuing
employees during the first quarter of 2015. The increase in 2014 was primarily due to merit increases for continuing employees during the first quarter of
2014 offset by a decrease in the number of employees. There were 513 full-time equivalent employees at December 31, 2015, compared to 400 at
December 31, 2014, and 406 at December 31, 2013.
• Occupancy and equipment expense increased $796,000 or 9.5% to $9.1 million in 2015 from $8.3 million in 2014, compared to $8.2 million in 2013. The
increase in 2015 was primarily due to increases in rent and depreciation expenses related to the acquisition of twelve ONB Branches. The increase in
2014 was primarily due to increases in maintenance and repair expense for equipment and software and buildings owned by the company offset by less
depreciation expense on software that was fully amortized during 2014.
• Net other real estate owned expense decreased $4,000 or 17.4% to $19,000 from $23,000 in 2014, and $163,000 in 2013. The decrease in 2015 was
primarily due to less losses on properties sold during 2015 compared to properties sold in 2014. The decrease during 2014 were primarily due to the
decline in the outstanding balance of other real estate owned.
• FDIC insurance expense increased $100,000 or 12.4% to $904,000 from $804,000 in 2014, and $832,000 in 2013. The increase in 2015 was primarily
due to an increase in average assets due to the acquisition of twelve ONB Branches. The decrease in 2014 was primarily due to lower assessment rates
as a result of improved asset quality offset by an increase in average assets compared to the previous year.
• Amortization of other intangibles expense increased $248,000 or 38.6% to $891,000 from $643,000 in 2014, compared to $674,000 in 2013. The increase
in 2015 was due to the acquisition of twelve ONB Branches. The decrease in intangible amortization expense in 2014 was due to less amortization
expense for core deposit intangibles.
• Other operating expenses increased $1,782,000 or 30.1% to $7,707,000 from $5,925,000 in 2014, compared to $5,590,000 in 2013. The increase in 2015
was primarily due to expenses incurred to acquire of twelve ONB Branches during the third quarter of 2015. The increase in 2014 was primarily due to
filing and listing fees paid to NASDAQ during 2014 that was not paid during 2013 and increases in various other expenses in 2014.
• On a net basis, all other categories of operating expenses increased $253,000 or 6.3% to $4,247,000 from $3,994,000 in 2014, compared to $3,894,000
in 2013. The increase in 2015 was primarily due to an increase in legal and professional fees, marketing and promotion, and stationary and supplies due
to the acquisition of twelve ONB Branches. The increase in 2014 was primarily due to an increase in legal and professional fees offset by a decrease in
marketing and promotion.
Income Taxes
Income tax expense amounted to $9,218,000 in 2015 compared to $9,254,000 in 2014, and $8,846,000 in 2013. Effective tax rates were 35.8% for 2015,
37.4% for 2014, and 37.5% for 2013. The decline in effective tax rate for 2015 was primarily due to a reduction in the Company's state tax rate, from 9.5% to
7.75% beginning January 1, 2015.
29
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
2015
December 31,
2014
2013
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
$
175,576
1.70% $
154,874
1.72% $
197,805
107,164
312,132
3,130
4,035
3.22%
2.52%
1.41%
1.38%
75,589
193,814
3,300
4,036
3.33%
2.48%
1.14%
1.20%
65,304
229,661
3,652
6,035
$
602,037
2.39% $
431,613
2.33% $
502,457
1.56%
3.43%
2.60%
1.14%
1.17%
2.27%
At December 31, 2015, the Company’s investment portfolio increased by $170.4 million from December 31, 2014 primarily due to purchases of obligation of
U.S. government corporations and agencies securities and mortgaged-backed securities as the company deploys the excess cash received in the
acquisition of the ONB Branches. 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. During the third quarter of 2014, management evaluated its available-for-sale portfolio and
transferred obligations of U.S. government corporations & agencies securities with a fair value of $53.6 million from available-for-sale to held-to-maturity to
reduce price volatility. Management determined it has both the intent and ability to hold these securities to maturity. Transfers of investment securities into
the held-to-maturity category from available-for-sale are made at fair value on the date of transfer. There were no gains or losses recognized as a result of
this transfer. The related $1.4 million of unrealized holding loss that was included in the transfer is retained in the carrying value of the held-to-maturity
securities and in other comprehensive income net of deferred taxes. These amounts are being amortized into net interest income over the remaining life of
the related securities as a yield adjustment, resulting in no impact on future net income.
The table below presents the credit ratings as of December 31, 2015 for certain investment securities (in thousands):
Amortized
Cost
Estimated
Fair Value
AAA
AA +/-
A +/-
BBB +/-
< BBB -
Not rated
Average Credit Rating of Fair Value at December 31, 2015 (1)
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 (2)
Trust preferred securities
Other securities
Total investments
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
$
90,368
$
90,141
$
— $
90,141
$
— $
— $
— $
107,164
312,132
3,130
4,035
110,717
312,054
1,906
4,030
3,066
75,996
30,827
—
—
—
—
—
—
—
—
2,000
1,966
—
—
—
—
—
1,906
—
—
828
312,054
—
64
$
516,829
$
518,848
$
3,066
$
166,137
$
32,827
$
1,966
$
1,906
$
312,946
$
85,208
$
85,737
$
— $
80,737
$
— $
— $
— $
5,000
(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.
30
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, 2015:
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
Estimated incremental defaults
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
3,130,000
1,906,000
(1,224,000)
1,111,000
CCC
35
8
1
360,850,000
13.7%
340,712,000
14.5%
40.2%
291,212,000
67,084,000
34,694,000
198,241,000
10,797,000
12.0%
1.62%-4.29%
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
31
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, 2015 the Company received all of the contractual interest payments for its trust preferred security. During 2014 and
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 failed and interest received on the PIK note was being capitalized,
which means the principal balance was being increased. Once the coverage test is met, capitalized interest is paid in cash and current cash interest
payments 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. During 2013, the Company received it's full
interest payments.
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 its trust preferred security 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 the full payment of the securities is ensured. The PIK status of these securities, among other
factors, indicates potential other-than-temporary impairment (“OTTI”) and accordingly, the Company performed further detailed analysis of the investments’
cash flows and the credit conditions of the underlying issuers. This analysis incorporates, among other things, the waterfall provisions and any resulting PIK
status of 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, 2015 and 2014.
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.
32
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
2015
2014
2013
2012
2011
Construction and land development
$
39,209
3.1% $
21,627
$
25,321
$
31,341
$
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
122,474
231,571
45,740
409,172
848,166
75,886
305,060
41,579
11,198
9.6%
18.1%
3.6%
31.9%
66.3%
5.9%
23.7%
3.2%
0.9%
110,193
181,921
53,129
379,604
746,474
68,298
223,780
15,118
8,736
109,405
184,761
50,174
356,999
726,660
64,128
168,353
14,579
9,084
86,271
186,498
44,863
316,322
665,295
61,014
160,299
16,264
8,193
23,136
72,585
181,849
19,846
321,001
618,417
63,257
150,716
16,271
11,413
$
1,281,889
100.0% $
1,062,406
$
982,804
$
911,065
$
860,074
Loan balances increased by $219.5 million or 20.7% from December 31, 2014 to December 31, 2015 primarily due to loans added in the acquisition of
twelve ONB Branches and increases in originations of loans secured by real estate and commercial and industrial loans. Loan balances increased by $79.6
million or 8.1% from December 31, 2013 to December 31, 2014 primarily due to originations of loans commercial and industrial loans. The balances of loans
sold into the secondary market were $57.1 million in 2015 compared to $44.0 million in 2014. The balance of real estate loans held for sale, included in the
balances shown above, amounted to $968,000 and $1,958,000 as of December 31, 2015 and 2014, respectively.
33
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, 2015 and 2014 (dollars in thousands):
Central region
Sullivan region
Decatur region
Peoria region
Highland region
Southern region
December 31, 2015
December 31, 2014
Principal
balance
% Outstanding
Loans
Principal
balance
% Outstanding
Loans
$
401,150
161,921
287,788
172,203
114,378
144,449
31.3% $
12.6%
22.5%
13.4%
8.9%
11.3%
368,484
153,731
256,241
166,056
117,894
—
34.7%
14.5%
24.1%
15.6%
11.1%
—%
Total all regions
$
1,281,889
100.0% $
1,062,406
100.0%
Loans are geographically dispersed among these regions located in central and southwestern Illinois. While these regions have experienced some economic
stress during 2015 and 2014, 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, 2015 and 2014, the Company did have industry loan
concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):
Other grain farming
$
All Other General Merchandise Stores
Lessors of non-residential buildings
Lessors of residential buildings & dwellings
Hotels and motels
December 31, 2015
December 31, 2014
Principal
balance
% Outstanding
Loans
Principal
balance
% Outstanding
Loans
161,495
39,864
109,070
67,513
62,881
12.60% $
155,136
3.11%
8.51%
5.27%
4.91%
46,169
96,508
65,781
56,546
14.60%
4.35%
9.08%
6.19%
5.32%
Balances of all other grain merchandise stores were not considered a concentration during 2015, but is shown here for comparative purposes. The Company
had no further industry loan concentrations in excess of 25% of total risk-based capital.
34
The following table presents the balance of loans outstanding as of December 31, 2015, 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
$
34,264
$
4,077
$
868
$
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.
6,452
21,531
1,372
43,196
106,815
56,702
130,591
3,299
1,398
53,094
78,887
18,266
238,296
392,620
18,225
119,409
27,444
3,971
62,928
131,153
26,102
127,680
348,731
959
55,060
10,836
5,829
39,209
122,474
231,571
45,740
409,172
848,166
75,886
305,060
41,579
11,198
$
298,805
$
561,669
$
421,415
$
1,281,889
As of December 31, 2015, loans with maturities over one year consisted of approximately $841.9 million in fixed rate loans and approximately $141.2 million
in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy
regarding renewals and borrower requests, which are handled on a case-by-case basis.
Nonperforming Loans and 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.
35
The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets (in thousands):
2015
2014
2013
2012
2011
December 31,
Nonaccrual loans
$
3,412
$
4,105
$
6,121
$
7,573
$
6,723
Restructured loans which are performing in accordance with
revised terms
Total nonperforming loans
Repossessed assets
601
4,013
477
435
4,540
263
348
6,469
568
20
7,593
1,229
717
7,440
4,606
Total nonperforming loans and repossessed assets
$
4,490
$
4,803
$
7,037
$
8,822
$
12,046
Nonperforming loans to loans, before allowance for loan losses
Nonperforming loans and repossessed assets to loans, before
allowance for loan losses
0.31%
0.35%
0.43%
0.45%
0.66%
0.72%
0.83%
0.98%
0.87%
1.40%
The $693,000 decrease in nonaccrual loans during 2015 resulted from the net of $2.3 million of loans put on nonaccrual status, offset by $397,000 of loans
transferred to other real estate owned, $85,000 of loans charged off and $2.5 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
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Total loans
December 31, 2015
December 31, 2014
Balance
% of Total
Balance
% of Total
142
454
975
317
269
2,157
79
928
248
4.2% $
13.3%
28.5%
9.3%
7.9%
63.2%
2.3%
27.2%
7.3%
785
29
878
—
2,074
3,766
—
332
7
19.1%
0.7%
21.4%
—%
50.5%
91.7%
—%
8.1%
0.2%
$
3,412
100.0% $
4,105
100.0%
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $48,000, $71,000 and $45,000 for the years
ended December 31, 2015, 2014 and 2013, respectively.
The $215,000 increase in repossessed assets during 2015 resulted from the net of $470,000 of additional assets repossessed, $234,000 of repossessed
assets sold and $21,000 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
1-4 family residential properties
Commercial real estate
Total real estate
Consumer Loans
Total repossessed collateral
December 31, 2015
December 31, 2014
Balance
% of Total
Balance
% of Total
$
$
186
—
291
477
1
478
38.9% $
—%
60.9%
99.8%
0.2%
100.0% $
201
62
—
263
—
263
76.4%
23.6%
—%
100.0%
—%
100.0%
36
Repossessed assets sold during 2015 resulted in net losses of $21,000, of which $14,000 was related to real estate asset sales and $7,000 was related to
other repossessed assets sales. Repossessed assets sold during 2014 resulted in net losses of $33,000, of which $33,000 were related to real estate asset
sales and $0 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.
Given the current state of the economy, management did assess the impact of the recession on each category of loans and adjusted historical loss factors
for more recent economic trends. Management utilizes three-year loss migration analysis 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 2015 and 2014. 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, 2015, the Company’s loan portfolio included $198.4 million of loans to borrowers whose businesses are directly
related to agriculture. Of this amount, $161.5 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related
to agriculture increased $19.9 million from $178.5 million at December 31, 2014 while loans concentrated in other grain farming increased $6.4 million from
$155.1 million at December 31, 2014.
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 $62.9 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 $109.1 million of loans to lessors of non-residential buildings and $67.5 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.
37
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
$
1,126,479
$
1,022,605
$
924,900
$
866,912
$
807,463
Allowance-beginning of period
13,682
13,249
11,776
11,120
10,393
2015
2014
2013
2012
2011
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
131
222
285
268
906
186
120
24
152
482
424
1,318
185
41
63
248
537
110
78
26
127
341
196
629
479
426
35
188
1,423
2,625
699
79
170
881
92
162
1,128
2,371
3,760
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
$
14,576
$
13,682
$
13,249
$
11,776
$
11,120
Ratio of annualized net charge-offs to average loans
0.04%
0.03%
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
1.14%
363.0%
1.29%
301.4%
1.35%
204.8%
1.29%
155.1%
1.29%
149.5%
The ratio of the allowance for loan losses to nonperforming loans is 363.0% as of December 31, 2015 compared to 301.4% as of December 31, 2014. The
increase in this ratio is primarily due to the decline in nonperforming loans during 2015. Management believes that the overall estimate of the allowance for
loan losses appropriately accounts for probable losses attributable to current exposures.
During 2015, the Company had net charge-offs of $424,000 compared to $196,000 in 2014. During 2015, the Company's significant charge-offs included
$49,000 on one commercial real estate loan, $149,000 on one commercial loan, and $251,000 on one consumer loan. During 2014, the Company's
significant charge-offs included $110,000 on four commercial real estate loans to 3 borrowers and $34,000 on one consumer loan.
At December 31, 2015, the allowance for loan losses amounted to $14.6 million or 1.14% of total loans. At December 31, 2014, the allowance for loan
losses amounted to $13.7 million or 1.29% of total loans. The decline in the ratio from December 31, 2014 to December 31, 2015 is due to the increase in
loan balances that were recorded at fair value from the ONB acquisition.
38
% of
loans to
total
loans
19.1%
61.8%
17.6%
1.5%
771
10,646
533
377
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, 2015
December 31, 2014
December 31, 2013
Allowance for
loan losses
% of
loans to
total
loans
Allowance for
loan losses
% of
loans to
total
loans
Allowance for
loan losses
Residential real estate
$
994
18.1% $
790
17.4% $
Commercial / Commercial real estate
Agricultural / Agricultural real estate
Consumer
Total allocated
Unallocated
11,379
1,337
642
63.0%
15.5%
3.4%
10,914
1,360
386
64.4%
16.8%
1.4%
14,352
100.0%
13,450
100.0%
12,327
100.0%
224
NA
232
N/A
922
N/A
Allowance at end of year
$
14,576
100.0% $
13,682
100.0% $
13,249
100.0%
Residential real estate
$
Commercial / Commercial real estate
Agricultural / Agricultural real estate
Consumer
Total allocated
Unallocated
December 31, 2012
December 31, 2011
Allowance for
loan losses
% of
loans to
total
loans
Allowance for
loan losses
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%
10,988
100.0%
10,351
100.0%
788
N/A
769
N/A
Allowance at end of year
$
11,776
100.0% $
11,120
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.
39
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, 2015, 2014 and 2013 (dollars in thousands):
2015
2014
2013
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
$
267,175
—% $
223,505
—% $
237,373
669,442
298,594
219,836
0.11%
0.13%
0.53%
559,168
281,185
229,763
0.12%
0.13%
0.56%
544,157
294,615
207,454
Total average deposits
$
1,455,047
0.16% $
1,293,621
0.18% $
1,283,599
—%
0.15%
0.15%
0.70%
0.21%
The following table sets forth the high and low month-end balances for the years ended December 31, 2015, 2014 and 2013 (in thousands):
High month-end balances of total deposits
Low month-end balances of total deposits
2015
2014
2013
$
1,741,079
$
1,305,825
$
1,310,169
1,266,199
1,265,058
1,263,941
In 2015, the average balance of deposits increased by $161.4 million from 2014. The increase was primarily the result of deposit balances acquired in the
acquisition of twelve ONB Branches. Average non-interest bearing deposits increased $43.7 million, other interest-bearing deposits increased by $110.2
million, savings accounts increased by $17.4 million, offset by a decrease of $9.9 million in time deposits. In 2014, the average balance of deposits
increased by $10.0 million from 2013. The increase was primarily attributable to an increase in time deposits offset by declines in non-interest bearing and
savings account balances. Average non-interest bearing deposits decreased by $13.9 million, savings accounts decreased by $13.4 million, average
balances of other interest-bearing deposits increased $15 million and time deposits increased by $22.3 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
2015
December 31,
2014
2013
30,108
$
35,604
$
10,714
23,091
24,942
15,270
21,710
25,861
88,855
$
98,445
$
17,946
12,625
38,084
28,060
96,715
$
$
The balance of time deposits of $100,000 or more decreased $9.6 million from December 31, 2014 to December 31, 2015. The balance of time deposits of
$100,000 or more increased $1.7 million from December 31, 2013 to December 31, 2014. The decrease in 2015 was a result of time deposits that were not
renewed and brokered CDs that were not replaced. The increase in 2014 was primarily due to an increase in public funds invested in CDs offset by declines
in other CDs.
In 2015 the Company maintained account relationships with various public entities throughout its market areas. Ninety four public entities had total balances
of $122.3 million in various checking accounts and time deposits as of December 31, 2015. These balances are subject to change depending upon the cash
flow needs of the public entity.
40
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, 2015, 2014 and 2013 is presented below (dollars in thousands):
At December 31:
Securities sold under agreements to repurchase
$
128,842
$
121,869
$
119,187
2015
2014
2013
Federal Home Loan Bank advances:
Fixed term – due in one year or less
Fixed term – due after one year
Junior subordinated debentures
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):
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
5,000
15,000
20,620
—
20,000
20,620
10,000
10,000
20,620
$
169,462
$
162,489
$
159,807
0.77%
0.54%
0.47%
$
128,842
$
121,869
$
119,187
—
—
10,000
20,000
2,000
20,620
—
—
10,000
20,000
—
20,620
142
—
5,479
17,685
471
20,620
16
—
1,520
13,055
101
20,620
5
11,000
10,000
10,000
—
20,620
87,468
1,463
2,915
3,589
6,754
—
20,620
$
158,145
$
132,790
$
122,809
0.36%
0.30%
0.68%
Securities sold under agreements to repurchase
$
113,748
$
97,478
$
Securities sold under agreements to repurchase increased $6.9 million during 2015 primarily due to agreements added with the acquisition of the twelve
ONB Branches. FHLB advances represent borrowings by First Mid Bank to economically fund loan demand.
41
At December 31, 2015 the advances totaling $20.0 million were as follows:
•
•
•
•
$5 million advance with a 10-year maturity, at 4.58%, due July 14, 2016, one year lockout, callable quarterly
$5 million advance with a 6-year maturity, at 2.30% due August 24, 2020
$5 million advance with a 7-year maturity, at 2.55% due October 1, 2021
$5 million advance with a 8-year maturity, at 2.4%, due January 9, 2023
At December 31, 2015 and 2014, there was no outstanding loan balance on a revolving credit agreement with The Northern Trust Company. This loan was
renewed on April 17, 2015 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, 2015). 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, 2015 and 2014.
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 (3.17% and 3.08% at December 31, 2015 and 2014, 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 (2.11% and 1.84% at December 31, 2015
and 2014, 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.
In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt rules that prohibit banks and
their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and
private equity funds). This rule is generally referred to as the “Volcker Rule.” On December 10, 2013, the federal banking agencies issued final rules to
implement the prohibitions required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry
regarding the adverse impact the final rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies
approved a final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities.
Under the final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets if (1)
the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the offering proceeds
received by the collateralized debt obligation were invested primarily in qualifying trust preferred collateral, and (3) the banking entity’s interests in the
collateralized debt obligation was acquired on or prior to December 10, 2013. Although the Volcker Rule impacts many large banking entities, the Company
does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company or First Mid Bank.
42
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.
The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at December 31, 2015 (dollars in thousands):
1 year
1-2 years
2-3 years
3-4 years
4-5 years
Thereafter
Total
Fair Value
Rate Sensitive Within
$
73,214
$
— $
— $
— $
— $
— $
73,214
$
73,214
25,000
—
—
—
—
—
10,968
32,205
52,993
58,320
338,789
25,000
493,339
25,056
493,868
945
301
2,566
584,274
244,117
170,906
103,736
1,255
95,803
105,195
110,717
110,717
83,053
1,281,889
1,280,670
$
683,007
$
256,030
$ 203,412
$
159,295
$
155,378
$ 527,037
$ 1,984,159
$ 1,983,525
64
455
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
$
199,030
$
43,721
$
45,471
$
64,722
$
66,740
$ 396,990
$
816,674
$
816,674
Money market accounts
Other time deposits
Short-term borrowings/debt
Long-term borrowings/debt
293,706
174,257
128,842
25,620
3,031
32,141
—
—
3,115
19,096
—
—
Total
$
821,455
$
78,893
$
67,682
Rate sensitive assets – rate
sensitive liabilities
$ (138,448) $
177,137
$ 135,730
Cumulative GAP
$ (138,448) $
38,689
$ 174,419
4,041
8,033
—
—
76,796
82,499
256,918
$
$
$
$
$
$
4,125
8,717
—
5,000
21,802
1,194
—
10,000
329,820
243,438
128,842
40,620
329,820
243,333
128,843
33,629
84,582
$ 429,986
$ 1,559,394
$ 1,552,299
70,796
$
97,051
$
424,765
327,714
$ 424,765
Cumulative amounts as % of
total Rate sensitive assets
Cumulative Ratio
-7.0%
-7.0%
8.9%
1.9%
6.8%
8.8%
4.2%
3.6%
4.9%
12.9%
16.5%
21.4%
The static GAP analysis shows that at December 31, 2015, 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.
43
Capital Resources
At December 31, 2015, the Company’s stockholders' equity had increased $40.1 million, or 24.3%, to $205,009,000 from $164,916,000 as of December 31,
2014. The increase resulted primarily from the private placement capital raise completed during the second quarter of 2015 which resulted in additional
common equity of $29.3 million. During 2015, net income contributed $16,512,000 to equity before the payment of dividends to stockholders. The change in
market value of available-for-sale investment securities increased stockholders' equity by $1,296,000, net of tax. Additional purchases of treasury stock
$53,246 shares (at an average cost of $20.01 per share) decreased stockholders’ equity by approximately $1,066,000.
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. During
2014, the Company converted the Series B Preferred Stock to approximately 1,139,195 shares of common stock in accordance with the terms of the offering.
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, 2015, the Company classified the cost basis of its
common stock issued and held in trust in connection with the DCP of approximately $3,566,000 as treasury stock. The Company also classified the cost
basis of its related deferred compensation obligation of approximately $3,566,000 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:
•
•
•
6,153 common shares during 2015
13,724 common shares during 2014, and
12,700 common shares during 2013
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:
•
•
•
11,885 common shares during 2015
8,971 common shares during 2014, and
9,747 common shares during 2013
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
$4,556,000 in common stock dividends paid during 2015, $1,069,000 or 23.5% was reinvested into shares of common stock of the Company through the
DRIP. Of the $2,489,000 in preferred stock dividends paid during 2015, $198,000 or 8.0% was reinvested into shares of common stock through the DRIP.
Events that resulted in common shares being reinvested in the DRIP:
•
•
•
During 2015, 50,003 common shares were issued from common stock dividends and 9,714 common shares were issued from preferred
stock dividends.
During 2014, 43,969 common shares were issued from common stock dividends and 17,339 common shares were issued from preferred
stock dividends.
During 2013, 31,035 common shares were issued from common stock dividends and 15,885 common shares were issued from preferred
stock dividends.
44
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, 2015, the Company had awarded 59,500 shares as
stock options under the SI Plan. There were no shares awarded as stock options during 2015 or 2014. During 2015, the Company awarded 18,002 shares
as stock unit awards. During 2014 the Company awarded 19,377 shares as 50% Stock Awards and 50% Stock Unit Awards under the SI Plan. This SI Plan
is more fully described in Note 13 - Stock Incentive Plan.
Stock Repurchase Program. Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may
repurchase a total of approximately $76.7 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.
On October 24, 2014, repurchases of $5 million additional shares of the Company's common stock.
During 2015, the Company repurchased 53,246 (0.63% of common shares) at a total price of $1,066,000. During 2014, the Company repurchased 82,680
(1.2% of common shares) at a total price of $1,763,000. As of December 31, 2015, approximately $7.2 million remains available for purchase under the
repurchase programs. Treasury stock is further affected by activity in the DCP.
45
Capital Ratios
Minimum regulatory requirements are 8% for the Total Risk-based capital ratio, 6% for the Tier 1 Risk-based capital ratio, 4.5% for the Common Equity Tier 1
capital ratio, and 4% for the Tier 1 Leverage ratio. The Company and First Mid Bank have capital ratios above the minimum regulatory capital requirements
and, as of December 31, 2015, 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, 2015 follows:
Total Risk-based
Capital Ratio
Tier One
Risk-based
Capital Ratio
Common Equity
Tier 1 Capital
Ratio
Tier One
Leverage Ratio
(Capital to
Average Assets)
First Mid-Illinois Bancshares, Inc. (Consolidated)
First Mid-Illinois Bank & Trust, N.A.
14.25%
13.75%
13.23%
12.73%
9.92%
12.73%
9.20%
8.83%
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, 2015, 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, 2015, the excess collateral at the FHLB would support approximately $123.5 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, 2015, 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 17, 2015 for one year as a
revolving credit agreement. 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, 2015 and 2014.
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, 2015 (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
$
243,438
$
167,359
$
53,116
$
21,665
$
20,620
148,842
48,308
715
—
133,842
2,594
100
—
15,000
5,001
200
—
—
4,028
123
$
461,923
$
303,895
$
73,317
$
25,816
$
1,298
20,620
—
36,685
292
58,895
46
For the year ended December 31, 2015, net cash of $22.0 million was provided from operating activities, $10.4 million was provided from investing activities,
and $31.7 million was provided from financing activities. In total cash and cash equivalents increased by $64.1 million since year-end 2014.
For the year ended December 31, 2014, net cash of $17.8 million was provided from operating activities, $10.0 million was used in investing activities, and
$21.1 million was used in financing activities. In total cash and cash equivalents increased by $13.4 million since year-end 2013.
For the year ended December 31, 2013, net cash of $24.7 million was provided from operating activities, $67.1 million was used in investing activities, and
$24.9 million was provided from financing activities. In total cash and cash equivalents increased by $1.0 million since year-end 2012.
For the years ended December 31, 2015 and 2014, 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.
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 2014-09, Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers ("ASU
2014-09"). In May 2014, FASB issued ASU 2014-09 which creates a new topic in the FASB Accounting Standards Codification(R) ("ASC"), Topic 606. In
addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASU 2014-09
establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time,
provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new
Subtopic to the ASC, Other Assets and Deferred Costs: Contracts with Customers ("ASC 340-40"), to provide guidance on costs related to obtaining a
contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does
not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial
instruments, guarantee other than product or service warranties, and non-monetary exchanges between entities in the same line of business to facilitate
sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016.
The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and
Disclosures ("ASU 2014-11"). In June 2014, FASB issued ASU 2014-11 which changes the accounting for repurchase-to-maturity transactions and
repurchase financing arrangements to secured borrowing accounting. ASU 2014-11 also requires enhanced disclosures about repurchase agreements and
other similar transactions. The accounting changes in this update are effective for the first interim or annual period beginning after December 31, 2014. The
disclosure for transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014; the disclosure
for transactions accounted for as secured borrowings is required to be presented for annual periods after December 15, 2014, and interim periods after
March 15, 2015. Early application is not permitted. The adoption of this amendment did not have a material effect on the Company's financial statements.
Accounting Standards Update 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial
Liabilities ("ASU 2016-01"). In January 2016, FASB issued ASU 2016-01 which amends prior guidance to require an entity to measure its equity
investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net
income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or
minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of same issuer. The new guidance
simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when
measuring fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of
the total change in fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected fair value option for
financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The new
guidance will be effective for reporting periods after January 1, 2018 and is not expected to have a significant impact on the Company's financial statements.
Accounting Standards Update 2016-02, Leases (Topic 842)("ASU 2016-02"). On February 25, 2016, FASB issued ASU 2016-02 which creates Topic
842, Leases and supersedes Topic 840, Leases. ASU 2016-02 is intended to improve financial reporting about leasing transactions, by increasing
transparency and comparability among organizations. Under the new guidance, a lessee will be required to all leases with lease terms of more than 12
months on their balance sheet as lease liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting,
requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new
guidance will be effective for public companies for fiscal years beginning on or after December 15, 2018, and for private companies for fiscal years beginning
on or after December 15, 2019. Early adoption is permitted for all entities. Managerment is evaluating the impact ASU 2016-02 will have on the Company's
financial statements.
47
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, 2015, 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, 2015
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, 2014:
December 31, 2014
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)
(%)
2015=8.80%
(1,825)
(916)
(2,861)
(5,402)
(4.2)%
(2.1)%
(6.5)%
(12.3)%
0.85 %
0.42 %
(1.3)%
(2.6)%
Increase (Decrease) In
Net Interest Income
Return On
Average Equity
($000)
(%)
2014=9.67%
(2,399)
(1,271)
(1,237)
(2,582)
(6.9)%
(3.6)%
(3.6)%
(7.4)%
(1.28)%
(0.68)%
(0.66)%
(1.38)%
$
$
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.
48
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, 2015 and 2014 (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, 2015
December 31, 2014
Changes In
Economic Value of Equity
Amount of
Change
($000)
$
(17,340)
(6,789)
(71,013)
(29,468)
(18,519)
(8,764)
(40,167)
(13,453)
Percent
of Change
(5.5)%
(2.1)%
(22.4)%
(9.3)%
(7.6)%
(3.6)%
(16.5)%
(5.5)%
Interest Rates
(basis points)
+200 bp
+100 bp
-200 bp
-100 bp
+200 bp
+100 bp
-200 bp
-100 bp
As indicated above, at December 31, 2015, 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, 2015, 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, 2015, First Mid Bank slightly exceeded policy guidelines for a decrease in interest rates of 200
basis points. 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.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
December 31, 2015 and 2014
(In thousands, except share data)
Assets
Cash and due from banks:
Non-interest bearing
Interest bearing
Federal funds sold
Cash and cash equivalents
Certificates of deposit investments
Investment securities:
Available-for-sale, at fair value
Held-to-maturity, at amortized cost (estimated fair value of $85,737 at
December 31, 2015 and $53,937 at December 31, 2014)
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
Repurchase agreements with customers
Interest payable
Other borrowings
Junior subordinated debentures
Dividends payable
Other liabilities
Total liabilities
Stockholders’ Equity:
Convertible preferred stock, no par value; authorized 1,000,000 shares; issued
5,500 shares in 2015 and 2014
Common stock, $4 par value; authorized 18,000,000 shares;
issued 9,003,710 shares in 2015 and 7,529,815 shares in 2014
Additional paid-in capital
Retained earnings
Deferred compensation
Accumulated other comprehensive income (loss)
Less treasury stock at cost, 549,743 shares in 2015 and 496,497 shares in 2014
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
50
$
$
$
2015
2014
$
42,570
72,722
492
115,784
25,000
518,848
85,208
968
1,280,921
(14,576)
1,266,345
8,085
477
31,340
41,007
8,997
12,440
2,114,499
$
$
342,636
1,389,932
1,732,568
128,842
356
20,000
20,620
550
6,554
1,909,490
27,400
38,015
79,626
71,712
3,245
723
(15,712)
205,009
40,716
10,520
494
51,730
—
377,856
53,650
1,958
1,060,448
(13,682)
1,046,766
6,828
263
27,352
25,753
1,844
13,103
1,607,103
222,116
1,049,961
1,272,077
121,869
285
20,000
20,620
530
6,806
1,442,187
27,400
32,119
55,607
61,956
3,329
(875)
(14,620)
164,916
$
2,114,499
$
1,607,103
Consolidated Statements of Income
For the years ended December 31, 2015, 2014 and 2013
(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
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.
51
2015
2014
2013
$
48,460
$
44,799
$
42,184
7,741
2,807
44
—
199
59,251
2,282
62
616
13
526
3,499
55,752
1,318
54,434
3,746
1,315
2,107
5,681
452
754
4,676
1,813
20,544
26,337
9,143
19
904
891
681
2,474
1,092
7,707
49,248
25,730
9,218
16,512
2,200
14,312
1.84
1.81
0.59
$
$
7,499
2,352
—
1
83
54,734
2,351
47
339
1
514
3,252
51,482
629
50,853
3,571
1,039
1,796
5,264
715
596
3,915
1,473
18,369
24,771
8,347
23
804
643
646
2,333
1,015
5,925
44,507
24,715
9,254
15,461
4,152
11,309
1.88
1.85
0.55
$
$
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
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2015, 2014 and 2013
(in thousands)
Net income
Other Comprehensive Income (Loss)
Unrealized gains (losses) on available-for-sale securities, net of
taxes of $(1,005), $(5,590), and $7,362 for the years ended
December 31, 2015, 2014 and 2013, respectively
Unamortized holding gains (losses) on held to maturity securities
transferred from available for sale, net of taxes of $(193), $518, $0
for December 31, 2015, 2014 and 2013.
Less: reclassification adjustment for realized gains included in net
income net of taxes of $176, $279, $894 for the years ended
December 31, 2015, 2014 and 2013, respectively
Other comprehensive income (loss), net of taxes
2015
2014
2013
$
16,512
$
15,461
$
14,722
1,572
8,751
(11,525)
302
(810)
—
(276)
1,598
(436)
7,505
(1,399)
(12,924)
Comprehensive income
$
18,110
$
22,966
$
1,798
See accompanying notes to consolidated financial statements.
52
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2015, 2014 and 2013
(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, 2014
$ 27,400 $ 32,119 $
55,607 $ 61,956 $
3,329 $
(875) $ (14,620) $ 164,916
Net income
Other comprehensive income, net of tax
Dividends on preferred stock ($400 per sh)
Dividends on common stock ($.59 per sh)
Issuance of 59,717 common shares
pursuant to the Dividend Reinvestment Plan
Issuance of 6,153 common shares pursuant
to the Deferred Compensation Plan
Issuance of 11,885 common shares
pursuant to the First Retirement & Savings
Plan
Issuance of 3,281 restricted common shares
pursuant to the 2007 Stock Incentive Plan
Issuance of 1,392,859 common shares
pursuant to private placement capital raise,
net proceeds
Purchase of 53,246 treasury shares
Deferred compensation
Tax benefit related to deferred compensation
distributions
Grant of restricted stock units pursuant to
the 2007 Stock Incentive Plan
Vested restricted shares/units compensation
expense
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
16,512
—
(2,200)
(4,556)
239
1,027
25
48
13
105
193
55
5,571
22,283
—
—
—
—
—
—
—
85
271
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(340)
—
—
26
—
—
230
—
1,598
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
16,512
1,598
(2,200)
(4,556)
1,266
130
241
(272)
—
27,854
(1,066)
(1,066)
(26)
—
—
—
—
85
271
230
December 31, 2015
$ 27,400 $ 38,015 $
79,626 $ 71,712 $
3,245 $
723 $ (15,712) $ 205,009
See accompanying notes to consolidated financial statements.
53
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2015, 2014 and 2013
(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, 2013
$ 52,035 $ 31,190 $
33,911 $ 86,578 $
2,989 $
(8,380) $ (48,942) $ 149,381
Net income
Other comprehensive income, net of tax
Dividends on preferred stock ($398 per sh)
Dividends on common stock ($.55 per sh)
Issuance of shares of preferred stock
Issuance of 61,308 common shares pursuant
to the Dividend Reinvestment Plan
Issuance of 13,724 common shares pursuant
to the Deferred Compensation Plan
Issuance of 8,971 common shares pursuant
to the First Retirement & Savings Plan
Issuance of 8,789 restricted common shares
pursuant to the 2007 Stock Incentive Plan
Issuance of 1,139,426 common shares
pursuant to conversion of 4,927 shares of
Series B preferred stock
Purchase of 86,681 treasury shares
Retirement of 1,500,000 treasury shares
Deferred compensation
Tax benefit related to deferred compensation
distributions
Grant of restricted stock units pursuant to the
2007 Stock Incentive Plan
Vested restricted shares/units compensation
expense
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
245
1,015
55
36
35
242
152
153
(24,635)
4,558
20,077
—
—
—
—
—
—
—
(4,000)
—
—
—
—
—
—
—
101
(44)
—
15,461
—
(4,152)
(3,540)
—
—
—
—
—
—
—
(32,391)
—
—
—
—
—
—
—
—
—
—
—
—
(145)
—
—
—
306
—
—
179
—
7,505
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,461
7,505
(4,152)
(3,540)
—
1,260
297
188
43
—
(1,763)
(1,763)
36,391
(306)
—
—
—
—
—
101
(44)
179
December 31, 2014
$ 27,400 $ 32,119 $
55,607 $ 61,956 $
3,329 $
(875) $ (14,620) $ 164,916
See accompanying notes to consolidated financial statements.
54
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2015, 2014 and 2013
(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
Other comprehensive loss, net of tax
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 option
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.
55
Consolidated Statements of Cash Flows
For the years ended December 31, 2015, 2014 and 2013
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2015
2014
2013
$
16,512
$
15,461
$
14,722
Provision for loan losses
Depreciation, amortization and accretion, net
Stock-based compensation expense
Gains on investment securities, net
(Gain) Loss 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
Increase (decrease) in accrued interest payable
Origination of loans held for sale
Proceeds from sale of loans held for sale
Decrease 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
Purchases of securities held-to-maturity
Net increase in loans
Purchases of premises and equipment
Proceeds from sales of other real property owned
Cash received related to acquisition, net of cash and cash equivalents acquired
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Increase 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
Conversion of preferred 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 and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
1,318
4,442
378
(452)
(21)
221
(763)
20
(763)
(54)
(56,091)
57,844
169
(762)
21,998
1,245
(26,245)
19,380
103,481
10,000
(257,693)
(46,000)
(68,958)
(1,762)
260
276,661
10,369
6,844
3,176
5,000
(5,000)
2,000
(2,000)
28,222
—
(1,066)
(2,002)
(3,487)
31,687
64,054
51,730
629
3,960
376
(715)
33
90
(621)
11
(214)
8
(45,430)
44,607
306
(724)
17,777
—
—
75,618
57,133
—
(63,540)
—
(78,698)
(1,178)
635
—
(10,030)
(15,539)
2,682
10,000
(10,000)
1,000
(1,000)
25,123
(24,635)
(1,763)
(4,339)
(2,648)
(21,119)
(13,372)
65,102
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
65,102
$
115,784
$
51,730
$
56
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2015, 2014 and 2013
(In thousands)
2015
2014
2013
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
Income taxes
Supplemental disclosures of noncash investing and financing activities
Securities transferred from available-for-sale to held-to-maturity
Loans transferred to other real estate owned
Dividends reinvested in common stock
Net tax benefit related to option and deferred compensation plans
$
3,428
$
3,244
$
7,796
—
458
1,266
85
9,336
53,594
344
1,261
101
3,599
7,657
—
1,046
1,066
117
See accompanying notes to consolidated financial statements.
57
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 2015 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.
58
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, 2015 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.
59
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, 2015, the Company managed or administered 1,346 accounts with assets totaling approximately $794.0 million. At December 31, 2014,
the Company managed or administered 1,478 accounts with assets totaling approximately $757.3 million.
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.
60
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, 2015 was $15.09 and the NASDAQ Bank Index value at December 31, 2015 was 2,853.15.
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 18,002 shares during 2015 as stock unit
awards and 19,377 shares and 14,054 shares during 2014 and 2013, respectively, as 50% Stock Awards and 50% Stock Unit Awards under the SI plan.
61
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) included in stockholders’ equity as of December 31, 2015 and 2014 are as follows (in
thousands):
December 31, 2015
Net unrealized gains on securities available-for-sale
Unamortized losses on securities held-to-maturity transferred
from available-for-sale
Securities with other-than-temporary impairment losses
Tax benefit (expense)
Balance at December 31, 2015
December 31, 2014
Net unrealized gains on securities available-for-sale
Unamortized losses on securities held-to-maturity transferred
from available-for-sale
Securities with other-than-temporary impairment losses
Tax benefit (expense)
Balance at December 31, 2014
Unrealized Gain
(Loss) on
Securities
Securities with
Other-Than-
Temporary
Impairment Losses
Total
$
$
$
$
3,243
$
— $
(834)
—
(939)
—
(1,224)
477
1,470
$
(747) $
2,829
$
— $
(1,328)
—
(586)
—
(2,936)
1,146
915
$
(1,790) $
3,243
(834)
(1,224)
(462)
723
2,829
(1,328)
(2,936)
560
(875)
Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the years ended
December 31, 2015, 2014 and 2013 , were as follows:
Unrealized gains on available-for-sale
securities
Total reclassifications out of accumulated
other comprehensive income
$
$
Amounts Reclassified from Other
Comprehensive Income
2015
2014
2013
Affected Line Item in the Statements of Income
452
$
715
$
2,293 Securities gains, net (Total reclassified amount before tax)
(176)
(279)
(894) Tax expense
276
$
436
$
1,399 Net reclassified amount
See “Note 4 – Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.
62
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, 2015, 2014 and
2013 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
2015
2014
2013
$
16,512,000
$
15,461,000
$
14,722,000
$
$
(2,200,000)
(4,152,000)
(4,417,000)
14,312,000
11,309,000
10,305,000
7,775,490
6,002,766
5,934,628
1.84
$
1.88
$
1.74
14,312,000
$
11,309,000
$
10,305,000
2,200,000
4,152,000
—
16,512,000
15,461,000
10,305,000
7,775,490
6,002,766
5,934,628
—
6,851
1,355,348
1,362,199
9,137,689
—
11,725
2,357,196
2,368,921
8,371,687
2,090
8,184
—
10,274
5,944,902
Diluted earnings per common share
$
1.81
$
1.85
$
1.73
The following shares were not considered in computing diluted earnings per share for the years ended December 31, 2015, 2014 and 2013 because they
were anti-dilutive:
Stock options to purchase shares of common stock
Average dilutive potential common shares associated with convertible preferred stock
2015
2014
2013
45,500
—
52,000
130,500
—
2,494,801
Note 3 -- Cash and Due from Banks
Aggregate cash and due from bank balances of $8,175,000, $3,903,000 and $1,583,000 were maintained in satisfaction of statutory reserve requirements of
the Federal Reserve Bank at December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, the Company’s cash accounts did not exceed the
federally insured limits.
63
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, 2015 and December 31, 2014 were as follows (in thousands):
December 31, 2015
Available-for-sale:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Fair Value
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
$
90,368
$
41
$
(268) $
90,141
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total available-for-sale
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
December 31, 2014
Available-for-sale:
107,164
312,132
3,130
4,035
3,608
1,374
—
29
(55)
(1,452)
(1,224)
(34)
110,717
312,054
1,906
4,030
516,829
$
5,052
$
(3,033) $
518,848
85,208
$
743
$
(214) $
85,737
$
$
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
$
101,224
$
91
$
(1,358) $
99,957
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total available-for-sale
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
75,589
193,814
3,300
4,036
2,608
2,548
—
26
(113)
(961)
(2,936)
(12)
78,084
195,401
364
4,050
377,963
$
5,273
$
(5,380) $
377,856
53,650
$
299
$
(12) $
53,937
$
$
During the third quarter of 2014, management evaluated its available-for-sale portfolio and transferred obligations of U.S. government corporations &
agencies securities with a fair value of $53.6 million from available-for-sale to held-to-maturity to reduce price volatility. Management determined it had both
the intent and ability to hold these securities to maturity. Transfers of investment securities into the held-to-maturity category from available-for-sale are made
at fair value on the date of transfer. There were no gains or losses recognized as a result of this transfer. The related $1.4 million of unrealized holding loss
that was included in the transfer is retained in the carrying value of the held-to-maturity securities and in other comprehensive income net of deferred taxes.
These amounts are being amortized into net interest income over the remaining life of the related securities as a yield adjustment, resulting in no impact on
future net income.
Trust preferred securities at December 31, 2015, is one trust preferred pooled security issued by First Tennessee Financial (“FTN”). The unrealized loss of
this security, which has a maturity of twenty-two 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.
64
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, 2015, 2014 and 2013 (in thousands):
Proceeds from sales
Gross gains
Gross losses
Income tax expense
2015
2014
2013
$
19,380
$
75,618
$
452
—
176
1,452
737
279
69,665
2,454
161
894
The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity
presented at amortized cost at December 31, 2015 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
Held-to-maturity:
One year or
less
After 1 through
5 years
After 5 through
10 years
After
ten years
Total
$
49,191
$
40,950
$
— $
— $
90,141
8,373
238
—
—
45,705
137,443
—
3,967
54,607
174,373
—
—
2,032
—
1,906
63
110,717
312,054
1,906
4,030
$
57,802
$
228,065
$
228,980
$
4,001
$
518,848
1.83%
2.23%
2.36%
2.81%
2.71%
3.23%
2.05%
2.91%
2.45%
2.93%
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$
50,632
$
29,486
$
5,090
$
— $
85,208
Weighted average yield
Full tax-equivalent yield
1.99%
1.99%
2.09%
2.09%
2.06%
2.06%
—%
—%
2.03%
2.03%
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,
2015.
Investment securities carried at approximately $404 million and $330 million at December 31, 2015 and 2014, respectively, were pledged to secure public
deposits and repurchase agreements and for other purposes as permitted or required by law.
65
The following table presents the aging of gross unrealized losses and fair value by investment category as of December 31, 2015 and 2014 (in thousands):
December 31, 2015
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$
$
December 31, 2014
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$
$
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or more
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
34,942
$
(142) $
12,971
$
(126) $
47,913
$
3,168
164,249
—
1,966
(32)
(841)
—
(34)
979
20,011
1,906
—
(23)
(611)
(1,224)
—
4,147
184,260
1,906
1,966
(268)
(55)
(1,452)
(1,224)
(34)
204,325
$
(1,049) $
35,867
$
(1,984) $
240,192
$
(3,033)
35,845
$
(214) $
— $
— $
35,845
$
(214)
7,289
$
(46) $
75,030
$
(1,312) $
82,319
$
(1,358)
3,586
19,565
—
—
(19)
(159)
—
—
4,416
37,224
364
1,988
(94)
(802)
(2,936)
(12)
8,002
56,789
364
1,988
(113)
(961)
(2,936)
(12)
30,440
$
(224) $
119,022
$
(5,156) $
149,462
$
(5,380)
4,853
$
(12) $
— $
— $
4,853
$
(12)
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At December 31, 2015, there were six available-for-sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $12,971,000 and unrealized losses of $126,000 in
a continuous unrealized loss position for twelve months or more. At December 31, 2014 there were sixteen available-for-sale U.S. Treasury securities and
obligations of U.S. government corporations and agencies with a fair value of $75,030,000 and unrealized losses of $1,312,000 in a continuous unrealized
loss position for twelve months or more. At December 31, 2015 and December 31, 2014 there were no held-to maturity 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, 2015 there were two obligations of states and political subdivisions with a fair value of
$979,000 and unrealized losses of $23,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2014, there were ten
obligations of states and political subdivisions with a fair value of $4,416,000 and unrealized losses of $94,000 in a continuous unrealized loss position for
twelve months or more.
Mortgage-backed Securities: GSE Residential. At December 31, 2015 there were seven mortgage-backed security with a fair value of $20,011,000 and
unrealized losses of $611,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2014, there were eleven mortgage-
backed security with a fair value of $37,224,000 and unrealized losses of $802,000 in a continuous unrealized loss position for twelve months or more.
66
Trust Preferred Securities. At December 31, 2015, there was one trust preferred security with a fair value of $1,906,000 and unrealized losses of
$1,224,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2014, there was one trust preferred securities with a fair
value of $364,000 and unrealized losses of $2,936,000 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 2015 or 2014. 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,
2015. 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.
Following are the details for the impaired trust preferred security remaining as of December 31, 2015 (in thousands):
Book
Value
Market Value
Unrealized
Gains (Losses)
Other-than-
temporary
Impairment
Recorded To-date
PreTSL XXVIII
$
3,130
$
1,906
$
(1,224) $
(1,111)
Other securities. At December 31, 2015 and 2014, 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, 2015 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.
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.
67
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, 2015, 2014 and 2013 (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:
2015
2014
2013
$
1,111
$
1,111
$
—
—
—
—
—
—
—
—
—
—
3,989
—
(2,878)
—
—
—
End of period
$
1,111
$
1,111
$
1,111
Maturities of investment securities were as follows at December 31, 2015 (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.
Amortized
Cost
Estimated
Fair Value
$
57,580
$
89,178
52,796
5,143
204,697
312,132
57,564
90,621
54,607
4,002
206,794
312,054
$
$
$
516,829
$
518,848
50,632
$
29,486
5,090
—
50,855
29,804
5,078
—
85,208
$
85,737
Available-for-sale:
Due in one year or less
Due after one-five years
Due after five-ten years
Due after ten years
Mortgage-backed securities: GSE residential
Total available-for-sale
Held-to-maturity:
Due in one year or less
Due after one-five years
Due after five-ten years
Due after ten years
Total held-to-maturity
68
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, 2015 and 2014 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
2015
2014
$
39,232
$
122,579
231,383
45,765
409,487
848,446
75,998
305,851
42,097
11,317
21,627
110,158
179,886
53,129
380,173
744,973
68,225
223,633
15,118
8,736
1,283,709
1,060,685
2,788
14,576
237
13,682
$
1,266,345
$
1,046,766
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 $968,000 and $1,958,000 at December 31, 2015 and 2014, respectively.
Most of the Company’s business activities are with customers located within central Illinois. At December 31, 2015, the Company’s loan portfolio included
$198.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $161.5 million was concentrated in other grain
farming. Total loans to borrowers whose businesses are directly related to agriculture increased $20.1 million from $178.5 million at December 31, 2014
while loans concentrated in other grain farming increased $6.4 million from $155.1 million at December 31, 2014. 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 $62.9 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 $109.1 million of loans to lessors of non-residential buildings and $67.5 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.
69
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 $250,000 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.
70
Adversely classified loans. A detailed analysis is also performed on each adversely classified (substandard or doubtful rated) borrower with an aggregate,
outstanding balance of $250,000 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 a three-year loss migration analysis 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. Consumer loans are evaluated for adverse classification established by federal
banking regulators. Classification standards are generally based on delinquency status, collateral coverage, bankruptcy and the presence of fraud.
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 three-year loss migration 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 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, 2015, 2014 and 2013 (in thousands):
Commercial/
Commercial
Real Estate
Agricultural/
Agricultural
Real Estate
Residential
Real Estate
Consumer
Unallocated
Total
December 31, 2015
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
$
$
$
$
$
$
$
10,914
$
1,360
$
451
(289)
303
(25)
—
2
$
790
267
(64)
1
11,379
$
1,337
$
994
$
134
11,245
$
$
— $
1,337
$
— $
994
$
386
633
(553)
176
642
$
$
— $
642
$
232
$
(8)
—
—
13,682
1,318
(906)
482
224
$
14,576
— $
134
224
$
14,442
807,736
$
198,066
$
232,348
$
43,739
$
— $
1,281,889
744
806,992
$
$
430
197,636
$
$
— $
— $
— $
1,174
232,348
$
43,739
$
— $
1,280,715
71
December 31, 2014
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
December 31, 2013
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
Commercial/
Commercial
Real Estate
Agricultural/
Agricultural
Real Estate
Residential
Real Estate
Consumer
Unallocated
Total
$
10,646
$
192
(86)
162
$
533
825
—
2
$
771
135
(140)
24
10,914
$
1,360
$
790
$
263
10,651
$
$
— $
1,360
$
— $
790
$
377
167
(311)
153
386
$
$
— $
386
$
922
$
13,249
(690)
—
—
629
(537)
341
232
$
13,682
— $
263
232
$
13,419
684,552
$
178,091
$
184,661
$
15,102
$
— $
1,062,406
3,301
681,251
$
$
— $
— $
— $
— $
3,301
178,091
$
184,661
$
15,102
$
— $
1,059,105
9,301
$
558
$
1,861
(764)
248
(30)
—
5
726
171
(141)
15
$
403
$
57
(223)
140
377
$
788
134
—
—
11,776
2,193
(1,128)
408
10,646
$
533
$
771
$
$
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
$
$
— $
— $
— $
172,979
$
187,796
$
14,967
$
— $
— $
5,145
977,659
$
$
$
$
$
$
$
$
$
$
$
$
$
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.
72
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 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, 2015 and 2014 (in
thousands):
Pass
Watch
Substandard
Doubtful
Total
Pass
Watch
Substandard
Doubtful
Total
Pass
Watch
Substandard
Doubtful
Total
Construction &
Land Development
2014
2015
Farm Loans
1-4 Family Residential
Properties
Multifamily Residential
Properties
2015
2014
2015
2014
2015
2014
$
39,067
$
20,842
$
118,103
$
107,976
$
224,552
$
177,764
$
45,180
$
52,793
—
142
—
—
785
—
2,282
2,089
—
1,036
1,181
—
1,454
5,565
—
1,187
2,970
—
243
317
—
—
336
—
$
39,209
$
21,627
$
122,474
$
110,193
$
231,571
$
181,921
$
45,740
$
53,129
Commercial Real Estate
(Nonfarm/Nonresidential)
2015
2014
Agricultural Loans
2014
2015
Commercial & Industrial
Loans
2015
2014
Consumer Loans
2014
2015
$
386,769
$
357,873
$
75,437
$
67,619
$
298,633
$
218,193
$
41,278
$
15,105
10,498
11,905
—
18,817
2,914
—
210
239
—
—
679
—
4,686
1,741
—
4,647
940
—
—
301
—
9
4
—
$
409,172
$
379,604
$
75,886
$
68,298
$
305,060
$
223,780
$
41,579
$
15,118
All Other Loans
Total Loans
2015
2014
2015
2014
$
11,198
$
8,736
$ 1,240,217
$ 1,026,901
—
—
—
—
—
—
19,373
22,299
—
25,696
9,809
—
$
11,198
$
8,736
$ 1,281,889
$ 1,062,406
73
The following table presents the Company’s loan portfolio aging analysis at December 31, 2015 and 2014 (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, 2015
Construction and land development
$
— $
— $
— $
— $
39,209
$
39,209
$
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, 2014
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
$
$
106
1,059
—
251
1,416
65
65
137
—
—
742
—
67
809
74
476
42
—
—
154
—
31
185
—
196
13
—
106
1,955
—
349
2,410
139
737
192
—
122,368
229,616
45,740
408,823
845,756
75,747
122,474
231,571
45,740
409,172
848,166
75,886
304,323
305,060
41,387
11,198
41,579
11,198
1,683
$
1,401
$
394
$
3,478
$ 1,278,411
$ 1,281,889
$
297
$
—
201
—
60
558
16
228
331
—
25
—
224
—
32
281
20
10
10
—
$
— $
322
$
21,305
$
21,627
$
—
385
—
945
1,330
—
98
5
—
—
810
—
1,037
2,169
36
336
346
—
110,193
181,111
53,129
378,567
744,305
68,262
110,193
181,921
53,129
379,604
746,474
68,298
223,444
223,780
14,772
8,736
15,118
8,736
$
1,133
$
321
$
1,433
$
2,887
$ 1,059,519
$ 1,062,406
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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.
74
The following tables present impaired loans as of December 31, 2015 and 2014 (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
2015
Unpaid
Principal
Balance
Recorded
Balance
Specific
Allowance
Recorded
Balance
2014
Unpaid
Principal
Balance
Specific
Allowance
$
— $
— $
— $
785
$
2,960
$
430
—
316
—
746
—
405
23
—
430
—
316
—
746
—
405
23
—
—
—
—
—
—
—
134
—
—
—
67
—
472
1,324
—
83
—
—
—
134
—
986
4,080
—
181
—
—
43
—
—
—
136
179
—
84
—
—
$
$
$
$
1,174
$
1,174
$
134
$
1,407
$
4,261
$
263
142
$
707
$
— $
— $
— $
24
1,373
1
304
28
1,688
1
325
1,844
2,749
79
670
242
—
79
932
256
—
—
—
—
—
—
—
—
—
—
73
1,156
—
1,640
2,869
—
249
15
—
235
2,866
—
3,808
6,909
—
933
60
—
2,835
$
4,016
$
— $
3,133
$
7,902
$
142
$
707
$
— $
785
$
2,960
$
454
1,373
317
304
2,590
79
1,075
265
—
458
1,688
317
325
3,495
79
1,337
279
—
—
—
—
—
—
—
134
—
—
73
1,223
—
2,112
4,193
—
332
15
—
235
3,000
—
4,794
10,989
—
1,114
60
—
—
—
—
—
—
—
—
—
—
—
—
43
—
—
—
136
179
—
84
—
—
$
4,009
$
5,190
$
134
$
4,540
$
12,163
$
263
75
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, 2015, 2014
and 2013 (in thousands):
2015
2014
2013
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
$
142
$
— $
933
$
— $
1,565
$
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
527
1,440
323
310
2,742
82
1,569
319
—
$
4,712
$
2
14
—
2
18
—
8
2
—
28
78
1,276
—
2,205
4,492
—
429
25
—
$
4,946
$
2
12
—
2
16
—
—
1
—
17
107
1,248
—
2,895
5,815
16
1,240
47
—
$
7,118
$
—
—
5
—
3
8
1
10
12
—
31
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 $397,000 of 1-4 Family residential properties, $147,000 of commercial & industrial, $36,000 of commercial real estate, and $21,000 of
consumer loans at December 31, 2015 and $345,000 of 1-4 Family residential properties, $37,000 of commercial real estate loans, $44,000 of farm loans
and $9,000 of consumer loans at December 31, 2014. For the years ended December 31, 2015, 2014 and 2013, 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, 2015 and December 31, 2014 (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
2015
2014
$
142
$
454
975
317
269
2,157
79
928
248
—
785
29
878
—
2,074
3,766
—
332
7
—
$
3,412
$
4,105
76
The aggregate principal balances of nonaccrual, past due ninety days or more loans were $3.4 million and $4.1 million at December 31, 2015 and 2014,
respectively. Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $48,000, $71,000 and $45,000 in
2015, 2014 and 2013, respectively.
Troubled Debt Restructuring
The balance of troubled debt restructurings ("TDRs") at December 31, 2015 and 2014 was $1,743,000 and $2,860,000, respectively. Approximately $0 and
$234,000 in specific reserves have been established with respect to these loans as of December 31, 2015 and 2014, 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, 2015 and 2014 (in thousands).
Troubled debt restructurings:
Construction and land development
Farm Loans
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
Farm Loans
Commercial real estate
Loans secured by real estate
Commercial and industrial loans
Consumer Loans
Total
2015
2014
$
142
$
232
515
124
1,013
491
239
1,743
$
397
$
—
36
433
147
21
601
$
$
$
$
785
44
503
1,283
2,615
236
9
2,860
345
44
37
426
—
9
435
The following table presents loans modified as TDRs during the years ended December 31, 2015 and 2014 as a result of various modified loan factors (in
thousands):
December 31, 2015
December 31, 2014
Number of
Modifications
Recorded
Investment
Type of
Modifications
Number of
Modifications
Recorded
Investment
Type of
Modifications
Farm Loans
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
4
5
1
10
5
4
232
(b)(c)
131
(b)(c)
33
(b)(c)
396
375
(b)(c)
233
(b)(c)
19
$
1,004
77
2
4
1
7
—
—
7
$
44
(b)
250
(b)(c)
501
(b)(c)
795
—
—
795
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, 2015 and 2014.
At December 31, 2015, the balance of real estate owned includes $477,000 of foreclosed residential real estate properties recorded as a result of obtaining
physical possession of the property. At December 31, 2015, the recorded investment of consumer mortgage loans secured by residential real estate
properties for which formal foreclosure proceeds are in process is $55,000.
Note 6 -- Premises and Equipment, Net
Premises and equipment at December 31, 2015 and 2014 consisted of:
Land
Buildings and improvements
Furniture and equipment
Leasehold improvements
Construction in progress
Subtotal
Accumulated depreciation and amortization
Total
2015
2014
$
6,112
$
31,618
16,621
4,084
1
58,436
27,096
$
31,340
$
5,966
29,617
15,936
2,646
—
54,165
26,813
27,352
Depreciation and amortization expense was $2.20 million, $2.40 million and $2.49 million for the years ended December 31, 2015, 2014 and 2013,
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, 2015 and 2014:
Goodwill not subject to amortization
Intangibles from branch acquisition
Core deposit intangibles
Customer list intangibles
2015
2014
Gross Carrying
Value
Accumulated
Amortization
Gross Carrying
Value
Accumulated
Amortization
$
$
44,767
$
3,760
$
29,513
$
3,015
15,202
3,731
3,015
8,017
1,919
3,015
8,986
1,904
3,760
3,015
7,142
1,904
66,715
$
16,711
$
43,418
$
15,821
Goodwill of $14.3 million was recorded for the acquisition of twelve Old National Bank Branches during the third quarter of 2015. The goodwill consists
largely of the synergies and economies of scale expected from combining the operations of the Company and the ONB Branches. All of the goodwill was
assigned to the banking segment of the Company. The Company expects this goodwill to be fully deductible for tax purposes. In addition, goodwill of
$980,000 was recorded for the acquisition of illiana during the fourth quarter of 2015. The goodwill consists primarily of the customer list of the agency.
78
The following table provides a reconciliation of the purchase price paid for the Branches and the amount of goodwill recorded (in thousands):
Purchase price
Less purchase accounting adjustments:
Fair value of loans
Fair value of premises and equipment
Fair value of time deposits
Core deposit intangible
Other Assets
Resulting goodwill from acquisition
3,377
125
837
(6,216)
259
$
15,892
(1,618)
14,274
$
During the fourth quarter of 2015, goodwill of $980,000 was also recorded for the acquisition of certain assets used by Illiana Insurance Agency, Ltd., in connection
with its health plan and life insurance and annuity's business. The following table provides a reconciliation of the purchase price paid for Illiana and the amount
of goodwill recorded (in thousands):
$
$
2,807
(1,827)
980
2015
2014
2013
876
15
643
—
$
891
$
643
$
674
—
674
Purchase price
Less purchase accounting adjustments:
Insurance company intangibles
Resulting goodwill from acquisition
Total amortization expense for the years ended December 31, 2015, 2014 and 2013 was as follows:
Core deposit intangibles
Customer list intangibles
Estimated amortization expense for each of the five succeeding years is shown in the table below:
For year ended 12/31/16
$
For year ended 12/31/17
For year ended 12/31/18
For year ended 12/31/19
For year ended 12/31/20
1,572
1,322
1,193
1,079
933
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, 2015 and 2014, 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.
79
Note 8 -- Deposits
As of December 31, 2015 and 2014, deposits consisted of the following:
Demand deposits:
Non-interest bearing
Interest-bearing
Savings
Money market
Time deposits
Total deposits
2015
2014
$
342,636
$
490,838
325,836
329,820
243,438
222,116
306,631
273,958
251,095
218,277
$
1,732,568
$
1,272,077
Total interest expense on deposits for the years ended December 31, 2015, 2014 and 2013 was as follows:
Interest-bearing demand
Savings
Money market
Time deposits
Total
2015
2014
2013
$
$
$
117
398
605
1,162
2,282
$
$
101
375
588
1,287
2,351
$
102
452
693
1,456
2,703
As of December 31, 2015, 2014 and 2013, 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
2015
2014
2013
$
88,855
$
98,445
$
493
598
96,715
546
The following table shows the amount of maturities for all time deposits as of December 31, 2015:
Less than 1 year
$
167,359
1 year to 2 years
2 years to 3 years
3 years to 4 years
4 years to 5 years
Over 5 years
Total
32,942
20,174
10,578
11,087
1,298
$
243,438
In 2015 the Company maintained account relationships with various public entities throughout its market areas. Ninety-four public entities had total balances
of $122.3 million in various checking accounts and time deposits as of December 31, 2015. These balances are subject to change depending upon the cash
flow needs of the public entity.
80
Note 9 -- Repurchase Agreements and Other Borrowings
As of December 31, 2015 and 2014 borrowings consisted of the following:
Securities sold under agreements to repurchase
Federal Home Loan Bank (FHLB) Fixed-term advances
Subordinated debentures
Total
Aggregate annual maturities of FHLB advances and subordinated debentures at December 31, 2015 are:
2015
2014
128,842
$
20,000
20,620
169,462
$
121,869
20,000
20,620
162,489
$
$
2016
2017
2018
2019
2020
Thereafter
$
$
5,000
—
—
—
5,000
30,620
40,620
FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. At December 31, 2015 the advances totaling $20 million were
as follows:
•
•
•
•
$5 million advance with a 10-year maturity, at 4.58%, due July 14, 2016, one year lockout, callable quarterly
$5 million advance with a 6-year maturity, at 2.30% due August 24, 2020
$5 million advance with a 7-year maturity, at 2.55% due October 1, 2021
$5 million advance with a 8-year maturity, at 2.40%, due January 9, 2023
Securities sold under agreements to repurchase have overnight maturities and a weighted average rate of .06%. 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. 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
2015
2014
2013
$
128,842
$
121,869
$
113,748
97,478
119,187
87,468
Securities sold under agreements to repurchase were $128.8 million at December 31, 2015, an increase of $7.0 million from $121.9 million at December 31,
2014. The increase during 2015 was primarily due to increases in balances of customers due to changes in cash flow needs for their businesses. All of the
transactions have overnight maturities.
81
The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the
fair value of the repurchase agreement should the Company be in default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement
(i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The
collateral is held by a third party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment
securities. For government entity repurchase agreements, the collateral is held by the Company in a segregated custodial account under a tri-party
agreement. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated
levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained, while
mitigating the potential of over-collateralization in the event of counterparty default. Repurchase agreements by class of collateral pledged are as follows (in
thousands):
US Treasury securities and obligations of U.S. government corporations & agencies
Mortgage-backed securities: GSE: residential
Total
December 31, 2015
$
$
85,805
43,037
128,842
At December 31, 2015 and 2014, there was no outstanding loan balance on the revolving credit agreement with The Northern Trust Company. This loan was
renewed on April 17, 2015. 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, 2015) 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, 2015 and 2014.
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, 2015 and 2014 the rate was
3.17% and 3.08%, respectively. The Company used the proceeds of the offering for general corporate purposes.
On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through Trust II, a statutory
business trust and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II for the purpose
of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s
investment in common equity of Trust II, a total of $10,310,000, was invested in junior subordinated debentures of the Company. The underlying junior
subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then
converted to floating rate (LIBOR plus 160 basis points) after June 15, 2011 (2.11% and 1.84% at December 31, 2015 and 2014). 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.
In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt rules that prohibit banks and
their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and
private equity funds). This rule is generally referred to as the “Volcker Rule.” On December 10, 2013, the federal banking agencies issued final rules to
implement the prohibitions required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry
regarding the adverse impact the final rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies
approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred
securities. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities under $15
billion in assets if (1) the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the
offering proceeds received by the collateralized debt obligation were invested primarily in qualifying trust preferred collateral, and (3) the banking entity’s
interests in the collateralized debt obligation was acquired on or prior to December 10, 2013. Although the Volcker Rule impacts many large banking entities,
the Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company or First Mid Bank.
82
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 capital standards to ensure capital adequacy require the Company and its subsidiary bank to maintain
a minimum capital amounts and ratios (set forth in the table below). Management believes that, as of December 31, 2015 and 2014, the Company and First
Mid Bank met all capital adequacy requirements.
As of December 31, 2015 and 2014, 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 capital, Tier 1 risk-based capital, Common
Equity Tier 1 risk-based capital, and Tier 1 leverage ratios must be maintained as set forth in the table below. At December 31, 2015, there were no
conditions or events since the most recent notification that management believes have changed this categorization.
December 31, 2015
Total Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Common Equity Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to average assets)
Company
First Mid Bank
December 31, 2014
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
$
204,033
14.25% $
114,576
> 8.00%
N/A
N/A
195,937
13.75%
114,012
> 8.00
$
142,514
> 10.00%
189,457
181,361
142,057
181,361
189,457
181,361
13.23%
12.73%
9.92%
12.73%
9.20%
8.83%
$
180,678
15.60% $
172,991
15.02%
166,996
159,309
166,996
159,309
14.42%
13.84%
10.52%
10.08%
85,932
85,509
64,449
64,131
82,385
82,137
92,675
92,110
46,338
46,055
63,493
63,210
> 6.00
> 6.00
> 4.50
> 4.50
> 4.00
> 4.00
N/A
N/A
114,012
> 8.00
N/A
92,634
N/A
> 6.50
N/A
N/A
102,671
> 5.00
> 8.00%
N/A
N/A
> 8.00
$
115,137
> 10.00%
> 4.00
> 4.00
> 4.00
> 4.00
N/A
N/A
69,082
> 6.00
N/A
N/A
79,012
> 5.00
The Company's risk-weighted assets, capital and capital ratios for December 31, 2015 are computed in accordance with Basel III capital rules which were
effective January 1, 2015. Prior periods are computed following previous rules. See heading "Basel III" in the Overview section of this report for a more
detailed description of Basel III rules. The decrease in capital ratios from December 31, 2014 is primarily due to additional assets from ONB Branch
acquisition partially offset by the capital raise completed by the Company during the second quarter of 2015.
83
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, 2015 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, 2015,
• 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.
84
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, 2015 and 2014 (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, 2015
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, 2014
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
$
$
$
90,141
$
— $
90,141
$
110,717
312,054
1,906
4,030
518,848
$
—
—
—
64
64
110,717
312,054
—
3,966
$
516,878
$
99,957
$
— $
99,957
$
78,084
195,401
364
4,050
—
—
—
55
55
78,084
195,401
—
3,995
$
377,437
$
—
—
—
1,906
—
1,906
—
—
—
364
—
364
Total available-for-sale securities
$
377,856
$
The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2015
and 2014 is summarized as follows (in thousands):
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
Trust Preferred Securities
December 31,
2015
December 31,
2014
$
364 $
—
—
—
1,712
—
—
—
(170)
1,906 $
— $
$
$
191
—
—
—
525
—
—
—
(352)
364
—
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.
85
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, 2015 was $428,000 and a fair value of $294,000 resulting in specific loss
exposures of $134,000. As of December 31, 2014, the total carrying amount of loans for which a specific reserve had been established was $1,576,000.
These loans had a fair value of $1,313,000 which resulted in specific loss exposures of $263,000.
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, 2015 was $477,000.
Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to
$423,000. The total carrying amount of other real estate owned as of December 31, 2014 was $263,000. Other real estate owned included in the total
carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $0.
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, 2015 and 2014 (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
$
$
294
$
423
— $
—
— $
—
294
423
1,313
$
— $
— $
1,313
December 31, 2015
Impaired loans (collateral dependent)
Foreclosed assets held for sale
December 31, 2014
Impaired loans (collateral dependent)
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.
86
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, 2015.
Trust Preferred Securities
Fair Value
(in thousands)
$
1,906
Valuation
Technique
Discounted
cash flow
Unobservable Inputs
Discount rate
Range (Weighted Average)
11.4%
Constant prepayment rate (1)
Cumulative projected prepayments
Probability of default
Projected cures given deferral
Loss severity
1.3%
23.6%
0.4%
100%
97.3%
Impaired loans (collateral dependent)
Foreclosed assets held for sale
(1) Every five years
294
423
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% )
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, 2014.
Trust Preferred Securities
Fair Value
(in thousands)
$
364
Valuation
Technique
Discounted
cash flow
Unobservable Inputs
Range (Weighted Average)
Discount rate
Constant prepayment rate (1)
Cumulative projected prepayments
Probability of default
Projected cures given deferral
Loss severity
11.6%
1.3%
24.4%
0.1%
100.0%
97.4%
Impaired loans (collateral dependent)
1,313
Third party
valuations
Discount to reflect realizable value
0%
-
40% (
20% )
(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, Federal Funds Sold, Interest Receivable, Federal Reserve and Federal Home Loan Bank Stock
The carrying amount approximates fair value.
Certificates of Deposit Investments
The fair value of certificates of deposit investments is estimated using a discounted cash flow calculation that applies the rates currently offered for
deposits of similar remaining maturities.
Held-to-Maturity Securities
Fair Value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans Held for Sale
Loans expected to be sold are classified as held for sale and are recorded at the lower of aggregate cost or market value.
87
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.
Interest Payable
The carrying amount approximates fair value.
Junior Subordinated Debentures, Federal Home Loan Bank Borrowings, and Other Borrowings
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
88
The following tables present estimated fair values of the Company’s financial instruments at December 31, 2015 and 2014 in accordance with FAS 107-1
and APB 28-1, codified with ASC 805 (in thousands):
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
December 31, 2015
Financial Assets
Cash and due from banks
Federal funds sold
Certificates of deposit investments
Available-for-sale securities
Held-to-maturity securities
Loans held for sale
$
115,292
$
115,292
$
115,292
$
492
25,000
518,848
85,208
968
492
25,056
518,848
85,737
968
Loans net of allowance for loan losses
1,266,345
1,265,126
Interest receivable
Federal Reserve Bank stock
Federal Home Loan Bank stock
Financial Liabilities
Deposits
8,085
2,272
3,391
8,085
2,272
3,391
1,732,568
1,732,463
Securities sold under agreements to repurchase
128,842
128,843
Interest payable
Federal Home Loan Bank borrowings
Junior subordinated debentures
356
20,000
20,620
356
20,422
13,207
December 31, 2014
Financial Assets
Cash and due from banks
Federal funds sold
Available-for-sale securities
Held-to-maturity securities
Loans held for sale
$
51,236
$
51,236
$
51,236
$
494
377,856
53,650
1,958
494
377,856
53,937
1,958
Loans net of allowance for loan losses
1,046,766
1,051,110
Interest receivable
Federal Reserve Bank stock
Federal Home Loan Bank stock
Financial Liabilities
Deposits
6,828
1,522
3,391
6,828
1,522
3,391
1,272,077
1,272,358
Securities sold under agreements to repurchase
121,869
121,870
Interest payable
Federal Home Loan Bank borrowings
Junior subordinated debentures
285
20,000
20,620
285
20,541
12,528
89
— $
—
25,056
516,878
85,737
968
—
8,085
2,272
3,391
1,489,130
128,843
356
20,422
13,207
— $
—
377,437
53,937
1,958
—
6,828
1,522
3,391
1,053,800
121,870
285
20,541
12,528
—
—
—
1,906
—
—
1,265,126
—
—
—
243,333
—
—
—
—
—
—
364
—
—
1,051,110
—
—
—
218,558
—
—
—
—
492
—
64
—
—
—
—
—
—
—
—
—
—
—
494
55
—
—
—
—
—
—
—
—
—
—
—
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, 2015, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately
$3,566,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $3,566,000 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 2015 and 2014 the Company issued 6,153 common shares and 13,724 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. There have been no options awarded since 2008. During 2015, the Company
awarded 18,002 shares as stock unit awards. During 2014 and 2013, the Company awarded 19,377 shares and 14,054 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 2015, 2014 or 2013.
The following table summarizes the compensation cost, net of forfeitures, related to stock-based compensation for the years ended December 31, 2015,
2014 and 2013:
Stock and stock unit awards:
Pre-tax compensation expense
Income tax benefit
Total share-based compensation expense, net of income taxes
2015
2014
2013
$
$
378
$
(132)
246
$
376
$
(132)
244
$
339
(118)
221
90
A summary of option activity under the SI Plan and the 1997 Stock Incentive Plan as of December 31, 2015, 2014 and 2013, 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
2015
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
$24.64
0.00
0.00
24.43
$24.67
$24.67
2.42
2.42
$
$
63,000
63,000
Shares
52,000
0
0
6,500
45,500
45,500
There were no options exercised during 2015. Stock options for 24,500 shares of common stock were not considered in computing the aggregate intrinsic
value of outstanding shares and exercisable shares for 2015 because they were anti-dilutive.
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
2014
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
$26.20
0.00
0.00
27.25
$24.64
$24.64
3.43
3.43
$
$
—
—
Shares
128,750
0
0
76,750
52,000
52,000
There were no options exercised during 2014. Stock options for 52,000 shares of common stock were not considered in computing the aggregate intrinsic
value of outstanding shares and exercisable shares for 2014 because they were anti-dilutive.
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
2.44
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.
All options were vested as of December 31, 2013.
91
The total fair value of shares subject to options that vested or were forfeited during the years ended December 31, 2015, 2014 and 2013, was $0, $0, and
$17,000, respectively . The following table summarizes information about stock options under the SI Plan outstanding at December 31, 2015:
Range of Exercise Prices
$22.50 to $24.50
$24.50 to $26.50
Options Outstanding
Options Exercisable
Number
Outstanding
Weighted-Average
Remaining
Contractual Life
Weighted-Average
Exercise Price
Number
Exercisable
Weighted-Average
Exercise Price
21,000
24,500
45,500
2.96
1.95
2.42
$23.00
$26.10
$24.67
21,000
24,500
45,500
$23.00
$26.10
$24.67
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). During 2015,
the Board approved a revision to the LTIP, whereby all awards granted to participants were stock unit awards, cumulative with a three-year performance
period and to be settled entirely in shares. All other provisions of the plan remain the same. The following table summarizes non-vested stock and stock unit
activity for the years ended December 31, 2015, 2014 and 2013:
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
Fair value of shares vested
2015
Weighted-avg
Grant-date Fair
Value
$22.95
20.14
23.77
0.00
$20.87
Shares
26,897
18,002
(14,730)
0
30,169
2014
Weighted-avg
Grant-date
Fair Value
$24.16
22.00
23.72
23.12
Shares
25,337
14,054
(14,592)
0
$22.95
24,799
Shares
24,799
19,377
(14,499)
(2,780)
26,897
2013
Weighted-avg
Grant-date
Fair Value
$22.16
23.46
20.01
0.00
$24.16
$
350,075
$
343,910
$
329,721
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, 2015, 2014 and 2013, there was $386,000, $435,000, and $470,000, respectively, of total unrecognized
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 100% of the first 3% and 50% of the next 2% 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 $1,080,000,
$1,074,000 and $1,012,000 in 2015, 2014 and 2013, 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 a senior officer that retired December 31,
2013. Total expense under these two agreements amounted to $29,000, $15,000 and $17,000 in 2015, 2014 and 2013, respectively. The current liability
recorded for these two agreements was $715,000 and $785,000, as of December 31, 2015 and 2014, respectively.
92
Note 15 -- Income Taxes
The components of federal and state income tax expense for the years ended December 31, 2015, 2014 and 2013 were as follows:
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Total
2015
2014
2013
$
7,357
$
6,956
$
1,841
9,198
(84)
104
20
2,287
9,243
(17)
28
11
5,899
1,976
7,875
750
221
971
$
9,218
$
9,254
$
8,846
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 2015, 2014 and 2013, 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
2015
2014
2013
$
9,006
$
8,650
$
8,249
(1,103)
11
1,264
41
(1)
(954)
10
1,505
43
—
(877)
9
1,429
36
—
$
9,218
$
9,254
$
8,846
Tax expense recorded by the Company during 2015, 2014 and 2013 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 2012.
93
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, 2015
and 2014 are presented below:
Deferred tax assets:
Allowance for loan losses
Available-for-sale investment securities
Deferred compensation
Supplemental retirement
Core deposit premium and other intangible assets
Other-than-temporary impairment on securities
Stock Compensation Expense
Deferred Revenue
Acquisition Costs
Other
Total gross deferred tax assets
Deferred tax liabilities:
Deferred loan costs
Intangibles amortization
Prepaid expenses
FHLB stock dividend
Depreciation
Purchase accounting
Accumulated accretion
Available-for-sale investment securities
Total gross deferred tax liabilities
Net deferred tax assets
2015
2014
$
5,735
$
—
1,046
281
400
438
197
98
430
155
8,780
133
3,791
340
278
766
7
72
462
5,849
$
2,931
$
5,522
559
1,108
317
173
449
183
127
168
137
8,743
110
3,441
296
285
600
—
39
—
4,771
3,972
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, 2015 and 2014 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, 2015. As of December 31, 2015, approximately $35.2 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.
94
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, 2015 and 2014 were as follows (in thousands):
Unused commitments and lines of credit:
Commercial real estate
Commercial operating
Home equity
Other
Total
Standby letters of credit
2015
2014
$
$
$
27,806
$
174,317
33,028
56,353
291,504
6,806
$
$
32,927
133,884
23,285
47,498
237,594
5,193
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, 2015 and 2014. 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 $25,617,000 and
$32,050,000 at December 31, 2015 and 2014, respectively. Activity during 2015 and 2014 was as follows:
Beginning balance
New loans
Loan repayments
Ending balance
2015
2014
32,050
$
80
(6,513)
25,617
$
24,539
11,154
(3,643)
32,050
$
$
Deposits from related parties held by First Mid Bank at December 31, 2015 and 2014 totaled $107,606,000 and $92,973,000, respectively.
95
Note 19 -- Business Combinations
On August 14, 2015, First Mid-Illinois Bank completed the acquisition of twelve Illinois bank branches ("ONB Branches") from Old National Bank, a national
banking association having its principal office in Evansville, Indiana. The acquisition expanded First Mid Bank's service area into Southern Illinois and
provided a stable source of core deposits. Pursuant to the terms of the Branch Purchase and Assumption Agreement, dated January 30, 2015, as amended,
by and between First Mid Bank and Old National Bank, First Mid Bank, among other matters, assumed certain deposit liabilities and acquired certain loans,
as well as cash, real property, furniture, and other fixed operating assets associated with the ONB Branches. The deposit and loan balances assumed were
approximately$453 million and $156 million at book value, respectively. First Mid Bank also assumed certain leases, and entered into certain subleases,
related to the ONB Branches.
First Mid Bank agreed to pay Old National Bank the sum of: (i) a deposit premium of 3.6% on the amount of deposit accounts of the ONB Branches, other
than brokered deposits and municipal deposits, which equated to approximately $15.9 million, (ii) $500,000, representing the fixed deposit premium related
to the municipal deposits of the Branches, (iii) the principal amount of the loans being purchased, plus the accrued but unpaid interest, (iv) the aggregate net
book value of the other assets purchased including facilities of approximately $4.5 million, and (v) the aggregate amount of cash on hand of $2.7 million as of
the closing. The acquisition was settled by Old National Bank paying cash of approximately $276.8 million to First Mid Bank for the difference between these
amounts and the total deposits assumed.
The purchase was accounted for under the acquisition method in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations,”
and accordingly the assets and liabilities were recorded at their fair values on the date of acquisition. The following table summarizes the estimated fair
values of assets acquired and liabilities assumed at the date of acquisition (in thousands).
Assets
Cash
Loans
Premises and equipment
Goodwill
Core deposit intangible
Other assets
Total assets acquired
Liabilities
Deposits
Securities sold under agreements to repurchase
Other liabilities
Total liabilities assumed
Acquired Book
Value
Fair Value
Adjustments
As Recorded by
First Mid Bank
$
279,468
$
— $
155,774
4,547
—
—
1,433
(3,377)
(125)
14,274
6,216
(259)
279,468
152,397
4,422
14,274
6,216
1,174
$
$
$
441,222
$
16,729
$
457,951
452,810
$
837
$
453,647
3,797
507
—
—
3,797
507
457,114
$
837
$
457,951
The Company recognized approximately $1.4 million of costs related to completion of the acquisition during 2015. These acquisition costs are included in
legal and professional and other expense. The difference between the fair value and acquired value of the purchased loans of $3,377,000 is being accreted
to interest income over the remaining term of the loans. The difference between the fair value and acquired value of the assumed time deposits of $837,000
is being amortized to interest expense over the remaining term of the time deposits. The core deposit intangible asset, with a fair value of $6,216,000, will be
amortized on an accelerated basis over its estimated life of ten years
96
The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the
purchase accounting adjustments and acquisition expenses, had the acquisition taken place at the beginning of the period (in thousands):
Twelve months ended December 31,
2015
2014
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Dividends on preferred shares
$
66,680
$
1,483
26,001
59,944
31,254
11,207
20,047
2,200
Net income available to common stockholders
$
17,847
$
Earnings per share
Basic
Diluted
$2.30
$2.19
61,943
838
24,141
56,851
28,395
10,579
17,816
4,152
13,664
$2.28
$2.13
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
7,775,490
9,137,689
6,002,766
8,371,687
The unaudited pro forma condensed combined financial statements do not reflect any anticipated cost savings and revenue enhancements. Accordingly, the
pro forma results of operations of the Company as of and after the business combination may not be indicative of the results that actually would have
occurred if the combination had been in effect during the periods presented or of the results that may be attained in the future.
Actual revenue and earnings of the ONB branches included in the consolidated statement of income of the Company for the year ended December 31, 2015,
was $3,270,000 and $(228,380), respectively.
Note 20 -- 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 $1,749,000,
$1,240,000 and $1,297,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Future minimum lease payments under operating leases
are:
$
2016
2017
2018
2019
2020
Thereafter
Total minimum lease payments
$
2,594
2,501
2,500
2,014
2,014
36,685
48,308
97
Note 21 -- Parent Company Only Financial Statements
Presented below are condensed balance sheets, statements of income and cash flows for the Company:
First Mid-Illinois Bancshares, Inc. (Parent Company)
Balance Sheets
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
$
$
$
December 31,
2015
2014
1,660
$
2,713
222,116
950
1,729
2,789
180,774
2,248
227,439
$
187,540
550
$
20,620
1,260
22,430
205,009
550
20,620
1,454
22,624
164,916
187,540
Total Liabilities and Stockholders’ equity
$
227,439
$
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 before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
Other comprehensive income (loss), net of taxes
Years ended December 31,
2015
2014
2013
$
6,094
$
7,900
$
66
6,160
2,556
3,604
974
4,578
11,934
16,512
1,598
65
7,965
2,425
5,540
948
6,488
8,973
15,461
7,505
1,438
64
1,502
2,233
(731)
876
145
14,577
14,722
(12,924)
Comprehensive income
$
18,110
$
22,966
$
1,798
98
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 operating activities
Cash flows from investing activities:
Investment in subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Conversion of preferred stock to shares of common 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
Decrease in cash
Cash at beginning of year
Cash at end of year
Years ended December 31,
2015
2014
2013
$
16,512
$
15,461
$
14,722
87
6,094
(11,934)
(4,707)
37
6,089
(27,825)
(27,825)
—
28,222
(1,066)
(2,002)
(3,487)
21,667
(69)
1,729
110
7,900
(8,973)
(7,412)
260
7,346
—
—
(24,635)
25,123
(1,763)
(4,339)
(2,648)
(8,262)
(916)
2,645
$
1,660
$
1,729
$
116
1,438
(14,577)
(1,512)
180
367
—
—
—
1,303
(4,619)
(4,050)
(2,014)
(9,380)
(9,013)
11,658
2,645
99
Note 22 -- Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the two years ended December 31, 2015 and 2014:
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 2015
March 31
June 30
September 30
December 31
$
13,439
$
14,172
$
14,943
$
16,697
827
12,612
265
12,347
4,799
10,804
6,342
2,303
4,039
550
828
13,344
143
13,201
4,537
11,230
6,508
2,352
4,156
550
947
13,996
481
13,515
5,009
12,882
5,642
1,979
3,663
550
897
15,800
429
15,371
6,199
14,332
7,238
2,584
4,654
550
4,104
$0.49
0.48
Net income available to common stockholders
$
3,489
$
3,606
$
3,113
$
Basic earnings per common share
Diluted earnings per common share
$0.50
0.48
$0.50
0.49
$0.37
0.37
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 2014
March 31
June 30
September 30
December 31
$
13,362
$
13,600
$
13,807
$
13,965
815
12,547
323
12,224
4,481
10,960
5,745
2,138
3,607
1,104
2,503
0.43
0.43
$
$
788
12,812
128
12,684
4,990
11,214
6,460
2,431
4,029
1,104
2,925
0.49
0.48
$
$
805
13,002
44
12,958
4,402
11,090
6,270
2,355
3,915
1,105
2,810
0.48
0.47
$
$
844
13,121
134
12,987
4,496
11,243
6,240
2,330
3,910
839
3,071
0.48
0.47
$
$
100
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, 2015 and 2014 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, 2015. 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, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2015, 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, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 4, 2016 expressed an unqualified opinion
on the effectiveness of the Company’s internal control over financial reporting.
Decatur, Illinois
March 4, 2016
101
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, 2015. 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, 2015, 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, 2015 based on the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control—Integrated Framework (2013).” Based on the
assessment, management determined that, as of December 31, 2015, 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, 2015 has been
audited by BKD, LLP, an independent registered public accounting firm, as stated in their report following.
March 4, 2016
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 2015 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
102
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, 2015, based on criteria established in
Internal Control – Integrated Framework (2013) 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,
2015, based on criteria established in Internal Control – Integrated Framework (2013) 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 4, 2016 expressed an unqualified opinion thereon.
Decatur, Illinois
March 4, 2016
103
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
2016 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 2016 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
2016 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 2016
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 2016 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)
—
45,500 (2)
—
45,500
$
$
—
24.67 (3)
—
24.67
359,829 (1)
239,261 (4)
—
599,090
(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.
104
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 2016 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 2016 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 2016 Annual Meeting of the Company’s
shareholders under the caption “Fees of Independent Auditors.”
PART IV
ITEM 15.
EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
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, 2015 and 2014
Consolidated Statements of Income -- For the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income -- For the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity -- For the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2015, 2014 and 2013.
•
•
•
•
•
(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.
105
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 4, 2016
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 4th day of March 2016, 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, Senior Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Holly A. Bailey, Director
Robert Cook, Director
Steven L. Grissom, Director
Gary W. Melvin, Director
William S. Rowland, Director
Ray A. Sparks, Director
James Zimmer, Director
106
Exhibit
Number
2.1
2.2
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Exhibit Index to Annual Report on Form 10-K
Description and Filing or Incorporation Reference
Branch Purchase and Assumption Agreement between Old National Bank and First Mid-Illinois Bank & Trust, N.A., dated as of January 30,
2015
Incorporated by reference to Exhibit 2.1 to First Mid-Illinois Bancshares, Inc.'s Current Report on Form 8-K filed with the SEC on January 30, 2015.
First Amendment to Branch Purchase and Assumption Agreement between First Mid-Illinois Bank & Trust, N.A. and Old National Bank, dated
August 14, 2015
Incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K/A filed October 23, 2015.
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.
The Registrant agrees to furnish to the Commission, upon request, a copy of each instrument with respect to issues of long-term debt involving a total
amount which does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis.
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.
Amendment No. 1 to the Rights Agreement
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 January 21, 2015.
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.
Form of Securities Purchase Agreement, by and among the Company and the purchasers thereto, effective June 18, 2015
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 June 19, 2015.
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.
First Amendment to Employment Agreement between the Company and John W. Hedges
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, 2014.
Employment Agreement between the Company and John W. Hedges
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, 2015.
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 28,2015.
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 28, 2015.
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 January 28, 2015.
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.
Employment Agreement between the Company and Amanda D. Lewis
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 29, 2014.
10.10 Amended and Restated Deferred Compensation Plan
Incorporated by reference to Exhibit 10.4 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the for the year ended
December 31, 2005.
107
Exhibit
Number
10.11
10.12
10.13
10.14
10.15
10.16
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.
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.
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.
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.
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.
Form of Stock Unit Award Agreement
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on September 27,
2011.
10.17 Supplemental Executive Retirement Plan
Incorporated by reference to Exhibit 10.8 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the for the year ended
December 31, 2005.
10.18
First Amendment to Supplemental Executive Retirement Plan
Incorporated by reference to Exhibit 10.9 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the for the year ended
December 31, 2005.
10.19 Participation Agreement (as Amended and Restated) to Supplemental Executive Retirement Plan between the Company and
William S. Rowland
Incorporated by reference to Exhibit 10.10 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005.
10.20 Description of Incentive Compensation Plan
Incorporated by reference to Exhibit 10.16 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008.
11.1
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)
108
Computation of Earnings Per Share
The Company follows Financial Accounting Standards Board's Statement No. 128, "Earnings Per Share" ("SFAS 128"), codified in ASC 260, in which income
for Basic Earnings Per Share ("EPS") is adjusted for dividends attributable to preferred stock and is based on the weighted average number of common
shares outstanding. Diluted EPS is computed by using the weighted average number of common shares outstanding, increased by the assumed conversion
of the convertible preferred stock and the assumed conversion of stock options and restricted stock.
The components of basic and diluted earnings per share for the years ended December 31, 2015, 2014 and 2013 are as follows:
Exhibit 11.1
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
2015
2014
2013
$
16,512,000
$
15,461,000
$
14,722,000
$
$
(2,200,000)
(4,152,000)
(4,417,000)
14,312,000
11,309,000
10,305,000
7,775,490
6,002,766
5,934,628
1.84
$
1.88
$
1.74
14,312,000
$
11,309,000
$
10,305,000
2,200,000
4,152,000
—
16,512,000
15,461,000
10,305,000
7,775,490
6,002,766
5,934,628
—
6,851
1,355,348
1,362,199
9,137,689
—
11,725
2,357,196
2,368,921
8,371,687
2,090
8,184
—
10,274
5,944,902
Diluted earnings per common share
$
1.81
$
1.85
$
1.73
The following shares were not considered in computing diluted earnings per share for the years ended December 31, 2015, 2014 and 2013 because they
were anti-dilutive:
Stock options to purchase shares of common stock
Average dilutive potential common shares associated with convertible preferred stock
2015
2014
2013
45,500
—
52,000
—
130,500
2,494,801
Exhibit 21.1
Subsidiaries of the Company
First Mid-Illinois Bank & Trust, N.A. (a national banking association)
Mid-Illinois Data Services, Inc. (a Delaware corporation)
The Checkley Agency, Inc. doing business as First Mid Insurance Group (an Illinois corporation)
First Mid-Illinois Statutory Trust I (a business trust)
First Mid-Illinois Statutory Trust II (a business trust)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
The Board of Directors
First Mid-Illinois Bancshares, Inc.
Re: Registration Statements
Registration No. 333-81850 on Form S-3
Registration No. 333-207199 on Form S-3
Registration No. 033-64061 on Form S-8
Registration No. 033-64139 on Form S-8
Registration No. 333-69673 on Form S-8
Registration No. 333-81852 on Form S-8
Registration No. 333-148080 on Form S-8
Registration No. 333-186919 on Form S-8
We consent to incorporation by reference in the Registration Statement on Form S-3 and S-8 of First Mid-Illinois Bancshares, Inc. of our reports dated
March 4, 2016, on our audits of the consolidated financial statements of First Mid-Illinois Bancshares, Inc. as of December 31, 2015 and 2014 and for each
of three years in the period ended December 31, 2015, and the effectiveness of the Company's internal control over financial reporting as of December 31,
2015 which reports appear in the December 31, 2015 annual report on Form 10-K of First Mid-Illinois Bancshares, Inc.
Decatur, Illinois
March 4, 2016
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 4, 2016
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. 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 4, 2016
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, 2015 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 4, 2016
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, 2015 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 4, 2016
Michael L. Taylor
Chief Financial Officer
E xecuti ve Man ag ement Tea m
Boa rd o f Dir ectors
HOLLY A. BAILEY
President, Howell Asphalt Company
President, Howell Paving, Inc.
ROBERT S. COOK
Managing Partner,
TAR CO Investments, LLC
JOSEPH R. DIVELY
Chairman, President
and Chief Executive Officer,
First Mid-Illinois Bancshares, Inc.
STEVEN L. GRISSOM
Chief Executive Officer,
SKL Investment Group, LLC
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
Senior Advisor,
Mattoon Area Family YMCA
JAMES E. ZIMMER
Owner,
Zimmer Real Estate Properties, LLC
Co-Founder, Bio-Enzyme
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
Senior Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Senior Executive Vice President, Chief Financial Officer,
First Mid-Illinois Bank & Trust, N.A.
JOHN W. HEDGES
Senior Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Senior Executive Vice President, Chief Credit Officer,
First Mid-Illinois Bank & Trust, N.A.
ERIC S. MCRAE
Executive Vice President, First Mid-Illinois Bancshares, Inc.
Executive Vice President, Senior Lender,
First Mid-Illinois Bank & Trust, N.A.
LAUREL G. ALLENBAUGH
Executive Vice President, First Mid-Illinois Bancshares, Inc.
Executive Vice President, Chief Operations & IT Officer,
First Mid-Illinois Bank & Trust, N.A.
BRADLEY L. BEESLEY
Executive Vice President, First Mid-Illinois Bancshares, Inc.
Executive Vice President, Chief Trust & Wealth Management Officer,
First Mid-Illinois Bank & Trust, N.A.
CLAY M. DEAN
Senior Vice President, First Mid-Illinois Bancshares, Inc.
Chief Executive Officer, First Mid Insurance Group
CHRISTOPHER L. SLABACH
Senior Vice President, First Mid-Illinois Bancshares, Inc.
Senior Vice President, Chief Risk Officer,
First Mid-Illinois Bank & Trust, N.A.
RHONDA R. GATONS
Senior Vice President, First Mid-Illinois Bancshares, Inc.
Senior Vice President, Director of Human Resources,
First Mid-Illinois Bank & Trust, N.A.
AMANDA D. LEWIS
Senior Vice President, First Mid-Illinois Bancshares, Inc.
Senior Vice President, Chief Deposit Services Officer,
First Mid-Illinois Bank & Trust, N.A.
F I R S T M I D . C O M
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