2018 Annual Report
Turning the page on a new chapter.
1421 Charleston Avenue | Mattoon IL 61938
firstmid.com
Stockholder Information
DIVIDEND REINVESTMENT PLAN TRANSFER AND DIVIDEND PAYING AGENT
For information concerning the Company’s Dividend Reinvestment Plan or for stockholder
inquiries concerning dividend checks or their stockholder records, contact:
REGULAR MAIL
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
STREET ADDRESS FOR OVERNIGHT DELIVERY
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
312-360-5377 | 877-373-6374
www.computershare.com/contactus
Annual Meeting of Stockholders
The annual meeting of stockholders will be Wednesday, April 24, 2019 at 4:00 p.m. in the
lobby of First Mid Bank & Trust, 1515 Charleston Avenue, Mattoon, Illinois.
FORM 10-K
A copy of the 2018 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” under
“About First Mid.” 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
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.
Corporate Profile
First Mid-Illinois Bancshares, Inc. (“First Mid”) is the parent
company of First Mid Bank & Trust, N.A. (“First Mid Bank”),
First Mid Wealth Management Co., First Mid Insurance Group, Inc.,
Mid-Illinois Data Services, Inc., and Soy Capital Bank and Trust Co.,
which is anticipated to merge with and into First Mid Bank
and Trust on or about April 5, 2019. 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 is a $3.8 billion community-focused organization that
provides a full suite of financial services including banking, wealth
management, brokerage, ag services, and insurance through a
sizeable network of locations throughout Illinois and eastern
Missouri and a loan production office in the greater Indianapolis
area. Together, our First Mid team takes great pride in their work
and their ability to serve our customers well over the last 154 years.
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.”
Executive Management Team
BRADLEY L. BEESLEY
Executive Vice President,
CHRISTOPHER L. SLABACH
Senior Vice President,
First Mid-Illinois Bancshares, Inc.
First Mid-Illinois Bancshares, Inc.
Chief Executive Officer,
Chief Risk Officer,
President and Chief Executive Officer,
First Mid Wealth Management Co.
First Mid Bank & Trust, N.A.
JOSEPH R. DIVELY
Chairman, President and
Chief Executive Officer,
First Mid-Illinois Bancshares, Inc.
First Mid Bank & Trust, N.A.
MICHAEL L. TAYLOR
Senior Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Operating Officer,
First Mid Bank & Trust, N.A.
MATTHEW K. SMITH
Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Financial Officer,
First Mid Bank & Trust, N.A.
LAUREL G. ALLENBAUGH
Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Operations & IT Officer,
First Mid Bank & Trust, N.A.
CLAY M. DEAN
Executive Vice President,
RHONDA R. GATONS
Senior Vice President,
First Mid-Illinois Bancshares, Inc.
First Mid-Illinois Bancshares, Inc.
Chief Executive Officer,
First Mid Insurance Group, Inc.
Chief Human Resources Officer,
First Mid Bank & Trust, N.A.
ERIC S. MCRAE
Executive Vice President,
DAVID R. HIDEN
Senior Vice President,
First Mid-Illinois Bancshares, Inc.
First Mid-Illinois Bancshares, Inc.
Chief Credit Officer,
First Mid Bank & Trust, N.A.
Chief Information Officer,
First Mid Bank & Trust, N.A.
AMANDA D. LEWIS
Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Deposit Services Officer,
First Mid Bank & Trust, N.A.
Board of Directors
HOLLY A. BAILEY
President, Howell Asphalt Company
STEVEN L. GRISSOM
Chief Executive Officer,
President, Howell Paving, Inc.
SKL Investment Group, LLC
ROBERT S. COOK
Managing Partner,
TAR CO Investments, LLC
GARY W. MELVIN
Consultant and Director,
Rural King Stores
JOSEPH R. DIVELY
Chairman, President
and Chief Executive Officer,
First Mid-Illinois Bancshares, Inc.
RAY A. SPARKS
Private Investor,
Sparks Investment Group, LP
MARY J. WESTERHOLD
Chief Financial Officer,
Madison Communications Company
JAMES E. ZIMMER
Owner,
Zimmer Real Estate Properties, LLC
Co-Founder, Bio-Enzyme
A Message from the Chairman
2018 was another strong year for First Mid both strategically and
financially. We continue to execute on our strategy to drive organic
growth across all business lines and to look for expansion and
diversification opportunities through acquisitions. We completed
the acquisition and integration of First BancTrust Corporation (“First
Bank”) and announced and closed on the SCB Bancorp, Inc. (Soy Capital)
acquisition. While there are similarities between the two organizations,
such as being customer and employee-centric community banks, each
brought unique strengths to First Mid and added new markets. They both
also added management depth and expertise that creates organizational
value beyond what can be seen on a balance sheet or income statement.
I couldn’t be more pleased with the spirit of cooperation the three
organizations’ teams have demonstrated, as we look to create a
stronger institution to serve our customers. I am confident that the two
acquisitions will deliver shareholder, customer and community value
while creating increased career opportunities for our team members.
Financially, as you will see in the report, we have delivered the strongest
results in our history and we continue to make investments for our future.
Joseph R. Dively
Chairman, President
and Chief Executive Officer
Refreshed Name and Logo. Marking a milestone this year, First Mid-Illinois
Bank & Trust introduced a new logo and shorter name that better reflects our
growth and the changing financial services environment. Our name and logo were
geographically limiting and no longer representative of our current and future
market areas. Our growth has already taken us beyond Central Illinois and out of
the state. First Mid Bank & Trust became the company’s official bank charter name
and the accompanying logo is a refreshed and more contemporary symbol. Our
customers have referred to us as “First Mid” for many years and that won’t change,
but the look is new and we’re excited about the forward momentum it represents.
To retain First Mid’s history, the new logo contains elements of the past, like the
familiar gold horizontal lines. The image is designed to be solid and enduring, with
the blue columns signifying the growth of customers, employees and the company.
The First Mid Bank & Trust name is now one of a family of companies operating
under First Mid-Illinois Bancshares, Inc., including First Mid Insurance Group and
First Mid Wealth Management. This year we will be proposing to our shareholders
our recommendation to shorten the holding company name accordingly.
Year-End Assets
(Consolidated - Dollars in Thousands)
$4,500,000
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
First Mid-Illinois Bancshares, Inc. • 2018 Annual Report | 1 |
$0.80$0.70$0.60$0.50$0.40$0.30$0.20$0.10$0.00 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018$0.38$0.38$0.38$0.63$0.46$0.55$0.59$0.62$0.66$0.70| 2 | 2018 Annual Report • First Mid-Illinois Bancshares, Inc.Recognition of Performance. We were pleased to be recognized by the U.S. Small Business Administration for the fifth consecutive year as the Central/Southern Illinois Community Bank of the Year for the best overall performance record for lending to small businesses in Illinois. First Mid is committed to the economic growth of the communities we serve and small businesses are the engines that power our local economy. From a lending perspective, we are the bank for the small business and agricultural industry sectors. Organic Growth. 2018 was another year with strong legacy loan growth at over 5% delivering in excess of what the economy provides. This increase represents nine consecutive years of growth in or above our stated objective of 5-8% per year. I am pleased that our other lines of business, Insurance and Wealth Management, also posted strong growth year-over-year. Our teams have never worked more closely on finding ways to deepen our customer relationships and serve the broader financial needs of our retail and commercial clients.Soy Capital Leads to Greater Diversification. Soy Capital was our fourth whole bank or branch acquisition in the last four years, as we closed in the fourth quarter. We were delighted to be chosen as Soy’s strategic partner and our culture and business units align very well. From a banking perspective, we met a strategic goal to deepen market penetration in Decatur, Peoria and Champaign with a like-minded community bank. The blending of each organization’s insurance and farm services divisions has created a premier provider in the state for these services. Soy’s JL Hubbard Insurance and Bonds agency has integrated into the First Mid Insurance Group. As the largest bank owned agency in the state, our team delivers a broad range of insurance services to both commercial and retail markets. With the combination of our two farm management groups, we now manage nearly 300,000 acres across eleven states. First Mid Ag Services offers farm management, farmland brokerage, farm appraisal and other ag related services. The combination of our two organizations serves to diversify our revenues, while doing so in businesses that we know and value. Dividends Paid Per Common Share Brian Thompson, who served as President of Soy Capital Ag Services, is now leading First Mid Ag Services. Left to right: Brian Thompson, President of First Mid Ag Services and Brad Beesley, CEO of First Mid Wealth Management Company.Dan Martini joined First Mid Insurance Group following the acquisition of JL Hubbard.Left to right: Dan Martini, former President of JL Hubbard and Clay Dean, CEO of First Mid Insurance Group. First Mid-Illinois Bancshares, Inc. • 2018 Annual Report | 3 |Capital Markets. Upon announcing the Soy Capital acquisition in June and to finance a portion of the deal, we completed a successful capital raise of $36 million. The reception by new and existing institutional investors was exceptional and we could not have been more pleased with how the market viewed the transaction and First Mid’s overall strategy.We continue to maintain outreach with institutional investors and analysts. Along with our financial performance, strong and consistent external communication helps maintain a positive market view of the company. First Mid now has five analysts completing and distributing research on the company.Investing in our Communities. A hallmark of First Mid, investing in our communities is a core value kept front and center with our teams. This past year, First Mid employees volunteered nearly 20,000 hours in their local communities. I’m very proud of our employees and their personal engagement within their communities, each looking to make a difference and giving back to make our communities stronger. 2018 Financial HighlightsThe combination of organic and acquisitive growth led to 2018 being a very strong year for the company. The financials included eight months of results from the First Bank acquisition and one and a half months from the Soy Capital acquisition. Net income and diluted earnings per share for 2018 were $36.6 million and $2.52, respectively. This was the highest net income ever reported by the company and represented an increase of 37.2% over the prior year. In 2018, our core deposit base continued to be a key differentiator and, combined with the solid loan growth, resulted in a strong net interest income. Net interest margin, on a tax equivalent basis, for 2018 was 3.80% compared to 3.70% in the prior year. As rates continued to rise throughout the year, we successfully increased yields on our earning assets at a greater pace than our cost of funds. Melissa Tovey joined our Deposit Services team following the First Bank acquisition.Left to right: Danielle Thomas, Regional Deposit Manager; Melissa Tovey, former Vice President of Deposit Operations for Soy Capital Bank and Trust; Mandy Lewis, Chief Deposit Services Officer.Following the First Bank and Soy Capital acquisitions, Matt Carr and Andy Cave joined our First Mid team.Left to right: Andy Cave, former President of Soy Capital Bank and Trust; Eric McRae, Chief Credit Officer; Matt Carr, former President of First Bank. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018$3.00$2.50$2.00$1.50$1.00$0.50$0$1.04$1.07$1.29$1.62$1.73$1.85$1.81$2.05$2.13Year-End Earnings Per Share(Diluted)$2.52 | 4 | 2018 Annual Report • First Mid-Illinois Bancshares, Inc.Non-interest income for the year was $35.4 million compared to $30.3 million the prior year. The increase was partially driven by acquisitions during the year, but also solid organic growth from our insurance and wealth management companies. Our wealth management division increased revenues by over 15% on an organic basis and, with the addition of Soy Capital, ended the year with close to $4.0 billion in assets under management. Excluding acquisitions, our insurance business unit increased revenues by over 9%, while maintaining strong margins.Operating expenses for 2018 were $90.0 million, which was an increase of $15.8 million over the prior year. The increase was primarily driven by the added operating expenses from the acquired companies. In addition, non-recurring acquisition-related expenses for 2018 totaled $6.3 million versus $2.1 million in 2017. Our full-time equivalent employees ended the year at 818 versus 592 at the end of 2017.Our asset quality ratios were in-line with our peers, but were negatively impacted by a few acquisition related credits, which had been identified in the due diligence process. All of our capital ratios remained strong in 2018 and both our book value per common share and tangible book value per common share reflected solid growth. Book value per common share increased $4.25 to $28.57 and tangible book value per common share increased $1.49 to $20.22. While on many measures 2018 was our best year ever, I am confident even better years are still ahead. That said, clearly current market pressures make for a tough operating environment. Margins continue to be squeezed by pressure on both deposit costs and loan yields. This dynamic led to a less favorable outlook for financial stocks resulting in a decrease in stock prices of many publicly-traded banks during the fourth quarter of 2018. While competition remains intense across all lines of business, I believe competition is good for our customers and for First Mid. It drives us to make investments and improvements across the organization. For example, we must continue to upgrade our online banking platforms to ensure we can serve our diverse and changing customer needs with the channels they prefer. We will listen to our customers and provide them with the products and experiences they ask for, across all lines of business. Competition and our intense desire to serve the broad financial needs of our communities and customers make us better. We will work hard in 2019, and beyond, to meet the needs of all our stakeholders. I greatly appreciate the investment you have made in First Mid and we will continue to focus on the things we can control to deliver a sound investment and strong return.Sincerely,Joseph R. DivelyChairman, President and Chief Executive Officer$45$40$35$30$25$20$15$10$5$0Year-End Market Price of StockFMBH stock price on December 31. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018$17.50$17.25$18.45$22.75$22.00$18.55$26.00$34.00$38.54$31.92 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18$250$200$150$100$ 50$ 100.00 $ 86.60 $ 124.76 $ 166.98 $ 192.71 $ 162.65$ 100.00 $ 113.69 $ 115.26 $ 129.05 $ 157.22 $ 150.33$ 100.00 $ 103.57 $ 111.80 $ 155.02 $163.20 $ 137.56* $100 invested on 12/31/13 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Source: S&P Global Market Intelligence © 2019First Mid-Illinois Bancshares, Inc.S&P 500SNL U.S. Bank NASDAQ Index 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18First Mid-Illinois Bancshares, Inc. • 2018 Annual Report | 5 |Building a BrandComparison of 5 Year Cumulative Total Return*Among First Mid-Illinois Bancshares, Inc., the S&P 500 Index, and the Bank NASDAQ Index Five-Year Financial Data
(Dollars in Thousands, except share data)
Selected Income Statement Data:
2018
2017
2016
2015
2014
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
$124,565
$99,555
$ 75,496
$59,251
$54,734
12,827
111,738
8,667
103,071
35,414
89,980
48,505
11,905
36,600
—
6,482
93,073
7,462
85,611
30,336
74,211
41,726
15,042
26,684
—
4,292
71,204
2,826
68,378
26,912
61,510
33,780
11,940
21,840
825
3,499
55,752
1,318
54,434
20,544
49,248
25,730
9,218
16,512
2,200
3,252
51,482
629
50,853
18,369
44,507
24,715
9,254
15,461
4,152
Net income available to common stockholders
$36,600
$26,684
$21,015
$14,312
$11,309
Selected Balance Sheet Data:
Assets
Cash and cash equivalents
$141,400
$88,879
$175,902
$115,784
$51,730
Certificates of deposit investments
7,569
1,685
14,643
25,000
—
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
761,710
647,911
694,079
604,056
431,506
1,508
1,025
1,175
968
1,958
2,616,822
1,918,499
1,808,064
1,266,345
1,046,766
310,725
183,540
190,672
102,346
75,143
$3,839,734
$2,841,539
$2,884,535
$2,114,499
$1,607,103
$2,988,686
$2,274,639
$2,329,887
$1,732,568
$1,272,077
348,799
249,739
267,837
169,462
162,489
26,385
9,197
6,138
7,460
7,621
3,363,870
2,535,575
2,603,862
1,909,490
1,442,187
475,864
307,964
280,673
205,009
164,916
Total liabilities and stockholders’ equity
$3,839,734
$2,841,539
$2,884,535
$2,114,499
$1,607,103
Dividends to preferred stockholders
Dividends paid to common stockholders
Dividends paid per common share
Basic earnings per common share
Diluted earnings per common share
$ —
$9,891
0.70
2.53
2.52
$ —
$8,288
0.66
2.13
2.13
$ 825
$6,511
0.62
2.07
2.05
$2,200
$4,556
0.59
1.84
1.81
$4,152
$3,540
0.55
1.88
1.85
Book value per common share
28.57
24.32
22.51
21.01
19.55
| 6 | 2018 Annual Report • First Mid-Illinois Bancshares, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-13368
FIRST MID-ILLINOIS BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(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, 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, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer”, "smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ]
Non-accelerated filer [ ]
Accelerated filer [X]
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
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 $513,588,874. 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 5, 2019, 16,671,367 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 2019 Annual Meeting of Shareholders to be held on April 24, 2019
III
First Mid-Illinois Bancshares, Inc.
Form 10-K Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
[Reserved]
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
Form 10-K Summary
Item 8
Item 9
Item 9A
Item 9B
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Item 16
Signatures
Exhibit Index
Page
3
13
15
15
15
16
17
19
20
47
49
110
110
112
112
112
113
113
113
114
114
115
116
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 subsidiaries, First Mid Bank & Trust, N.A. (“First Mid Bank”) and Soy Capital Bank & Trust Company ("Soy Capital 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, First Mid Insurance Group (“First Mid Insurance”). The Company offers trust, farm
services, investment services, and retirement planning through its wholly owned subsidiary, First Mid Wealth Management Company. The Company also
wholly owns four statutory business trusts, First Mid-Illinois Statutory Trust I (“First Mid Trust I”), and First Mid-Illinois Statutory Trust II (“First Mid Trust II”),
Clover Leaf Statutory Trust I ("CLST Trust"), and FBTC Statutory Trust I ("FBTCST I"), all of which are unconsolidated subsidiaries of the Company.
The Company, a Delaware corporation, was incorporated on September 8, 1981, and pursuant to the approval of the Board of Governors of the Federal
Reserve System (the “Federal Reserve Board”) became the holding company owning all of the outstanding stock of First National Bank, Mattoon (“First
National”) on June 1, 1982. First National changed its name to First Mid-Illinois Bank & Trust, N.A. in 1992. The Company acquired all of the outstanding
stock of a number of community banks or thrift institutions on the following dates, and subsequently combined their operations with those of the Company:
•
•
•
•
•
•
•
•
•
•
•
•
Mattoon Bank, Mattoon on April 2, 1984
State Bank of Sullivan on April 1, 1985
Cumberland County National Bank in Neoga on December 31, 1985
First National Bank and Trust Company of Douglas County on December 31, 1986
Charleston Community Bank on December 30, 1987
Heartland Federal Savings and Loan Association on July 1, 1992
Downstate Bancshares, Inc. on October 4, 1994
American Bank of Illinois on April 20, 2001
Peoples State Bank of Mansfield on May 1, 2006
First Clover Leaf Financial on September 8, 2016
First BancTrust Corporation on August 10, 2018
SCB Bancorp Inc. on November 15, 2018
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 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 and its subsidiaries collectively employed 818 people on a full-time equivalent basis as of December 31, 2018. 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.
3
Business Lines
The Company has chosen to operate in three primary lines of business—community banking through First Mid Bank and Soy Capital Bank, wealth
management through First Mid Wealth Management Company, and insurance brokerage through First Mid Insurance. Of these, the community banking line
contributes approximately 90% of the Company’s total revenues. 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 plan is reviewed and updated, if needed, annually. 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 $380 million at December 31, 2014 to $907 million at December 31, 2018. Of this increase, approximately $20 million was the result of the
acquisition of the ONB Branches in the third quarter of 2015 and $156 million was the result of the acquisition of First Clover Leaf in the third quarter of 2016,
$55 million was the result of the acquisition of First Bank during the second quarter of 2018, and $50 million was the result of the acquisition of Soy Capital
Bank during the fourth quarter of 2018. Approximately 67% of the Company’s total revenues were derived from lending activities in the fiscal year ended
December 31, 2018. 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, senior insurance
products 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.
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 and is focused on
improving the liquidity of the stock.
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 and Soy Capital 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. The Company has invested, and will
continue to invest, significant resources to ensure the quality, experience and training of our 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 Board of Directors must approve all
underwriting decisions in excess of $15 million. The legal lending limit for First Mid Bank was $52.6 million and Soy Capital Bank was $6.8 million at
December 31, 2018. While the underlying nature of lending will result in some amount of loan losses, First Mid's loan loss experience has been good with
average net charge offs amounting to $1.6 million (0.10% of total loans) over the past five years. Nonperforming loans were $39.8 million (1.51% of total
loans) at December 31, 2018. 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 2018, the Company’s net interest margin increased to 3.71%
from 3.57% in 2017 primarily due to the increase interest earnings assets and net accretion income from the acquisition of First Clover Leaf.
Markets and Competition
The Company has active competition in all areas in which First Mid Bank and Soy Capital Bank do business. The banks compete 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 2018, First Mid Bank and Soy Capital Bank operated branches in the Illinois counties of Adams, Champaign, Christian, Clark, Coles, Cumberland,
Dewitt, Douglas, Edgar, Effingham, Jackson, Jefferson, Kankakee, Knox, Lawrence, Macon, Madison, Moultrie, McClean, Peoria, Piatt, Saline, St Clair,
Wabash, White and Williamson and in Missouri, St. Louis county. Each branch primarily serves the community in which it is located. First Mid Bank served
thirty-seven different communities with sixty-four separate locations in Illinois, 1 location in Missouri, and a loan production office in Indiana.
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 and at www.sec.gov as soon as reasonably practicable
after these materials are filed with the SEC.
First BancTrust Corporation
On December 11, 2017, the Company and Project Hawks Merger Sub LLC (formerly known as Project Hawks Merger Sub Corp.), a newly formed Delaware
limited liability company and wholly-owned subsidiary of the Company (“Hawks Merger Sub”), entered into an Agreement and Plan of Merger (as amended as
of January 18, 2018, the “First Bank Merger Agreement") with First BancTrust Corporation, a Delaware corporation (“First Bank”), pursuant to which, among
other things, the Company agreed to acquire 100% of the issued and outstanding shares of First Bank pursuant to a business combination whereby First Bank
merged with and into Hawks Merger Sub, with Hawks Merger Sub as the surviving entity and a wholly-owned subsidiary of the Company (the “First Bank
Merger”).
Subject to the terms and conditions of the First Bank Merger Agreement, at the effective time of the First Bank Merger, each share of common stock, par value
$0.01 per share, of First Bank issued and outstanding immediately prior to the effective time of the First Bank Merger (other than shares held in treasury by
First Bank and shares held by stockholders who have properly made and not withdrawn a demand for appraisal rights under Delaware law) converted into and
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become the right to receive, (a) $5.00 in cash and (b) 0.800 shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional
shares, less any applicable taxes required to be withheld and subject to certain adjustments, all as set forth in the First Bank Merger Agreement.
The First Bank Merger closed on May 1, 2018 and the Company issued an aggregate total of 1,643,900 shares of common stock and paid approximately
$10,275,000, including cash in lieu of fractional shares. The accounting for the First Bank Merger is presented in Note 8 to the consolidated financial statements.
First Bank’s wholly-owned bank subsidiary, First Bank & Trust, merged with and into the Company’s wholly owned bank subsidiary, First Mid Bank, on August
10, 2018. At the time of the bank merger, First Bank & Trust’s banking offices became branches of First Mid Bank.
SCB Bancorp, Inc.
On June 12, 2018, The Company and Project Almond Merger Sub LLC, a newly formed Illinois limited liability company and wholly-owned subsidiary of the
Company (“Almond Merger Sub”), entered into an Agreement and Plan of Merger (the “SCB Merger Agreement”) with SCB Bancorp, Inc., an Illinois corporation
(“SCB”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of SCB pursuant to a business
combination whereby SCB will merge with and into Almond Merger Sub, whereupon the separate corporate existence of SCB will cease and Merger Sub will
continue as the surviving company and a wholly-owned subsidiary of the Company (the “SCB Merger”).
Subject to the terms and conditions of the SCB Merger Agreement, at the effective time of the SCB Merger, each share of common stock, par value $7.50 per
share, of SCB issued and outstanding immediately prior to the effective time of the SCB Merger were converted into and become the right to receive, at the
election of each stockholder, either $307.93 in cash or 8.0228 shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional
shares, less any applicable taxes required to be withheld. In addition, immediately prior to the closing of the proposed merger, SCB paid a special dividend to
its shareholders in the aggregate amount of approximately $25 million. The SCB Merger was subject to customary closing conditions, including the approval
of the appropriate regulatory authorities and of the stockholders of SCB. The SCB Merger was completed November 15, 2018 and an aggregate of 1,330,571
shares of common stock were issued, and approximately $19,046,000 was paid, to the stockholders of SCB, including cash in lieu of fractional shares.
It is anticipated that SCB’s wholly-owned bank subsidiary, Soy Capital Bank and Trust Company (“Soy Capital Bank”), will be merged with and into First Mid
Bank on April 6, 2019. At the time of the bank merger, Soy Capital Bank’s banking offices will become branches of First Mid Bank.
Capital Raise
On June 13, 2018, the Company and First Mid Bank entered into an underwriting agreement (the “Underwriting Agreement”) with FIG Partners, LLC, as the
representative of the several underwriters named therein (the “Underwriters”), pursuant to which the Company agreed to issue and sell to the Underwriters
and the Underwriters agreed to purchase, subject to and upon the terms and conditions of the Underwriting Agreement, an aggregate of 823,799 shares of
the Company’s common stock, par value $4.00 per share, at a public offering price of $38.00 per share, in an underwritten public offering (the “Offering”).
The Company granted the Underwriters an option for a period of 30 days after the date of the Underwriting Agreement to purchase up to an additional
123,569 shares of common stock at the public offering price, less discounts and commissions. The Underwriters exercised their option in full on June 13,
2018, resulting in 947,368 shares of common stock being offered in the Offering. The Offering closed on June 15, 2018. The net proceeds to the Company,
after deducting underwriting discounts and commissions and offering expenses, were approximately $34.0 million.
At-The-Market Program
On August 16, 2017, the Company entered into a Sales Agency Agreement, pursuant to which the Company may sell, from time to time, up to an aggregate
of $20 million of its common stock. Shares of common stock are offered pursuant to the Company's shelf registration statement filed within the SEC. During
2018, the company sold no shares of common stock under the program. During the twelve months ended December 31, 2017, the company sold 98,710
shares of common stock at the weighted average price of approximately $35.13, representing gross proceeds of $3.47 million and net proceeds of $3.4
million. As of December 31, 2018, approximately $16.53 million of common stock remained available for issuance under the At The Market program.
Employee Stock Purchase Plan
At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan
(“ESPP”). The ESPP provides eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount through payroll
deductions. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 600,000
shares of common stock may be issued under the ESPP.
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, First Mid Bank, and Soy Capital 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.
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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 revised 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 a 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.
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 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 Bank and Soy Capital Bank, will continue to count as Tier 1 capital.
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.
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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.
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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.
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.
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 financial 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.
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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 for 2018, which include the partial phase in of the capital conservation buffer: a total capital to total risk-based capital ratio of not less than
9.875%, a Tier 1 risk-based ratio of not less than 7.875%, a common equity Tier 1 capital ratio of not less than 6.375%, and a Tier 1 leverage ratio of not less
than 4.00%. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders’ equity, 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.
As of December 31, 2018, 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 13.63%, a Tier 1 risk-based ratio of 12.76%, a common equity Tier 1 capital ratio of 11.81% and a
leverage ratio of 11.15%.
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 and Soy Capital Bank
General. First Mid Bank is a national bank, chartered under the National Bank Act. Soy Capital Bank is an Illinois state-chartered bank. The FDIC insures
the deposit accounts of the Banks. The Banks are members of the Federal Reserve System and are subject to the examination, supervision, reporting and
enforcement requirements of the OCC, as the primary federal regulator of national banks, the Illinois Department of Financial and Professional Regulation,
Division of Banking (the "IDFPR"), as the primary regulator of Illinois chartered banks, and the FDIC, as administrator of the deposit insurance fund.
Deposit Insurance. As an FDIC-insured institution, the Banks are 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 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 $967,000, $779,000 and $851,000 for this assessment during 2018, 2017 and 2016, respectively. The increase in
this assessment was primarily due to an increase in quarterly average assets.
9
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 $92,000, $126,000 and $115,000 during 2018, 2017
and 2016, 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, 2018,
2017, and 2016 the Company expensed supervisory fees totaling $596,000, $582,000, and $453,000, respectively. Changes in total expense are due to
changes in assessment rates and increases in total assets of the bank.
Capital Requirements. The banking regulators has established the following minimum capital standards for banks for 2018, which include the partial phase
in of the capital conservation buffer in a total capital to total risk-based capital ratio of not less than 9.875%, a Tier 1 risk-based ratio of not less than 7.875%,
a common equity Tier 1 capital ratio of not less than 6.375%, and a Tier 1 leverage ratio of not less than 4.00%. 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 banking regulators 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, 2018, First Mid Bank and Soy Capital Bank were not required to increase capital to an amount in excess of the
minimum regulatory requirements, and capital ratios exceeded those required for categorization as well-capitalized under the capital adequacy guidelines
established by bank regulatory agencies. First Mid Bank's total risk-based capital ratio was 12.85%, Tier 1 risk-based ratio was 11.89%, common equity Tier
1 ratio was 11.89% and leverage ratio was 9.92%. Soy Capital Bank's total risk-based capital ratio was 14.33%, Tier 1 risk-based ratio was 14.33% and
leverage ratio was 11.12%.
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 and the Illinois Banking Act impose limitations on the amount of dividends that may be paid by a bank. Generally, a 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 and Soy Capital Bank exceeded minimum capital requirements under
applicable guidelines as of December 31, 2018. As of December 31, 2018, approximately $28.8 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 or IDFPR may prohibit the payment of any dividends
if the OCC or IDFPR, as applicable, determines that such payment would constitute an unsafe or unsound practice.
Affiliate and Insider Transactions. First Mid Bank and Soy Capital Bank are 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 and Soy Capital Bank to their 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 and Soy Capital 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 or Soy Capital 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
10
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.
Community Reinvestment Act. First Mid Bank and Soy Capital 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 and Soy Capital Bank received
satisfactory CRA ratings from their regulator in their most recent CRA examination.
Consumer Laws and Regulations. In addition to the laws and regulations discussed above, First Mid Bank and Soy Capital Bank are also subject to
certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive,
these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit
Reporting Act, the Fair and Accurate Credit Transactions Act and the Real Estate Settlement Procedures Act, among others. These laws and regulations
mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making
loans to or marketing to or engaging in other types of transactions with such customers. Failure to comply with these laws and regulations could lead to
substantial penalties, operating restrictions and reputational damage to the financial institution.
11
Supplemental Item – Executive Officers of the Registrant
The executive officers of the Company are elected annually by the Company’s Board of Directors and are identified below.
Name (Age)
Position With Company
Joseph R. Dively (59)
Chairman of the Board of Directors, President and Chief Executive Officer
Michael L. Taylor (50)
Senior Executive Vice President and Chief Operating Officer
Matthew K. Smith (44)
Executive Vice President and Chief Financial Officer
Eric S. McRae (53)
Executive Vice President
Bradley L. Beesley (47)
Executive Vice President
Laurel G. Allenbaugh (58)
Executive Vice President
Clay M. Dean (44)
Executive Vice President
Amanda D. Lewis (39)
Executive Vice President
David Hiden (57)
Senior Vice President
Christopher L. Slabach (56)
Senior Vice President
Rhonda Gatons (47)
Senior Vice President
Joseph R. Dively, age 59, 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 50, has been Senior Executive Vice President since 2014 and Chief Operating Officer since July 2017. He served as Chief Financial
Officer of the Company from 2000 to 2017. He served as Executive Vice President from 2007 to 2014 and as Vice President from 2000 to 2007. He was
with AMCORE Bank in Rockford, Illinois from 1996 to 2000.
Matthew K. Smith, age 44, has been Executive Vice President of the Company since November 2016 and Chief Financial Officer since July 2017. He
served as Director of Finance from November 2016 to July 2017. He was Treasurer and Vice President of Finance and Investor Relations with Consolidated
Communications, Inc from 1997 to 2016.
Eric S. McRae, age 53, has been Executive Vice President of the Company and Executive Vice President, Chief Credit Officer of First Mid Bank since
January 2017. He served as Senior Lender of First Mid Bank from December 2008 to December 2016 and he served as President of the Decatur region
from 2001 to December 2008.
Bradley L. Beesley, age 47, has been Executive Vice President of the Company and Chief Trust & Wealth Management Officer of First Mid Bank since March
2015 and First Mid Wealth Management Company since July 2018. He served as Senior Vice President from May 2007 to March 2015.
Laurel G. Allenbaugh, age 58, has been Executive Vice President of the Company and Executive Vice President, Chief Operations 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.
Clay M. Dean, age 44, has been Executive Vice President of the Company since January 2019 and 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 39, has been Executive Vice President of the Company since January 2019 and Senior Vice President of the Company and Senior
Vice President, Retail Banking Officer of First Mid Bank since September 2014. She served as Vice President, Director of Marketing from 2001 until
September 2014.
David Hiden, age 57, has been Senior Vice President, Chief Information Officer of the Company since July 2018.
Christopher L. Slabach, age 56, 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.
Rhonda Gatons, age 47, has been Senior Vice President of the Company and Director of Human Resources since March 2016. Prior to joining the
Company, she was the Director of Human Resources at Midland States Bank.
12
ITEM 1A. RISK FACTORS
Various risks and uncertainties, some of which are difficult to predict and beyond the Company’s control, could negatively impact the Company. As a financial
institution, the Company is exposed to interest rate risk, liquidity risk, credit risk, operational risk, risks from economic or market conditions, and general
business risks among others. Adverse experience with these or other risks could have a material impact on the Company’s financial condition and results of
operations, as well as the value of its common stock.
Difficult economic conditions and market disruption have adversely impacted the banking industry and financial markets generally and may
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.
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 years 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 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 $1.7 billion 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 five industries as of December 31, 2018. 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.
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.
13
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, 2018, 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, 2018. 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 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, to replace existing capital, or to complete acquisitions 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 reputation, 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.
14
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.
The Company and the banking industry are subject to government regulation, legislation and policy. Government regulation, legislation and policy
affect the Company and the banking industry as a whole, including the Company’s business and results of operations. The Company’s results of operations
could be adversely affected by changes in how existing regulations are interpreted or applied by government agencies, or by the adoption of new
government regulation, legislation and policy. These changes may require the Company to invest significant funds and management attention and resources
in order to reach compliance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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 is used by branch support
operations. In December 2018, the Company acquired a facility at 1420 Wabash Avenue which will also be used by branch support operations.
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 for 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-six counties throughout Illinois and one
Missouri county. Of the fifty-five other banking offices operated by First Mid Bank, thirty-six are owned and twenty-one are leased from non-affiliated third
parties. FIrst Mid Bank also has a loan production office in metro Indianapolis. In addition, the acquired ten additional facilities in the acquisition of Soy
Capital of which eight are owned and two 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, 2018 was
$59.1 million.
ITEM 3.
LEGAL PROCEEDINGS
On February 13, 2018, an alleged class action complaint was filed by a purported stockholder of First Bank in the United States District Court for the District
of Delaware captioned Parshall v. First BancTrust Corporation (Case No. 1:18- cv-00218) against the Company, Merger Sub, First Bank and members of
First Bank’s board of directors (the “Lawsuit”). The Lawsuit related to the Agreement and Plan of Merger, dated as of December 11, 2017 (as amended by
the First Amendment to Agreement and Plan of Merger entered into as of January 18, 2018), among the Company, Merger Sub and First Bank and the
merger contemplated thereby (the “Merger”). Among other things, the Lawsuit alleged that the Registration Statement on Form S-4 filed with the SEC by the
Company on January 22, 2018 failed to disclose allegedly material information relating to the Company’s and First Bank’s financial projections, the analyses
performed by First Bank’s financial advisor, and alleged potential conflicts of interest of First Bank’s officers, directors and financial advisor. The plaintiff
sought, among other relief, to enjoin the Merger from proceeding. The Company believes that the factual allegations in the Lawsuit were without merit.
On March 9, 2018, in order to moot plaintiff’s disclosure claims, reduce the expenses, burdens, risks and uncertainties inherent in litigation and avoid the risk
of delaying or adversely affecting the Merger, in exchange for the plaintiff agreeing to withdraw the Lawsuit and dismiss his claims with prejudice, the
Company and First Bank made additional supplemental disclosures to the proxy statement/prospectus related to the Merger that was first mailed to
stockholders of First Bank on or about February 9, 2018. The agreement between the parties did not release or otherwise prejudice any potential claims of
any member of the putative class other than the plaintiff and did not constitute any admission by any of the defendants as to the merits of any claims. In
January 2019, the parties resolved the plaintiff's counsel's claim for an award of attorneys' fees and expenses pursuant to a confidential settlement
agreement.
15
From time to time the Company and its subsidiaries may be involved in litigation that the Company believes is a type common to our industry. None of any
such existing claims are believed to be individually material at this time to the Company, although the outcome of any such existing claims cannot be
predicted with certainty.
ITEM 4.
[RESERVED]
16
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER OF
PURCHASES OF EQUITY SECURITIES
PART II
The Company’s common stock was held by approximately 1,031 shareholders of record as of December 31, 2018 and is included for quotation on the
NASDAQ Stock Market, LLC under the trading symbol "FMBH".
The Company’s shareholders are entitled to receive 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 the Bank’s dividend restrictions, see Item1 – “Business” – “First Mid Bank” – “Dividends” and Note 16 – “Dividend Restrictions” herein.
The following table summarizes share repurchase activity for the fourth quarter of 2018:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
October 1, 2018 – October 31, 2018
November 1, 2018 – November 30, 2018
December 1, 2018 – December 31, 2018
Total
(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
—
—
1,312
1,312
—
—
32.58
$32.58
—
—
1,312
1,312
$6,280,000
6,280,000
6,238,000
$6,238,000
All of the repurchase activity that occurred during 2018 resulted from shares withheld to cover taxes on employee stock vesting. 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.
17
ITEM 6.
SELECTED FINANCIAL DATA
The following sets forth a five-year comparison of selected financial data (dollars in thousands, except per share data).
Summary of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Other income
Other expense
Income before income taxes
Income tax expense
Net income
Dividends on preferred shares
Net income available to common stockholders
Per Common Share Data
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
2018
2017
2016
2015
2014
$
124,565
$
99,555
$
75,496
$
59,251
$
54,734
$
$
$
$
12,827
111,738
8,667
35,414
89,980
48,505
11,905
36,600
—
36,600
2.53
2.52
0.70
28.57
20.22
13.63%
12.76%
11.81%
11.15%
3.71%
1.13%
9.59%
27.67%
11.77%
0.99%
$
$
6,482
93,073
7,462
30,336
74,221
41,726
15,042
26,684
—
26,684
2.13
2.13
0.66
24.32
18.73
12.70%
11.83%
10.78%
9.91%
3.57%
0.94%
8.92%
30.99%
10.59%
1.03%
4,292
71,204
2,826
26,912
61,510
33,780
11,940
21,840
825
21,015
2.07
2.05
0.62
22.51
16.84
12.79%
11.99%
10.86%
9.19%
3.28%
0.94%
9.30%
29.95%
10.12%
0.92%
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
15,090.00
$
$
$
$
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%
$
3,839,734
$
2,841,539
$
2,884,535
$
2,114,499
$
1,607,103
2,618,330
2,988,686
475,864
1,919,524
2,274,639
307,964
1,809,239
2,329,887
280,673
1,267,313
1,732,568
205,009
1,048,724
1,272,077
164,916
$
3,241,574
$
2,825,702
$
2,333,866
$
1,807,998
$
1,593,227
2,253,469
2,569,033
381,646
18
1,818,317
2,273,949
299,389
1,439,192
1,893,203
236,254
1,112,413
1,455,047
186,898
1,008,980
1,293,621
158,364
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, 2018, 2017 and 2016. 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, 2018, 2017 and 2016
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 $36.6 million, $26.7 million, and $21.8 million and diluted earnings per share were $2.52, $2.13, and $2.05 for the years ended December
31, 2018, 2017 and 2016, respectively. The following table shows the Company’s annualized performance ratios for the years ended December 31, 2018,
2017 and 2016:
Return on average assets
Return on average common equity
Average common equity to average assets
2018
2017
2016
1.13%
9.59%
11.77%
0.94%
8.92%
10.59%
0.94%
9.30%
10.12%
Total assets at December 31, 2018, 2017 and 2016 were $3.84 billion, $2.84 billion, and $2.88 billion, respectively. Net loan balances increased to $2.62
billion at December 31, 2018, from $1.92 billion at December 31, 2017, from $1.81 billion at December 31, 2016. The increase in 2018 was primarily due to
loans acquired in the acquisition of First Bank and Soy Capital Bank. Of the increase in 2017, $58.5 million was due to increases in construction and land
development loans and $51.6 million was due to increases in commercial real estate loans.
Total deposit balances increased to $2.99 billion at December 31, 2018 from $2.27 billion at December 31, 2017 and from $2.33 billion at December 31,
2016. The increase in 2018 was primarily due to deposits acquired in the acquisitions of First Bank and Soy Capital Bank. The decrease in 2017 was
primarily due to a decrease in money market deposits and interest bearing deposits.
Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.71% for 2018, 3.57% for 2017 and 3.28% for 2016. In
2018 the increase was primarily due to an increase in earnings assets, increases in average rates on earnings assets and accretion income from the
acquisitions. In 2017, the increase was primarily due to an increase in earnings assets and net accretion income from the acquisition of First Clover Leaf.
Net interest income increased to $111.7 million in 2018 from $93.1 million in 2017 and $71.2 million in 2016. During 2018, net interest income increased
primarily due to earning assets acquired from First Bank and Soy Capital Bank, increases in rates on earnings assets and net accretion income from all
acquisitions. In 2017, the net interest income increased primarily due to growth in average earnings assets including loans and investments and net
accretion income from the acquisition of First Clover Leaf. In 2016, net interest income increased primarily due to growth in average earnings assets
including loans and investments primarily due to the acquisition of First Clover Leaf and the ONB branches.
Non-interest income increased to $35.4 million in 2018 compared to $30.3 million in 2017 and $26.9 million in 2016. Bank Owned Life insurance income
decreased $249,000 or 15.2% due to a non-recurring death benefit of $511,000 received on a single policy in 2017. ATM revenue increased by $992,000 or
15.3%, and service charge income increased $515,000 or 7.4% primarily due to increased transactions. Insurance commissions increased $1,720,000 or
19
44.4% compared to last year due to additional revenues from commissions and contingency income. Additionally, other income decreased $761,000
primarily due to income tax refunds received in 2017 resulting from overpayment of taxes in 2016 by First Clover Leaf.
Non-interest expenses increased $15.8 million, to $90.0 million in 2018 compared to $74.2 million in 2017, and $61.5 million in 2016. The increase in 2018
was primarily due to expenses incurred to acquire and merge First Bank into First Mid Bank of approximately $5 million, expenses to acquire Soy Capital of
approximately $900,000 and increases in salaries and benefits, occupancy and amortization expense related to these acquisitions. The increase during 2017
was primarily due to expenses of approximately $2 million associated with the merger of First Clover Leaf into First Mid Bank and an increase in operating
expenses from the addition of First Clover Leaf Bank. Additionally, salaries and benefits expense increased $7.0 million or 17.7% compared to $39.8 million
at the same period last year. The increase during 2016 was primarily due to expenses incurred of $1.3 million to acquire First Clover Leaf, expenses for the
operation of the First Clover Leaf branches from acquisition in September to year-end and expense for the operation of the twelve ONB Branches acquired
in August of 2015. In addition, 2016 salaries & benefits expense increased $7.4 million or 22.9%, and occupancy and equipment expense increased $1.2
million or 10.3%.
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
2018 vs 2017
2017 vs 2016
$
$
18,665
$
(1,205)
5,078
(15,759)
3,137
9,916
$
21,869
(4,636)
3,424
(12,711)
(3,102)
4,844
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $39.8 million at December 31, 2018 compared to $17.5
million at December 31, 2017, and $18.2 million at December 31, 2016. The increase in 2018 was primarily due to non performing loans acquired from First
Bank. Repossessed Assets balances totaled $2.6 million at December 31, 2018 compared to $2.8 million at December 31, 2017, and $2 million at
December 31, 2016. The increase in 2017 was primarily due to the addition of two 1-4 family residential borrowers and one commercial real estate borrower.
The increase in 2016 was primarily due to properties acquired in the acquisition of First Clover Leaf Bank net of properties sold during 2016. The Company’s
provision for loan losses was $8.7 million for 2018, compared to $7.5 million for 2017, and $2.8 million for 2016. The increase in provision expense in 2018
and 2017 was primarily due to increases in loan balances and net charge-offs. Loans secured by both commercial and residential real estate comprised
66%, 66%, and 67% of the loan portfolio for 2018, 2017, and 2016, respectively.
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, 2018, 2017 and 2016 was 12.76%, 11.83%, and 11.99%, respectively. The
Company’s total capital to risk weighted assets ratio at December 31, 2018, 2017 and 2016 was 13.63%, 12.70% ,and 12.79%, respectively. In 2017, the capital
ratios declined in the fourth quarter due to reduced net income resulting from expense following remeasurement of deferred tax assets and liabilties, an increase
in loan loss provision, strong loan growth, which drove a higher capital allocation on risk-weighted assets. In 2016, the primary reason for the decrease in these
ratios was the First Clover Leaf acquisition which increased risk-weighted assets by approximately $649 million offset by stock issued of approximately $65.9
million, lower preferred dividends due to the conversion of Series C Preferred Stock, and the movement of cash from the Old National branch acquisition into
loans and investments that require higher capital allocation.
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, 2018, 2017 and 2016 were $564.1 million, $415.5 million, and $485.1 million, respectively. See Note 17 – “Commitments and Contingent Liabilities”
herein for further information.
Critical Accounting Policies and Use of Significant Estimates
The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of
the Company’s financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial
statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of
the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material
impact on the carrying values of assets and liabilities and the results of operations of the Company.
20
Allowance for Loan Losses. The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant
judgments and assumptions used in the preparation of its consolidated financial statements. An estimate of potential losses inherent in the loan portfolio are
determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows and estimated
collateral values. In assessing these factors, the Company uses 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 Securities. The Company classifies its investments in debt 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.
21
Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income
Taxes,” codified within ASC 740. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater
than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount
of judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the largest amount of tax
benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in
a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.
Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the
Company’s balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful
lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its
carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment during 2018 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.
22
The Company’s average balances, interest income and expense and rates earned or paid for major balance sheet categories are set forth in the following
table (dollars in thousands):
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
ASSETS
Interest-bearing deposits
$
27,911 $
Federal funds sold
Certificates of deposit investments
615
3,013
482
8
66
1.73% $
28,544 $
1.32%
2.18%
9,025
3,317
291
62
50
1.02% $
38,359 $
0.69%
1.50%
8,392
28,777
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
514,220
173,151
2,276,500
2,995,410
48,948
45,780
174,467
(23,031)
13,070
5,167
105,772
124,565
2.54%
2.98%
559,657
171,678
4.65% 1,836,617
4.16% 2,608,838
11,708
4,774
82,670
99,555
2.09%
2.78%
514,096
122,987
4.50% 1,454,591
3.82% 2,167,202
55,937
39,176
140,051
(18,300)
49,632
33,389
99,042
(15,399)
Total assets
$ 3,241,574
$ 2,825,702
$ 2,333,866
195
40
295
9,260
3,754
61,952
75,496
0.51%
0.48%
1.02%
1.80%
3.05%
4.26%
3.47%
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits, interest-bearing $ 1,194,089
Savings deposits
Time deposits
Securities sold under agreements
to repurchase
FHLB advances
Federal funds purchased
Subordinated debentures
Other debt
395,028
473,043
140,622
97,701
3,794
27,391
10,103
3,293
579
4,699
330
2,071
97
1,409
349
0.28% $ 1,119,835
0.15%
0.99%
367,261
348,278
0.23%
2.12%
2.55%
5.14%
3.45%
144,674
57,405
3,996
23,956
13,289
1,811
486
1,697
181
883
61
927
436
0.16% $
881,994
0.13%
0.49%
340,746
298,124
0.13%
1.54%
1.51%
3.87%
3.28%
129,734
36,648
1,795
21,650
6,202
993
445
1,275
96
630
14
672
167
Total interest-bearing liabilities
2,341,771
12,827
0.55% 2,078,694
6,482
0.31% 1,716,893
4,292
Demand deposits
Other liabilities
Stockholders’ equity
506,873
11,284
381,646
438,575
9,144
299,289
372,339
8,380
236,254
Total liabilities & equity
$ 3,241,574
$ 2,825,702
$ 2,333,866
$
111,738
$
93,073
$
71,204
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.
3.51%
0.06%
3.57%
3.61%
0.10%
3.71%
23
0.11%
0.13%
0.43%
0.07%
1.72%
0.77%
3.10%
2.69%
0.25%
3.22%
0.06%
3.28%
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):
2018 Compared to 2017
Increase – (Decrease)
2017 Compared to 2016
Increase – (Decrease)
Total
Change
Volume (1)
Rate (1)
Total
Change
Volume (1)
Rate (1)
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
$
191
$
(6) $
197
$
$
96
22
(245)
(60) $
3
(340)
(54)
16
1,362
393
23,102
25,010
1,482
93
3,002
149
1,188
36
482
(87)
6,345
(85)
(5)
(1,006)
41
20,280
19,219
121
31
780
(5)
773
(3)
147
(109)
1,735
31
21
2,368
352
2,822
5,791
1,361
62
2,222
154
415
39
335
22
2,448
1,020
20,718
24,059
818
41
422
85
253
47
255
269
869
1,378
17,059
18,909
305
41
231
10
325
27
76
225
1,240
156
19
95
1,579
(358)
3,659
5,150
513
—
191
75
(72)
20
179
44
950
$
18,665
$
17,484
$
1,181
$
21,869
$
17,669
$
4,200
4,610
2,190
(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 $18.7 million or 20.1% in 2018 compared to an increase of $21.9 million or 30.7% in 2017. Net interest income increased
primarily due to the growth in average earnings assets including loans and investments acquired from First Bank and Soy Capital Bank. The net interest
margin was higher due to growth in earnings assets, increases in rates on earning assets and net accretion income related to the acquisition of First Bank
and Soy Capital Bank.
In 2018, average earning assets increased by $386.6 million, or 14.8%, and average interest-bearing liabilities increased by $263.1 million or 12.7%. In
2017, average earning assets increased by $441.6 million or 20.4% and average interest-bearing liabilities increased $361.8 million or 21.1% compared with
2016. Changes in average balances are shown below:
• Average interest-bearing deposits held by the Company decreased $0.6 million or 2.2% in 2018 compared to 2017. In 2017, average interest-bearing
deposits held by the Company decreased $9.8 million or 25.6% compared to 2016.
• Average federal funds sold decreased $8.4 million or 93.2% in 2018 compared to 2017. In 2017, average federal funds sold increased $633,000 or 7.5%
compared to 2016.
• Average certificates of deposit investments decreased $0.3 million or 9.2% in 2018 compared to 2017. In 2017, average certificates of deposit investments
decreased $25.5 million or 88.5% compared to 2016.
• Average loans increased by $439.9 million or 24.0% in 2018 compared to 2017. In 2017, average loans increased by $382.0 million or 26.3% compared
to 2016.
24
• Average securities decreased by $44.0 million or 6.0% in 2018 compared to 2017. In 2017, average securities increased by $94.3 million or 14.8%
compared to 2016.
• Average deposits increased by $226.8 million or 12.4% in 2018 compared to 2017. In 2017, average deposits increased by $314.5 million or 20.7%
compared to 2016.
• Average securities sold under agreements to repurchase decreased by $4.1 million or 2.8% in 2018 compared to 2017. In 2017, average securities sold
under agreements to repurchase increased by $14.9 million or 11.5% compared to 2016.
• Average borrowings and other debt increased by $40.3 million or 40.9% in 2018 compared to 2017. In 2017, average borrowings and other debt increased
by $32.4 million or 48.8% compared to 2016.
• Net interest margin increased to 3.71% compared to 3.57% in 2017 and 3.28% in 2016. Asset yields increased by 34 basis points in 2018, and interest-
bearing liabilities increased by 24 basis points.
To compare the tax-exempt yields on interest-earning assets to taxable yields, the Company also computes non-GAAP net interest income on a tax
equivalent basis where the interest earned on tax-exempt securities is adjusted to an amount comparable to interest subject to normal income taxes,
assuming a federal tax rate of 21% for 2018 and 35% for 2017 and 2016 (referred to as the tax equivalent adjustment). The tax equivalent basis adjustments
to net interest income for 2018, 2017 and 2016 were $2,025,000, $3,404,000, and $2,428,000, respectively. The net yield on interest-earning assets on a tax
equivalent basis was 3.79% in 2018, 3.70% in 2017 and 3.39% in 2016.
Provision for Loan Losses
The provision for loan losses in 2018 was $8,667,000 compared to $7,462,000 in 2017 and $2,826,000 in 2016. Nonperforming loans increased to
$39,839,000 at December 31, 2018 from $17,513,000 at December 31, 2017 and $18,241,000 at December 31, 2016. The increase in provision expense in
2018 and 2017 was primarily due to a increase in loan volume. Net charge-offs were $2,455,000 during 2018, $4,238,000 during 2017 and $649,000 during
2016. 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
Bank Owned Life Insurance
Other
Total other income
2018
2017
2016
2018
2017
$ Change From Prior Year
$
5,786
$
3,744
$
3,517
$
2,042
$
2,674
5,592
7,435
901
1,205
7,487
1,389
2,945
2,161
3,872
6,920
616
1,184
6,495
1,638
3,706
1,908
3,452
6,791
1,192
1,172
6,004
671
2,205
513
1,720
515
285
21
992
(249)
(761)
$
35,414
$
30,336
$
26,912
$
5,078
$
227
253
420
129
(576)
12
491
967
1,501
3,424
25
Total non-interest income increased to $35.4 million in 2018 compared to $30.3 million in 2017 and $26.9 million in 2016. The primary reasons for the more
significant year-to-year changes in other income components are as follows:
• Trust revenues increased $2,042,000 or 54.5% in 2018 to $5,786,000 from $3,744,000 in 2017 compared to $3,517,000 in 2016. The increases 2018
were due to an increases in market value and revenue from defined contribution and other retirement accounts and accounts added with the
acquisition of Soy Capital. Trust assets under management were $1,129.6 million at December 31, 2018 compared to $997.8 million at December 31,
2017 and $831.6 million at December 31, 2016.
• Revenue from brokerage increased $513,000 or 23.7% to $2,674,000 in 2018 from $2,161,000 in 2017 and $1,908,000 in 2016 primarily due to an
increase in the number of brokerage accounts from new business development efforts.
• Insurance commissions increased $1,720,000 or 44.4% to $5,592,000 in 2018 from $3,872,000 in 2017 and $3,452,000 in 2016. The growth is
primarily due to growth in senior care policies underwritten through the Illiana Insurance Agency branch from insurance activities and revenues
following the acquisition of Soy Capital.
• Fees from service charges increased $515,000 or 7.4% to $7,435,000 in 2018 from $6,920,000 in 2017 and $6,791,000 in 2016. The increase in 2018
was primarily due to a increase in income from the First Bank acquisition. The increase in 2017 was due to First Clover Leaf acquisition in place for a
full year.
• Net securities gains in 2018 were $901,000 compared to $616,000 in 2017 and $1,192,000 in 2016.
• Mortgage banking income increased $21,000 or 1.8% to $1,205,000 in 2018 from $1,184,000 in 2017 and $1,172,000 in 2016. Loans sold balances
are as follows:
$62 million (representing 489 loans) in 2018
$68 million (representing 536 loans) in 2017
$80 million (representing 566 loans) in 2016
First Mid Bank generally releases the servicing rights on loans sold into the secondary market.
• Revenue from ATMs and debit cards increased $992,000 or 15.3% to $7,487,000 in 2018 from $6,495,000 in 2017 and $6,004,000 in 2016. The
increase in 2018 was primarily due to an increase in electronic transactions following the First Bank and Soy Capital Bank acquisition. The increases
during 2017 were primarily due to an increase in electronic transactions following the acquisition of First Clover Leaf and quarterly incentives received
from VISA.
• Bank owned life insurance decreased $249,000 or 15.2% to $1,389,000 in 2018 from $1,638,000 in 2017 and $671,000 in 2016. The decrease is
primarily due to a death benefit of $511,000 that was received in 2017 that did not recur in 2018. The Company invested $25 million in bank owned life
insurance during the first quarter of 2016, acquired $8.6 million in bank owned life insurance in the First Bank acquisition in 2018, and acquired $13.6
million in bank owned life insurance in the Soy Capital acquisition in 2018, and acquired $15.6 million in bank owned life insurance in the First Clover
Leaf acquisition in 2016.
• Other income decreased $761,000 or 20.5% in 2018 to $2,945,000 from $3,706,000 in 2017 and $2,205,000 in 2016. The decrease was primarily due
to income tax refunds received in 2017 resulting from overpayment of taxes in 2016 by First Clover Leaf Financial and a decline in loan late charges
and closing fees resulting from less loan transaction activity. The increase from 2016 to 2017 is primarily due to income tax refunds resulting from
overpayment of taxes in 2016 by First Clover Leaf Bank and increases in various loan 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):
26
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
2018
2017
2016
2018
2017
$ Change From Prior Year
$
46,803
$
39,756
$
32,354
$
7,047
$
14,533
12,596
11,418
282
1,059
3,215
963
5,243
1,794
560
905
2,153
724
3,887
1,356
16,088
12,284
60
966
1,909
815
3,035
1,845
9,108
1,937
(278)
154
1,062
239
1,356
438
3,804
$
89,980
$
74,221
$
61,510
$
15,759
$
7,402
1,178
500
(61)
244
(91)
852
(489)
3,176
12,711
Total non-interest expense increased to $90.0 million in 2018 from $74.2 million in 2017 and $61.5 million in 2016. 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 $7.0 million or 17.7% to $46.8 million from $39.8 million in 2017, and
$32.4 million in 2016. The increase is primarily due to the addition of 112 employees from the First Bank acquisition, the addition of 149 employees from
the Soy Capital Bank acquisition and merit increases in 2018 for continuing employees during the first quarter of 2018. The increase in 2017 is primarily
due to merit increases for continuing employees and a full year of expenses for the acquired First Clover Leaf employees. There were 818 full-time
equivalent employees at December 31, 2018, compared to 592 at December 31, 2017, and 598 at December 31, 2016.
• Occupancy and equipment expense increased $1,937,000 or 15.4% to $14.5 million in 2018 from $12.6 million in 2017, and $11.4 million in 2016. The
increase in 2018 was primarily due to increases in maintenance and repair expenses, rent expense, and building insurance related to the acquisition of
First Bank and Soy Capital Bank. The increase in 2017 and 2016 was primarily due to increases in rent, property taxes, and depreciation expenses related
to the acquisition of First Clover Leaf Bank during the third quarter of 2016.
• Net other real estate owned expense decreased $278,000 or 49.6% to $282,000 from $560,000 in 2017, and $60,000 in 2016. The decrease in 2018 was
primarily due to more gains on properties sold during 2017 than properties sold in 2018. The increase in 2017 was primarily due to a write down of one
property to the appraised value and real estate taxes and maintenance expenses on properties owned.
• FDIC insurance expense increased $154,000 or 17.0% to $1,059,000 from $905,000 in 2017, and $966,000 in 2016. The increase in 2018 was primarily
due to an increase in average assets offset by a decline in FDIC rates. The decrease in 2017 was primarily due to a decline in FDIC rates.
• Amortization of other intangibles expense increased $1,062,000 or 49.3% to $3,215,000 from $2,153,000 in 2017, and $1,909,000 in 2016. The increase
in 2018 was due to amortization of core deposit intangibles from the First Bank and Soy Capital acquisitions. The increase in 2017 was due to a full year
of amortization of deposit premium for First Clover Leaf Bank.
• Other operating expenses increased $3,804,000 or 31.0% to $16,088,000 from $12,284,000 in 2017, and $9,108,000 in 2016. The increase in 2018 was
primarily due to costs associated with the acquisition and merger of First Bank and the acquisition of Soy Capital Bank. The increase in 2017 was primarily
due to additional expenses from First Clover Leaf locations and costs associated with the merger of First Clover Leaf Bank during the first quarter of 2017.
• On a net basis, all other categories of operating expenses increased $2,033,000 or 34.1% to $8,000,000 from $5,967,000 in 2017, and $5,695,000 in
2016. The increase is primarily due to an increase in legal and professional fees primarily associated with the acquisitions of First Bank and Soy Capital.
The increase from 2016 to 2017 was primarily due to an increase in legal expenses, primarily due to acquisition and loan collection related expenses.
Income Taxes
Income tax expense amounted to $11,905,000 in 2018 compared to $15,042,000 in 2017, and $11,940,000 in 2016. Effective tax rates were 24.5% for
2018, 36.0% for 2017, and 35.3% for 2016. The decline in effective tax rate for 2018 compared to 2017 was primarily due to a change in federal statutory
corporate tax rate from 35% to 21% effective January 1, 2018. The increases in tax expense and the effective tax rate for 2017 were primarily due to an
increase in taxable income, and increase in Illinois corporate income tax rate from 7.75% to 9.50% effective July 1, 2017, and additional one-time income tax
expense of approximately $1.4 million during the fourth quarter of 2017, due to remeasurement of deferred tax assets and liabilities because of the Tax Cut
and Jobs Act.
The Company files U.S. federal and state of Illinois, Indiana, and Missouri income tax returns. The Company is no longer subject to U.S. federal or state
income tax examinations by tax authorities for years before 2015.
27
Analysis of Balance Sheets
Securities
The Company’s overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital
against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of securities
purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions. The following table sets forth the
amortized cost of the available-for-sale and held-to-maturity securities for the last three years (dollars in thousands):
2018
December 31,
2017
2016
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
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
270,816
193,195
304,372
—
2,278
2.38% $
2.94%
2.86%
—%
3.58%
185,128
165,037
295,778
2,893
2,039
1.98% $
2.86%
2.59%
2.15%
2.50%
213,050
164,163
318,829
3,050
4,034
$
770,661
2.72% $
650,875
2.55% $
703,126
1.83%
2.80%
2.57%
1.86%
2.14%
2.39%
At December 31, 2018, the amortized cost of the Company’s investment portfolio increased by $119.8 million from December 31, 2017 primarily due to
securities that were added in the acquisitions of First Bank and Soy Capital, net of declines due to securities that were sold to provide cash flow to fund
loans. At December 31, 2017, the amortized cost of the Company's investment portfolio decreased by $52.3 million from December 31, 2016 primarily due
to securities that were sold to provide cash flow to fund loans. When purchasing investment securities, the Company considers its overall liquidity and
interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed.
The table below presents the credit ratings as of December 31, 2018 for certain investment securities (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 (2)
Trust preferred securities
Other securities
Total investments
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Amortized
Cost
Estimated
Fair Value
AAA
AA +/-
A +/-
BBB +/-
< BBB -
Not rated
Average Credit Rating of Fair Value at December 31, 2018 (1)
$
201,380
$
198,649
$
— $
198,649
$
— $
— $
— $
—
193,195
304,372
—
2,278
192,579
298,672
—
2,374
18,923
1,017
—
—
118,627
51,753
—
—
—
—
—
—
495
—
—
2,010
—
—
—
—
2,781
297,655
—
364
$
701,225
$
692,274
$
19,940
$
317,276
$
51,753
$
2,505
$
— $
300,800
$
69,436
$
67,909
$
— $
67,909
$
—
(1) Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.
(2) Mortgage-backed securities include mortgage-backed securities (MBS) and collateralized mortgage obligation (CMO) issues from the following government sponsored
enterprises: FHLMC, FNMA, GNMA and FHLB. While MBS and CMOs are no longer explicitly rated by credit rating agencies, the industry recognizes that they are backed
by agencies which have an implied government guarantee.
28
Other-than-temporary Impairment of Securities
Declines in the fair value, or unrealized losses, of all available for sale investment securities, are reviewed to determine whether the losses are either a
temporary impairment or OTTI. Temporary adjustments are recorded when the fair value of a security fluctuates from its historical cost. Temporary
adjustments are recorded in accumulated other comprehensive income, and impact the Company’s equity position. Temporary adjustments do not impact
net income. A recovery of available for sale security prices also is recorded as an adjustment to other comprehensive income for securities that are
temporarily impaired, and results in a positive impact to the Company’s equity position.
OTTI is recorded when the fair value of an available for sale security is less than historical cost, and it is probable that all contractual cash flows will not be
collected. Investment securities are evaluated for OTTI on at least a quarterly basis. In conducting this assessment, the Company evaluates a number of
factors including, but not limited to:
•
•
•
•
•
•
•
•
how much fair value has declined below amortized cost;
how long the decline in fair value has existed;
the financial condition of the issuers;
contractual or estimated cash flows of the security;
underlying supporting collateral;
past events, current conditions and forecasts;
significant rating agency changes on the issuer; and
the Company’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
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):
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
2018
50,619
231,700
373,518
184,051
906,850
1,746,738
135,877
557,011
91,516
113,377
2,644,519
$
$
% Outstanding
Loans
1.9% $
8.8%
14.1%
7.0%
34.2%
66.0%
5.1%
21.1%
3.5%
4.3%
100.0% $
2017
107,594
127,183
293,667
61,798
681,757
1,271,999
86,631
444,263
29,749
106,859
1,939,501
$
$
2016
49,104
126,108
326,415
83,200
630,135
1,214,962
86,685
409,033
38,028
77,284
1,825,992
$
$
2015
39,209
122,474
231,571
45,740
409,172
848,166
75,886
305,060
41,579
11,198
1,281,889
$
$
2014
21,627
110,193
181,921
53,129
379,604
746,474
68,298
223,780
15,118
8,736
1,062,406
Loan balances increased by $705.0 million or 36.4% from December 31, 2017 to December 31, 2018 primarily due to loans acquired from First Bank and
Soy Capital Bank. Loan balances increased by $113.5 million or 6.2% from December 31, 2016 to December 31, 2017 primarily due to increases in
construction and land development, commercial operating, and commercial real estate loans. The balances of loans sold into the secondary market were
$62.3 million in 2018 compared to $67.5 million in 2017. The balance of real estate loans held for sale, included in the balances shown above, amounted to
$1,508,000 and $1,025,000 as of December 31, 2018 and 2017, respectively.
Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on
loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets,
repayment of such loans may be influenced to a great extent by conditions in the market or the economy. The Company does not have any sub-prime
mortgages or credit card loans outstanding which are also generally considered to be higher credit risk.
29
The following table summarizes the loan portfolio geographically by branch region as of December 31, 2018 and 2017 (dollars in thousands):
Central region
Sullivan region
Decatur region
Peoria region
Highland region
Southern region
Soy Capital Bank
Total all regions
December 31, 2018
December 31, 2017
Principal
balance
% Outstanding
Loans
Principal
balance
% Outstanding
Loans
$
$
571,909
375,407
501,743
291,283
518,881
133,225
252,071
2,644,519
21.7% $
14.2%
19.0%
11.0%
19.6%
5.0%
9.5%
100.0% $
543,938
167,977
378,867
189,639
525,983
133,097
—
1,939,501
28.0%
8.7%
19.5%
9.8%
27.1%
6.9%
—%
100.0%
Loans are geographically dispersed among these regions located in central and southwestern Illinois. While these regions have experienced some economic
stress during 2018 and 2017, the Company does not consider these locations high risk areas since these regions have not experienced the significant
volatility 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, 2018 and 2017, the Company did have industry loan
concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):
Other grain farming
Lessors of non-residential buildings
Lessors of residential buildings & dwellings
Hotels and motels
Other Gambling Industries
December 31, 2018
December 31, 2017
Principal
balance
% Outstanding
Loans
Principal
balance
% Outstanding
Loans
$
276,142
250,495
289,169
129,216
105,259
10.44% $
9.47%
10.93%
4.89%
3.98%
170,758
185,967
131,756
131,702
95,713
8.80%
9.59%
6.79%
6.79%
4.93%
The Company had no further industry loan concentrations in excess of 25% of total risk-based capital.
The following table presents the balance of loans outstanding as of December 31, 2018, 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
$
29,636
$
9,836
$
11,147
$
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
(1) Based upon remaining contractual maturity.
(2) Includes demand loans, past due loans and overdrafts.
10,472
28,985
11,380
87,732
168,205
104,746
218,470
5,288
12,468
76,472
82,628
126,850
369,957
665,743
27,121
281,843
74,996
33,052
144,756
261,905
45,821
449,161
912,790
4,010
56,698
11,232
67,857
50,619
231,700
373,518
184,051
906,850
1,746,738
135,877
557,011
91,516
113,377
$
509,177
$
1,082,755
$
1,052,587
$
2,644,519
30
As of December 31, 2018, loans with maturities over one year consisted of approximately $1.6 billion in fixed rate loans and approximately $557 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.
The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets (in thousands):
2018
2017
2016
2015
2014
December 31,
Nonaccrual loans
$
27,298
$
16,659
$
12,053
$
3,412
$
4,105
Restructured loans which are performing in accordance with
revised terms
Total nonperforming loans
Repossessed assets
2,451
29,749
2,595
854
17,513
2,834
6,185
18,238
1,985
601
4,013
478
Total nonperforming loans and repossessed assets
$
32,344
$
20,347
$
20,223
$
4,491
$
Nonperforming loans to loans, before allowance for loan losses
Nonperforming loans and repossessed assets to loans, before
allowance for loan losses
1.12%
1.22%
0.90%
1.05%
1.00%
1.11%
0.31%
0.35%
435
4,540
263
4,803
0.43%
0.45%
The $10.6 million increase in nonaccrual loans during 2018 resulted from the net of $14.7 million of loans put on nonaccrual status including $2,242,000
acquired from First Bank and $344,000 acquired from Soy Capital Bank, offset by $235,000 of loans transferred to other real estate owned, $564,000 of
loans charged off and $3.3 million of loans becoming current or paid-off. The amounts above do not include loans formerly identified as TDRs by Soy Capital
Bank. 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
All Other loans
Total loans
December 31, 2018
December 31, 2017
Balance
% of Total
Balance
% of Total
377
309
5,762
2,105
8,457
17,010
667
8,990
625
6
1.4% $
1.1%
21.1%
7.7%
31.1%
62.4%
2.4%
32.9%
2.3%
—%
—
291
2,687
368
5,596
8,942
757
6,658
302
—
—%
1.7%
16.1%
2.2%
33.6%
53.6%
4.5%
40.1%
1.8%
—%
$
27,298
100.0% $
16,659
100.0%
31
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $1,189,000, $471,000 and $133,000 for the
years ended December 31, 2018, 2017 and 2016, respectively.
The $239,000 decrease in repossessed assets during 2018 resulted from the net of $619,000 of additional assets repossessed, $1,408,000 assets acquired,
$1,729,000 of repossessed assets sold and $537,000 of further write-downs of repossessed assets to current market value. The following table summarizes
the composition of repossessed assets (in thousands):
Construction and land development
Farm Loans
1-4 family residential properties
Multi-family residential properties
Commercial real estate
Total real estate
Agricultural Loans
Commercial & Industrial Loans
Consumer Loans
Total repossessed collateral
December 31, 2018
December 31, 2017
Balance
% of Total
Balance
% of Total
$
1,513
58.2% $
1,781
—
583
—
438
2,534
—
61
—
—%
22.5%
—%
16.9%
97.6%
—%
2.4%
—%
—
413
—
560
2,754
—
44
36
62.7%
—%
14.6%
—%
19.8%
97.1%
—%
1.6%
1.3%
$
2,595
100.0% $
2,834
100.0%
Repossessed assets sold during 2018 resulted in net losses of $132,000, of which $120,000 of net losses was related to real estate asset sales and $12,000
of net losses was related to other repossessed assets.
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 a five-year loss history as one of several components in assessing the probability of inherent future
losses. Given the continued weakened economic conditions, management also increased its allocation to various loan categories for economic factors
during 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 central and southern
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, 2018, the Company’s loan portfolio included $367.6 million of loans to borrowers whose businesses are
directly related to agriculture. Of this amount, $276.1 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly
related to agriculture increased $153.8 million from $213.8 million at December 31, 2017 while loans concentrated in other grain farming increased $105.3
million from $170.8 million at December 31, 2017.
While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought
conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the
level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio.
In addition, the Company has $129.2 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
32
also has $250.5 million of loans to lessors of non-residential buildings and $289.2 million of loans to lessors of residential buildings and dwellings, and
$105.3 million to other gambling industries.
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.
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
$
2,276,500
$
1,836,617
$
1,454,591
$
1,126,479
$
1,022,605
2018
2017
2016
2015
2014
Allowance-beginning of period
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
19,977
16,753
14,576
13,682
13,249
1,281
925
364
423
2,993
91
133
80
234
538
2,455
8,667
1,025
3,649
98
423
5,195
406
281
27
243
957
4,238
7,462
381
630
292
372
1,675
529
283
25
189
1,026
649
2,826
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
$
26,189
$
19,977
$
16,753
$
14,576
$
13,682
Ratio of annualized net charge-offs to average loans
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
0.11%
0.99%
88.0%
0.23%
1.03%
114.1%
0.05%
0.92%
92.0%
0.04%
0.03%
1.14%
363.0%
1.29%
301.4%
The ratio of the allowance for loan losses to nonperforming loans is 88.0% as of December 31, 2018 compared to 114.1% as of December 31, 2017. The
decrease in this ratio is primarily due to the increase in loan balances and the increase in non performing loans to $29.7 million at December 31, 2018 from
$17.5 million at December 31, 2017 including $.3 million in non-performing loans from Soy Capital Bank and $6.6 million in non-performing loans acquired
from First Bank during the second quarter of 2018. The amounts above do not include loans formerly identified as TDRs by Soy Capital Bank. Management
believes that the overall estimate of the allowance for loan losses appropriately accounts for probable losses attributable to current exposures.
During 2018, the Company had net charge-offs of $2,455,000 compared to $4,238,000 in 2017. During 2018, there were significant charge offs of
commercial real estate loans to one borrower of $169,000, charge offs of two agricultural loans to one borrower of $93,000, and charge offs of six
commercial operating loans to two borrowers of $540,000. During 2017, the Company had net charge-offs of $4,238,000 compared to $649,000 in 2016.
During 2017, there were significant charge offs of commercial real estate loans to three borrowers of $619,000, charge offs of two agricultural loans to one
borrower of $662,000, and charge offs of twelve commercial
operating loans to five borrowers of $2,689,000.
33
At December 31, 2018, the allowance for loan losses amounted to $26.2 million or 0.99% of total loans. At December 31, 2017, the allowance for loan
losses amounted to $20.0 million or 1.03% of total loans. The decrease in this ratio in 2018 is primarily due to an increase in loan balances. The increase in
this ratio in 2017 is primarily due to an increase in provision recorded as loans acquired renewed or paid off.
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):
Residential real estate
Commercial / Commercial real estate
Agricultural / Agricultural real estate
Consumer
Total allocated
Unallocated
December 31, 2018
December 31, 2017
December 31, 2016
Allowance for
loan losses
% of
loans to
total
loans
Allowance for
loan losses
% of
loans to
total
loans
Allowance for
loan losses
$
1,504
21,556
2,197
932
14.8% $
886
16.2% $
67.5%
13.9%
3.8%
16,546
1,742
803
70.8%
11.0%
2.0%
874
12,901
2,249
693
% of
loans to
total
loans
20.1%
66.0%
11.6%
2.3%
26,189
100.0%
19,977
100.0%
16,717
100.0%
—
NA
—
NA
36
NA
Allowance at end of year
$
26,189
100.0% $
19,977
100.0% $
16,753
100.0%
Residential real estate
Commercial / Commercial real estate
Agricultural / Agricultural real estate
Consumer
Total allocated
Unallocated
Allowance at end of year
December 31, 2015
December 31, 2014
Allowance for
loan losses
% of
loans to
total
loans
Allowance for
loan losses
994
18.1% $
11,379
1,337
642
63.0%
15.5%
3.4%
790
10,914
1,360
386
% of
loans to
total
loans
17.4%
64.4%
16.8%
1.4%
14,352
100.0%
13,450
100.0%
224
NA
232
N/A
14,576
100.0% $
13,682
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.
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, 2018, 2017 and 2016 (in thousands):
2018
2017
2016
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
$
506,873
—% $
438,575
—% $
1,194,089
395,028
473,043
0.28%
0.15%
0.99%
1,119,835
367,261
348,278
0.16%
0.13%
0.49%
372,339
881,994
340,746
298,124
Total average deposits
$
2,569,033
0.33% $
2,273,949
0.18% $
1,893,203
—%
0.11%
0.13%
0.43%
0.14%
34
The following table sets forth the high and low month-end balances for the years ended December 31, 2018, 2017 and 2016 (in thousands):
High month-end balances of total deposits
Low month-end balances of total deposits
2018
2017
2016
$
3,017,035
$
2,331,084
$
2,208,941
2,217,477
2,329,887
1,699,770
In 2018, the average balance of deposits increased by $295.1 million from 2017. The increase was primarily the result of deposit balances acquired in the
acquisition of First Bank during the second quarter of 2018 and the acquisition of Soy Capital Bank during the fourth quarter of 2018. Average non-interest
bearing deposits increased $68.3 million, other interest-bearing deposits increased by $74.3 million, savings accounts increased by $27.8 million, and time
deposits increased $124.8 million. In 2017, the average balance of deposits increased by $380.7 million from 2016. The increase was primarily attributable
the acquisition of FIrst Clover Leaf during the third quarter of 2016 that were included for the full-year in 2017. Average non-interest bearing deposits
increased by $66.2 million, savings accounts increased by $26.5 million, average balances of other interest-bearing deposits increased $237.8 million and
time deposits increased by $50.2 million.
Balances of time deposits of $100,000 or more include time deposits maintained for public fund entities and consumer time deposits. The following table sets
forth the maturity of time deposits of $100,000 or more (in thousands):
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
2018
December 31,
2017
2016
44,898
$
31,467
$
49,476
78,567
155,071
34,194
54,607
46,805
23,796
20,352
37,094
70,020
328,012
$
167,073
$
151,262
$
$
The balance of time deposits of $100,000 or more increased $160.9 million from December 31, 2017 to December 31, 2018. The balance of time deposits of
$100,000 or more increased $15.8 million from December 31, 2016 to December 31, 2017. The increase in 2018 and 2017 was primarily due to the deposits
added through acquisitions.
In 2018 the Company maintained account relationships with various public entities throughout its market areas. 83 public entities had total balances of $94.8
million in various checking accounts and time deposits as of December 31, 2018. These balances are subject to change depending upon the cash flow
needs of the public entity.
35
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term obligations of First Mid Bank and Soy Capital Bank. These obligations are collateralized with
certain government securities that are direct obligations of the United States or one of its agencies. These retail repurchase agreements are 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, 2018, 2017 and 2016 is presented below (in thousands):
At December 31:
Securities sold under agreements to repurchase
$
192,330
$
155,388
$
185,763
2018
2017
2016
Federal Home Loan Bank advances:
Fixed term – due in one year or less
Fixed term – due after one year
Junior subordinated debentures
Debt due in one year or less
Debt due after one year
Total
Average interest rate 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
Debt due after one year
Junior subordinated debentures
Averages for the period (YTD):
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:
Loans due in one year or less
Loans due after one year
Junior subordinated debentures
Total
$
$
29,000
90,745
29,000
—
7,724
—
60,038
24,000
—
10,313
5,000
35,094
23,917
4,000
14,063
348,799
$
249,739
$
267,837
1.30%
1.00%
0.52%
192,330
$
163,626
$
22,000
20,000
185,763
12,500
30,000
29,000
101,745
—
10,313
30,221
30,000
5,000
60,061
4,000
14,063
24,000
10,000
20,000
35,109
7,000
15,000
23,917
$
140,622
$
144,674
$
129,734
3,794
3,996
1,795
9,434
16,510
71,757
548
9,555
27,391
8,598
2,356
46,452
658
12,632
23,956
$
279,611
$
243,322
$
3,992
10,260
22,396
1,454
4,749
21,650
196,030
Average interest rate during the period
1.52%
1.02%
0.81%
Securities sold under agreements to repurchase increased $36.9 million during 2018 primarily due to balances acquired from Soy Capital Bank, and the
seasonal demands in balances and change in cash flow needs of various customers. FHLB advances represent borrowings by the Banks to economically
fund loan demand.
36
At December 31, 2018 the advances totaling $120.0 million were as follows:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
$4 million advance with a 3-year maturity, at 1.72% due April 12, 2019
$15 million advance with a 6-month maturity, at 2.40% due May 13, 2019
$5 million advance with a 2-year maturity, at 1.56%, due June 28, 2019
$10 million advance with a 11-month maturity at 2.81%, due August 30, 2019
$5 million advance with a 15-month maturity, at 2.63%, due September 27, 2019
$2 million advance with a 5-year maturity, at 1.89%, due October 17, 2019
$10 million advance with a 14-month maturity at 2.88%, due November 29, 2019
$5 million advance with a 1.5-year maturity, at 2.67%, due December 27, 2019
$4 million advance with a 3-year maturity, at 2.68%, due January 9, 2020
$5 million advance with a 2.5-year maturity, at 1.67%, due January 31, 2020
$5 million advance with a 4-year maturity, at 1.79%, due April 30, 2020
$10 million advance with a 1.5 year maturity at 2.95%, due May 29, 2020
$5 million advance with a 2-year maturity, at 2.75%, due June 26, 2020
$5 million advance with a 3-year maturity, at 1.75%, due July 31, 2020
$5 million advance with a 6-year maturity, at 2.30%, due August 24, 2020
$5 million advance with a 3.5-year maturity, at 1.83%, due February 1, 2021
$5 million advance with a 5-year maturity, at 1.85%, due April 12, 2021
$5 million advance with a 7-year maturity, at 2.55%, due October 1, 2021
$5 million advance with a 5-year maturity, at 2.71%, due March 21, 2022
$5 million advance with a 8-year maturity, at 2.40%, due January 9, 2023
The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $10 million. The balance on this line of credit was
$0 as of December 31, 2018. This loan was renewed on April 13, 2018 for one year as a revolving credit agreement with a maximum available balance of
$10 million. The interest rate is floating at 2.25% over the federal funds rate (4.65% and 3.67% at December 31, 2018 and 2017, respectively). The loan is
secured by all of the stock of First Mid Bank. The Company and its subsidiary banks were in compliance with the then existing covenants at December 31,
2018 and 2017.
On September 7, 2016, the Company entered into, with The Northern Trust Company, a $15 million fixed-rate note with a maturity date of September 7,
2020. The interest rate is floating at 2.25% over the federal funds rate (4.65% and 3.67% at December 31, 2018 and 2017, respectively) and interest and
principal payments are due quarterly. As of December 31, 2018, the balance due was paid off. The loan is secured by all of the stock of First Mid Bank. The
Company used the proceeds of this note to fund the cash portion of the acquisition price of First Clover Leaf Financial.
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 (5.19% and 4.21% at December 31, 2018 and 2017, 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 (4.39% and 3.19% at December 31, 2018
and 2017, respectively). The net proceeds to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield
Bancorp, Inc. in 2006.
37
On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a
wholly owned unconsolidated subsidiary of First Clover Financial. The $4,000,000 of trust preferred securities and an additional $124,000 additional
investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear
interest at three-month LIBOR plus 185 basis points (4.64% and 3.44% at December 31, 2018 and 2017, respectively) and resets quarterly.
On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly
owned unconsolidated subsidiary of First BancTrust Corporation. The $6,000,000 of trust preferred securities and an additional $186,000 additional
investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035,
bear interest at three-month LIBOR plus 170 basis points (4.49% and 3.29% at December 31, 2018 and 2017, respectively) and resets quarterly.
The trust preferred securities issued by Trust I, Trust II, CLST I, and FBTCST I 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.
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.
38
The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at December 31, 2018 (dollars in thousands):
1 year
1-2 years
2-3 years
3-4 years
4-5 years
Thereafter
Total
Fair Value
Rate Sensitive Within
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:
$
77,807
$
— $
— $
— $
— $
— $
77,807
$
77,807
2,944
364
2,665
13,079
490
47,665
1,225
49,527
245
—
74,691
383,805
7,569
569,131
7,569
567,090
—
5,298
7,250
8,675
4,491
1,024,723
355,089
495,869
332,838
308,591
166,865
127,409
192,579
192,579
2,644,519
2,541,037
$ 1,105,838
$
376,131
$ 551,274
$
392,265
$
388,018
$ 678,079
$ 3,491,605
$ 3,386,082
Savings and NOW accounts
$
334,175
$
115,008
$ 115,008
$
115,008
$
115,008
$ 541,538
$ 1,335,745
$ 1,335,745
Money market accounts
Other time deposits
Short-term borrowings/debt
Long-term borrowings/debt
361,467
325,158
192,330
92,493
19,561
183,713
—
19,561
47,583
—
38,976
15,000
Total
$ 1,305,623
$
357,258
$ 197,152
Rate sensitive assets – rate
sensitive liabilities
$ (199,785) $
18,873
$ 354,122
Cumulative GAP
$ (199,785) $ (180,912) $ 173,210
19,561
21,033
—
5,000
160,602
231,663
404,873
$
$
$
$
$
$
19,561
13,506
—
5,000
45,677
776
—
—
485,388
591,769
192,330
156,469
485,388
594,260
192,179
151,846
153,075
$ 587,991
$ 2,761,701
$ 2,759,418
234,943
$
90,088
$
729,904
639,816
$ 729,904
Cumulative amounts as % of
total Rate sensitive assets
Cumulative Ratio
-5.7%
-5.7%
0.5%
10.1%
6.6%
6.7%
2.6%
-5.2%
5.0%
11.6%
18.3%
20.9%
The static GAP analysis shows that at December 31, 2018, 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.
Capital Resources
At December 31, 2018, the Company’s stockholders' equity had increased $167.9 million, or 54.5%, to $475,864,000 from $307,964,000 as of December 31,
2017. During 2018, net income contributed $36,600,000 to equity before the payment of dividends to stockholders. The change in market value of
available-for-sale investment securities decreased stockholders' equity by $4,169,000, net of tax. Shares issued in the capital raise increased stockholders'
equity by $34 million and shares issued in acquisitions added $109.3 to stockholders' equity.
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
2016, the Company converted the Series C Preferred Stock to approximately 1,355,319 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
39
purposes of the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan (“DCP”). At December 31, 2018, the Company classified the cost basis of its
common stock issued and held in trust in connection with the DCP of approximately $3,548,000 as treasury stock. The Company also classified the cost
basis of its related deferred compensation obligation of approximately $3,548,000 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:
•
•
•
9,043 common shares during 2018
6,875 common shares during 2017, and
4,683 common shares during 2016
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 three months of service with the Company. The Company offers common stock as an investment option for participants of
the 401(k) plan. Beginning in 2016, shares for the 401(k) plan were purchased in the open market instead of being issued by the Company. The Company
issued, pursuant to the 401(k) plan:
•
•
•
0 common shares during 2018
0 common shares during 2017, and
558 common shares during 2016
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
$9,891,000 in common stock dividends paid during 2018, $1,099,000 or 11.1% was reinvested into shares of common stock of the Company through the
DRIP. Events that resulted in common shares being reinvested in the DRIP:
•
•
•
During 2018, 30,655 common shares were issued from common stock dividends.
During 2017, 30,059 common shares were issued from common stock dividends.
During 2016, 46,894 common shares were issued from common stock dividends and 3,552 common shares were issued from preferred
stock dividends.
Stock Incentive Plan. At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The
SI Plan was implemented to succeed the Company’s 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means
whereby directors, employees, consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal
involvement in the continued development and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and
its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common
Stock of the Company on the terms and conditions established in the SI Plan.
A maximum of 149,983 shares of common stock may be issued under the SI Plan. During 2018, 2017, and 2016 (under the 2007 Stock Incentive Plan), the
Company awarded 28,700 and 18,391, and 13,912 shares as stock and stock unit awards, respectively. 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.
40
•
•
•
•
•
•
•
•
•
•
•
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 2018, the Company repurchased $3,900 (0.02% of common shares) at a total price of approximately $138,000. All of these shares were a result of
shares withheld for taxes on vested employee stock incentives. During 2017, the Company repurchased $20,734 (0.16% of common shares) at a total price
of approximately $797,000. As of December 31, 2018, approximately $6.2 million remains available for purchase under the repurchase programs. Treasury
stock is further affected by activity in the DCP.
41
Capital Ratios
For 2018, the minimum regulatory requirements are 9.875% for the Total Risk-based capital ratio, 7.875% for the Tier 1 Risk-based capital ratio, 6.375% for
the Common Equity Tier 1 capital ratio, and 4% for the Tier 1 Leverage ratio. The Company, First Mid Bank, and Soy Capital Bank have capital ratios above
the minimum regulatory capital requirements and, as of December 31, 2018, the Company, First Mid Bank, and Soy Capital 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, First Mid Bank, and Soy Capital Bank's capital ratios as of December 31, 2018 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)
13.63%
12.85%
14.33%
12.76%
11.89%
14.33%
11.81%
11.89%
14.33%
11.15%
9.92%
11.12%
First Mid-Illinois Bancshares, Inc. (Consolidated)
First Mid Bank
Soy Capital Bank
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 $65 million available in overnight federal fund lines, including $30 million from First Tennessee Bank, N.A., $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, 2018, 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, 2018, the excess collateral at the FHLB would support approximately $454.4 million of additional advances for
First Mid Bank.
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, 2018, the Company had a revolving credit agreement in the amount of $10 million with The Northern Trust
Company with an outstanding balance of $0 million and $10 million in available funds. This loan was renewed on April 13, 2018 for one year
as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of
First Mid Bank, and includes requirements for operating and capital ratios. The Company and its subsidiary banks were in compliance with the
existing covenants at December 31, 2018 and 2017.
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.
42
The following table summarizes significant contractual obligations and other commitments at December 31, 2018 (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
$
$
591,769
$
325,158
$
231,296
$
34,539
$
30,930
245,123
40,771
533
—
181,123
2,880
100
—
54,000
216
97
—
10,000
4,420
100
909,126
$
509,261
$
285,609
$
49,059
$
776
30,930
—
33,255
236
65,197
For the year ended December 31, 2018, net cash of $42.2 million was provided from operating activities, $11.0 million was used in investing activities, and
$21.3 million was provided from financing activities. In total cash and cash equivalents increased by $52.5 million from year-end 2017.
For the year ended December 31, 2017, net cash of $46.2 million was provided from operating activities, $56.0 million was used in investing activities, and
$77.2 million was used in financing activities. In total cash and cash equivalents increased by $87.0 million from year-end 2016.
For the year ended December 31, 2016, net cash of $27.4 million was provided from operating activities, $78.1 million was used in investing activities, and
$110.8 million was provided from financing activities. In total cash and cash equivalents decreased by $60.1 million from year-end 2015.
For the years ended December 31, 2018 and 2017, the Company also had $10 million of floating rate trust preferred securities outstanding through each of
Trust I and Trust II, and in September 2016, the Company acquired $4 million of floating rate trust preferred securities from First Clover Leaf under Clover
Leaf Statutory Trust I and on May 1, 2018, the Company acquired $6.1 million of floating rate trust preferred securities from First BancTrust
Corporation. 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.
43
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 and Soy Capital 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, 2018, 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 the First
Mid Bank's and Soy Capital Bank's performance, on a consolidated basis, as follows:
December 31, 2018
Prime rate is 5.50%
Prime rate increase of:
200 basis points to 7.50%
100 basis points to 6.50%
Prime rate decrease of:
100 basis points to 4.50%
200 basis points to 3.50%
Increase (Decrease) In
Net Interest Income
Return On
Average Equity
($000)
(%)
2018=9.59%
$
(4,007)
(1,850)
(4,285)
(11,285)
(3.9)%
(1.8)%
(4.2)%
(11.1)%
(0.96)%
(0.44)%
(1.03)%
(2.75)%
The following table shows the same analysis for First Mid Bank performed as of December 31, 2017:
December 31, 2017
Prime rate is 4.50%
Prime rate increase of:
200 basis points to 6.50%
100 basis points to 5.50%
Prime rate decrease of:
100 basis points to 3.50%
200 basis points to 2.50%
Increase (Decrease) In
Net Interest Income
Return On
Average Equity
($000)
(%)
2017=8.92%
$
(1,912)
(837)
(4,465)
(8,899)
(3.1)%
(1.4)%
(7.2)%
(14.4)%
(0.59)%
(0.26)%
(1.38)%
(2.79)%
The Company'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 ramped rate increases and do not take into account any management response
or mitigating action.
44
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 the First Mid Bank and Soy Capital 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 the Company's projected change in EVE, on a consolidated basis, for the various rate shock levels at December 31, 2018 and
2017 (in thousands). All market risk sensitive instruments presented in the tables are held-to-maturity or available-for-sale. The Banks have no trading
securities.
December 31, 2018
December 31, 2017
Changes In
Economic Value of Equity
Amount of
Change
($000)
$
(36,159)
(16,479)
(63,947)
(19,944)
(27,611)
(11,926)
(74,933)
(28,272)
Percent
of Change
(5.6)%
(2.5)%
(9.9)%
(3.1)%
(5.8)%
(2.5)%
(15.6)%
(5.9)%
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, 2018, in the event of a sudden and sustained increase in prevailing market interest rates, the 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, The Company's
EVE would be expected to decrease. At December 31, 2018, the estimated changes in EVE were within the Company’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. 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 the Company 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 and Soy Capital 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.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
December 31, 2018 and 2017
(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 $67,909 and
$68,457 at December 31, 2018 and 2017, respectively)
Loans held for sale
Loans
Less allowance for loan losses
Net loans
Interest receivable
Other real estate owned
Premises and equipment, net
Goodwill, net
Intangible assets, net
Bank owned life insurance
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Repurchase agreements with customers
Interest payable
FHLB borrowings
Other borrowings
Junior subordinated debentures
Other liabilities
Total liabilities
Stockholders’ Equity:
Common stock, $4 par value; authorized 30,000,000 shares;
issued 17,219,012 shares in 2018 and 13,231,225 shares in 2017
Additional paid-in capital
Retained earnings
Deferred compensation
Accumulated other comprehensive loss
Less treasury stock at cost, 574,377 shares in 2018 and 570,477 shares in 2017
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
46
$
$
$
2018
2017
$
63,593
77,142
665
141,400
7,569
692,274
69,436
1,508
2,643,011
(26,189)
2,616,822
16,881
2,534
59,117
105,277
33,820
65,484
27,612
3,839,734
$
$
575,784
2,412,902
2,988,686
192,330
1,758
119,745
7,724
29,000
24,627
3,363,870
70,876
293,937
131,392
2,761
(6,473)
(16,629)
475,864
75,398
12,990
491
88,879
1,685
578,579
69,332
1,025
1,938,476
(19,977)
1,918,499
10,832
2,754
38,266
60,150
10,679
41,883
18,976
2,841,539
480,283
1,794,356
2,274,639
155,388
602
60,038
10,313
24,000
8,595
2,533,575
54,925
163,603
104,683
3,540
(2,304)
(16,483)
307,964
$
3,839,734
$
2,841,539
Consolidated Statements of Income
For the years ended December 31, 2018, 2017 and 2016
(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
Bank owned life insurance
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
ATM / debit card expense
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.
47
2018
2017
2016
$
105,772
$
82,670
$
61,952
13,070
5,167
66
8
482
124,565
8,571
330
2,071
446
1,409
12,827
111,738
8,667
103,071
5,786
2,674
5,592
7,435
901
1,205
7,487
1,389
2,945
35,414
46,803
14,533
282
1,059
3,215
963
5,243
1,794
2,971
13,117
89,980
48,505
11,905
36,600
—
36,600
2.53
2.52
0.70
$
$
11,708
4,774
50
62
291
99,555
3,995
181
883
496
927
6,482
93,073
7,462
85,611
3,744
2,161
3,872
6,920
616
1,184
6,495
1,638
3,706
30,336
39,756
12,596
560
905
2,153
724
3,887
1,356
2,393
9,891
74,221
41,726
15,042
26,684
—
26,684
2.13
2.13
0.66
$
$
9,288
3,726
295
40
195
75,496
2,713
96
630
181
672
4,292
71,204
2,826
68,378
3,517
1,908
3,452
6,791
1,192
1,172
6,004
671
2,205
26,912
32,354
11,418
60
966
1,909
815
3,035
1,845
1,994
7,114
61,510
33,780
11,940
21,840
825
21,015
2.07
2.05
0.62
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2018, 2017 and 2016
(in thousands)
Net income
Other Comprehensive Income (Loss)
Unrealized gains (losses) on available-for-sale securities, net of
taxes of $1,475, $(2,855), and $3,848 for the years ended
December 31, 2018, 2017 and 2016, respectively
Unamortized holding gains on held to maturity securities transferred
from available for sale, net of taxes of $(33), $(32), and $(172) for
December 31, 2018, 2017 and 2016, respectively
Less: reclassification adjustment for realized gains included in net
income net of taxes of $261, $216, and $465 for the years ended
December 31, 2018, 2017 and 2016, respectively
Other comprehensive income (loss), net of taxes
2018
2017
2016
$
36,600
$
26,684
$
21,840
(3,611)
3,845
(6,025)
82
80
268
(640)
(4,169)
(400)
3,525
(727)
(6,484)
15,356
Comprehensive income
$
32,431
$
30,209
$
See accompanying notes to consolidated financial statements.
48
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2018, 2017 and 2016
(In thousands, except share and per share data)
Common
Stock
Additional
Paid-In-
Capital
Retained
Earnings
Deferred
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
December 31, 2017
$ 54,925 $ 163,603 $ 104,683 $
3,540 $
(2,304) $ (16,483) $ 307,964
Net income
Other comprehensive loss, net of tax
Dividends on common stock ($.70 per sh)
Issuance of 1,643,900 common shares pursuant to
acquisition of First Banctrust Corporation, net proceeds
Issuance of 1,330,571 common shares pursuant to
acquisition of SCB Bancorp, net proceeds
Issuance of 947,368 common shares pursuant to capital
raise
—
—
—
—
—
—
36,600
—
(9,891)
6,576
54,646
5,322
42,770
3,789
30,197
Issuance of 30,655 common shares pursuant to the
Dividend Reinvestment Plan
123
Issuance of 9,043 common shares pursuant to the
Deferred Compensation Plan
Issuance of 13,250 restricted common shares pursuant
to the 2017 Stock Incentive Plan
Issuance of 10,500 common shares pursuant to the
exercise of stock options
Purchase of 3,900 treasury shares
Deferred compensation
Tax benefit related to deferred compensation
distributions
Grant of restricted stock units pursuant to the 2017
Stock Incentive Plan
Vested restricted shares/units compensation expense
36
53
52
—
—
—
—
—
976
309
463
247
—
—
160
566
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8
—
—
(787)
—
(4,169)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
36,600
(4,169)
(9,891)
61,222
48,092
33,986
1,099
345
516
299
(138)
(138)
(8)
—
—
—
—
160
566
(787)
December 31, 2018
$ 70,876 $ 293,937 $ 131,392 $
2,761 $
(6,473) $ (16,629) $ 475,864
See accompanying notes to consolidated financial statements.
49
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2018, 2017 and 2016
(In thousands, except share and per share data)
Common
Stock
Additional
Paid-In-
Capital
Retained
Earnings
Deferred
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
December 31, 2016
$ 54,083 $ 158,671 $ 86,216 $
3,201 $
(5,761) $ (15,737) $ 280,673
Net income
Other comprehensive income, net of tax
Dividends on common stock ($.66 per sh)
Reclass of stranded AOCI due to tax reform
Issuance of 30,059 common shares pursuant to the
Dividend Reinvestment Plan
Issuance of 6,875 common shares pursuant to the
Deferred Compensation Plan
Issuance of 47,339 restricted common shares pursuant
to the 2007 and 2017 Stock Incentive Plan
Issuance of 98,710 common shares pursuant to At-The-
Market program, less issuance costs
Purchase of treasury shares
Deferred compensation
Tax benefit related to deferred compensation
distributions
Grant of restricted stock units pursuant to the 2017
Stock Incentive Plan
Issuance of 27,500 common shares pursuant to the
exercise of stock options
Release of restricted stock units pursuant to 2017 SIP
Disqualified disposition of incentive stock option
Vested restricted shares/units compensation expense
—
—
—
—
120
28
189
395
—
—
—
—
110
—
—
—
—
—
—
—
937
204
1,615
2,856
—
—
216
359
589
(1,849)
5
—
26,684
—
(8,285)
68
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(51)
—
—
—
—
—
390
—
3,525
—
(68)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26,684
3,525
(8,285)
—
1,057
232
1,804
3,251
(797)
(797)
51
—
—
—
—
—
—
—
216
359
699
(1,849)
5
390
December 31, 2017
$ 54,925 $ 163,603 $ 104,683 $
3,540 $
(2,304) $ (16,483) $ 307,964
See accompanying notes to consolidated financial statements.
50
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2018, 2017 and 2016
(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, 2015
$ 27,400 $ 38,015 $
79,626 $ 71,712 $
3,245 $
723 $ (15,712) $ 205,009
Net income
Other comprehensive loss, net of tax
Dividends on preferred stock ($150 per sh)
Dividends on common stock ($.62 per sh)
Issuance of 2,500 common shares pursuant
to the exercise of stock options
Issuance of 1,355,319 common shares
pursuant to conversion of 5,500 shares of
Series C preferred stock
Issuance of 50,446 common shares
pursuant to the Dividend Reinvestment Plan
Issuance of 4,683 common shares pursuant
to the Deferred Compensation Plan
Issuance of 558 common shares pursuant to
the First Retirement & Savings Plan
Issuance of 2,910 restricted common shares
pursuant to the 2007 Stock Incentive Plan
Issuance of 2,600,616 common shares
pursuant to acquisition of First Clover Leaf
Financial, net proceeds
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
—
—
—
—
—
—
—
—
—
10
—
—
—
—
52
(27,400)
5,421
21,979
—
—
—
—
—
—
—
—
—
202
1,121
19
2
12
100
12
68
10,402
55,295
—
—
—
—
—
140
278
—
21,840
—
(825)
(6,511)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25
—
—
(69)
—
(6,484)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21,840
(6,484)
(825)
(6,511)
62
—
1,323
119
14
80
—
65,697
(25)
—
—
—
—
140
278
(69)
December 31, 2016
$
— $ 54,083 $ 158,671 $ 86,216 $
3,201 $
(5,761) $ (15,737) $ 280,673
See accompanying notes to consolidated financial statements.
51
Consolidated Statements of Cash Flows
For the years ended December 31, 2018, 2017 and 2016
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation, amortization and accretion, net
Change in cash surrender value of bank owned life insurance
Gain on bank owned life insurance
Stock-based compensation expense
Gains on investment securities, net
Loss (gain) on sales of other real property owned, net
Donation of building
Loss on write down of premises and equipment
Loss on loans sold
Gains on sale of loans held for sale, net
Deferred income taxes
Increase in accrued interest receivable
Increase (decrease) in accrued interest payable
Origination of loans held for sale
Proceeds from sale of loans held for sale
(Increase) 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
Proceeds from sale of premises and equipment
Purchases of premises and equipment
Proceeds from sales of other real property owned
Investment in bank owned life insurance
Capitalization of mortgage servicing rights
Proceeds from settlement of bank owned life insurance policies
Cash received related to acquisition, net of cash and cash equivalents acquired
Net cash used in investing activities
Cash flows from financing activities:
Net (decrease) increase in deposits
(Decrease) Increase in repurchase agreements
Proceeds from FHLB advances
Repayment of FHLB advances
Proceeds from short-term debt
Repayment of short-term debt
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from issuance of common stock
Direct expenses related to capital transactions
Purchase of treasury stock
Dividends paid on preferred stock
Dividends paid on common stock
Net cash provided by (used in) financing activities
52
2018
2017
2016
$
36,600
$
26,684
$
21,840
8,667
7,881
(1,337)
—
294
(901)
132
—
30
—
(1,070)
4,283
(1,708)
829
(62,623)
63,210
(4,266)
(7,846)
42,175
1,486
—
13,152
55,035
—
(38,852)
—
(96,665)
—
(3,112)
1,606
—
—
—
56,389
(10,961)
(19,548)
15,762
45,000
(35,000)
—
—
—
(10,313)
36,645
(2,309)
(138)
—
(8,792)
21,307
7,462
8,134
(1,126)
(511)
954
(616)
667
—
11
698
(1,102)
2,498
(279)
94
(67,321)
68,573
668
666
46,154
12,958
—
159,663
73,310
—
(183,319)
—
(123,931)
—
(1,274)
5,559
—
—
1,072
—
(55,962)
(55,248)
(30,375)
52,000
(32,000)
—
(4,000)
—
(3,750)
4,399
(216)
(797)
—
(7,228)
(77,215)
2,826
7,936
(671)
—
384
(1,192)
(1)
653
28
—
(1,224)
(2,388)
(629)
(84)
(79,682)
80,699
1,802
(2,875)
27,422
25,245
(12,958)
70,757
117,003
83,000
(194,946)
(71,557)
(106,608)
147
(695)
793
(25,000)
(14)
—
36,774
(78,059)
60,632
33,658
20,000
(15,000)
7,000
(3,938)
15,000
—
195
(229)
—
(1,286)
(5,277)
110,755
4,113
13,135
328
1,323
140
27,500
First Clover Leaf
668,905
$
22,545
65,926
88,471
580,434
$
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2018, 2017 and 2016
(In thousands)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
Income taxes
2018
2017
2016
52,521
88,879
(87,023)
175,902
$
141,400
$
88,879
$
60,118
115,784
175,902
$
$
11,671
9,645
$
6,415
11,721
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned
Dividends reinvested in common stock
Net tax benefit related to option and deferred compensation plans
Conversion of preferred stock
518
1,099
160
—
6,034
1,057
221
—
Supplemental disclosure of purchase of capital stock:
Fair value of assets acquired
Consideration paid:
Cash paid
Common stock issued
Total consideration paid
Fair value of liabilities assumed
Supplemental disclosure of purchase of capital stock:
Fair value of assets acquired
Consideration paid:
Cash paid
Common stock issued
Total consideration paid
Fair value of liabilities assumed
Supplemental disclosure of purchase of capital stock:
Fair value of assets acquired
Consideration paid:
Cash paid
Common stock issued
Total consideration paid
Fair value of liabilities assumed
First Bank
501,285
10,275
61,350
71,625
429,660
Soy Capital
479,056
19,046
48,260
67,306
411,750
$
$
$
$
See accompanying notes to consolidated financial statements.
53
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 Wealth Management, First Mid Bank & Trust, N.A. (“First Mid Bank”), Soy Capital Bank and
Trust Company ("Soy Capital Bank"), and 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 2018
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 premises and
equipment. 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 three to five years and are carried at cost.
Investment Securities
The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale in accordance with 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.
54
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 uses 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.
The Company has loans acquired from business combinations with uncollected principal balances. These loans are carried net of a fair value adjustment for
credit risk and interest rates and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment.
However, as the acquired loans renew, it is necessary to establish an allowance which represents an amount that, in management's opinion, will be
adequate to absorb probable credit losses inherent in such loans.
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, 2018 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.
55
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.
Bank Owned Life Insurance
First Mid Bank and Soy Capital Bank have purchased life insurance policies on certain senior management. Bank owned life insurance is recorded at the
amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other
amounts that are probable at settlement.
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.
On December 22, 2017, the United States enacted certain tax reforms through the Tax Cuts and Jobs Act, which changes existing tax laws, most
significantly a change in the statutory corporate tax rate from 35% to 21%. As a result of this enactment, the Company incurred additional one-time income
tax expense of approximately $1.4 million during the fourth quarter of 2017, primarily due to remeasurement of deferred tax assets and liabilities.
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, 2018, the Company managed or administered 1,141 accounts with assets totaling approximately $1,129.6 million. At December 31, 2017,
the Company managed or administered 1,119 accounts with assets totaling approximately $997.8 million.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
56
Stock Incentive Awards
At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented
to succeed the Company's 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees,
consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development
and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and
selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions
established in the SI Plan.
A maximum of 149,983 shares of common stock may be issued under the SI Plan. The Company awarded 28,700, 18,391, and 13,912 shares during 2018,
2017, and 2016 (under the 2007 Stock Incentive Plan), respectively as stock and stock unit awards.
Employee Stock Purchase Plan
At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan
(“ESPP”). The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common
stock of the Company at a 5% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section
423 of the Internal Revenue Code. A maximum of 600,000 shares of common stock may be issued under the ESPP.
General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or
ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows
of the Company.
Revenue Recognition
Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), establishes a revenue recognition model for reporting information
about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. Most
of the Company’s revenue-generating transactions are not subject toASC 606, including revenue generated from financial instruments, such as loans and
investment securities, and revenue related to mortgage servicing activities, which are subject to other accounting standards. A description ofthe revenue-
generating activities that are within the scope ofASC 606, and included in other income in the Company’s condensed consolidated statements of income are
as follows:
Trust revenues. The Company generates fee income from providing fiduciary services through its trust department. Fees
are billed in arrears based upon the preceding period account balance. Revenue from the farm management department is
recorded when service is complete, for example when crops are sold.
Brokerage commissions. The primary brokerage revenue is recorded at the beginning of each quarter through billing to
customers based on the account asset size on the last day of the previous quarter. If a withdrawal of funds takes place, a
prorated refund may occur; this is reflected within the same quarter as the original billing occurred. All performance
obligations are met within the same quarter that the revenue is recorded.
Insurance commissions. The Company’s insurance agency subsidiary, First Mid Insurance Group (“FMIG”), receives
commissions on premiums ofnew and renewed business policies. FMIG records commission revenue on direct bill policies
as the cash is received. For agency bill policies, FMIG retains its commission portion of the customer premium payment
and remits the balance to the carrier. In both cases, the entire performance obligation is held by the carriers.
Service charges on deposits. The Company generates revenue from fees charged for deposit account maintenance,
overdrafts, wire transfers, and check fees. The revenue related to deposit fees is recognized at the time the performance
obligation is satisfied.
ATM/debit card revenue. The Company generates revenue through service charges on the use of its ATM machines and
interchange income from the use of Company issued credit and debit cards. The revenue is recognized at the time the
service is used and the performance obligation is satisfied.
Other income. Treasury management fees and lock box fees are received and recorded after the service performance
obligation is completed. Merchant bank card fees are received from various vendors, however the performance obligation
is with the vendors. The Company records gains on the sale ofloans and the sale ofOREO properties after the transactions
are complete and transfer of ownership has occurred.
As each of the Company’s facilities is located in markets with similar economies, no disaggregation of revenue is necessary.
57
Adoption of New Accounting Guidance
Accounting Standards Update 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification ("ASU 2017-09"). In May 2017,
FASB issued ASU 2017-09. This update provides guidance on determining which changes to the terms and conditions of share-based payment awards
require the application of modification accounting under Topic 718. The guidance is effective for public companies for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments should be
applied on a prospective basis to an award modified on or after adoption date. The Company adopted ASU 2017-09 on January 1, 2018. The update did not
have an impact on the Company's consolidated financial statement.
Accounting Standards Update 2017-08, Receivables-Nonrefundable Fees and Other Costs ("ASU 2017-08"). In March 2017, FASB issued ASU
2017-08. This update amends the amortization period for certain purchased callable debt securities held at a premium. The update shortens the premium's
amortization period to the earliest call date to more closely align the amortization period of premiums to expectations incorporated in market pricing on the
underlying securities. For public companies, the update is effective for annual periods beginning after December 15, 2018, and is to be applied on a modified
retrospective basis with a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. Early adoption is permitted,
including adoption in an interim period. The Company has adopted ASU 2017-08 early and there was not a significant impact on the Company's consolidated
financial statements.
Accounting Standards Update 2017-04, Intangibles-Goodwill and Other (Topic 350: Simplifying the Test for Goodwill Impairment ("ASU 2017-04").
In January 2017, FASB issued ASU 2017-04. The amendments in this update simplify the measurement of goodwill by eliminating Step 2 from the goodwill
impairment test. Under this guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit
with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair
value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public companies for the
reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. Although the Company cannot anticipate future goodwill impairment, based on the most recent assessment, it is unlikely that an
impairment amount would need to be calculated and, therefore, does not anticipate a material impact on the Company's financial statements. The current
accounting policies and procedures of the Company are not anticipated to change, except for the elimination of Step 2 analysis.
Accounting Standards Update 2016-08, Revenue from Contracts with Customers (Topic 606) (“ASU 2016-08"). In March 2016, the FASB issued ASU
2016-08 which amended the accounting guidance issued by the FASB in May 2014 that revised the criteria for determining when to recognize revenue from
contracts with customers and expanded disclosure requirements. The amendment defers the effective date by one year. This accounting guidance can be
implemented using either a retrospective method or a cumulative-effect approach. This new guidance will be effective for interim and annual reporting
periods beginning after December 15, 2017. The Company completed its overall assessment of revenue streams and review of related contracts potentially
affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance
commissions. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently
recognizes revenue for these revenue streams.
Accounting Standards Update 2016-02, Leases (Topic 842)("ASU 2016-02"). On February 25, 2016, FASB issued ASU 2016-02 which creates Topic
842, Leases and supersedes Topic 840, Leases. ASU 2016-02 is intended to improve financial reporting about leasing transactions, by increasing
transparency and comparability among organizations. Under the new guidance, a lessee is required to record all leases with lease terms of more than 12
months on their balance sheet as lease liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting,
requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new
guidance is effective for public companies for fiscal years beginning on or after December 15, 2018, and for private companies for fiscal years beginning on
or after December 15, 2019. The Company will adopt the guidance effective January 1, 2019 and estimates it will record a right of use asset of $14.1 million
and a lease liability of $14.1 million. The Company does not expect the new guidance will have a material impact on its consolidated statement of income.
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
Company adopted ASU 2016-01 on January 1, 2018. Accordingly, the Company refined the calculation used to determine the disclosed fair value of loans
held for investments as part of adopting this standard. The Adoption of this standard did not have a significant impact on the fair value disclosures included
in NOTE 11.
Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments
(“ASU 2016-13”). In June 2016, FASB issued ASU 2016-13. The provisions of ASU 2016-13 requires an entity to utilize a new impairment model known as
the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the
amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in
more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-
sale debt securities. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.
58
Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which
the guidance is adopted.
Management has formed an internal, cross functional committee to evaluate implementation steps and assess the impact ASU 2016-13 will have on the
Company’s consolidated financial statements. The committee has assigned roles and responsibilities, key tasks to complete, and has established a general
timeline for implementation. The Company also engaged an outside consultant to assist with the methodology review and data validation, as well as other
key aspects of implementing the standard. The committee meets periodically to discuss the latest developments and ensure progress is being made and
also keeps current on evolving interpretations and industry practices related to ASU 2016-13. The committee continues to evaluate and validate data
resources and different loss methodologies. Key implementation activities for 2019 include finalization of models, establishing processes and controls,
development of supporting analytics and documentation, policies and disclosure, and implementing parallel processing. The committee is still evaluating the
impact ASU 2016-13 will have on the Company's consolidated financial statements.
Accounting Standards Update 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”). In August 2018, FASB issued ASU 2018-13. This ASU eliminates, adds and modifies certain disclosure
requirements for fair value measurements. Among the changes, an entity will no longer be required to disclose the amount of and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant
unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15,
2019; early adoption is permitted. As ASU 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated
financial statements.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) included in stockholders’ equity as of December 31, 2018 and 2017 are as follows (in
thousands):
December 31, 2018
Net unrealized losses 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
Balance at December 31, 2018
December 31, 2017
Net unrealized losses 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
Balance at December 31, 2017
Unrealized Gain
(Loss) on
Securities
Securities with
Other-Than-
Temporary
Impairment Losses
Total
$
$
$
$
(8,951) $
— $
(166)
—
2,644
—
—
—
(6,473) $
— $
(2,619) $
— $
(281)
—
841
—
(345)
100
(2,059) $
(245) $
(8,951)
(166)
—
2,644
(6,473)
(2,619)
(281)
(345)
941
(2,304)
Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the years ended
December 31, 2018, 2017 and 2016 , were as follows (in thousands):
Amounts Reclassified from Other
Comprehensive Income
2018
2017
2016
Affected Line Item in the Statements of Income
Realized gains on available-for-sale
securities
Total reclassifications out of accumulated
other comprehensive income
$
$
901
(261)
616
(216)
1,192 Securities gains, net (Total reclassified amount before tax)
(465) Tax expense
640
$
400
$
727 Net reclassified amount
See “Note 4 – Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.
59
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, 2018, 2017 and 2016 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
2018
2017
2016
$
36,600,000
$
26,684,000
$
21,840,000
$
$
—
36,600,000
14,487,126
—
(825,000)
26,684,000
12,531,659
21,015,000
10,149,099
2.53
$
2.13
$
2.07
36,600,000
$
26,684,000
$
21,015,000
—
36,600,000
14,487,126
—
26,684,000
12,531,659
825,000
21,840,000
10,149,099
209
13,250
—
13,459
4,875
—
—
4,875
3,111
4,107
507,393
514,611
Diluted weighted average common shares outstanding
14,500,585
12,536,534
10,663,710
Diluted earnings per common share
$
2.52
$
2.13
$
2.05
There were no shares not considered in computing diluted earnings per share for the years ended December 31, 2018, 2017 and 2016.
Note 3 -- Cash and Due from Banks
Aggregate cash and due from bank balances of $14,564,000, $8,944,000 and $16,643,000 were maintained in satisfaction of statutory reserve requirements
of the Federal Reserve Bank at December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, the Company's cash accounts exceeded federal
insurance limits by $1,906,000.
60
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, 2018 and December 31, 2017 were as follows (in thousands):
December 31, 2018
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Other securities
Total available-for-sale
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
December 31, 2017
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Trust preferred securities
Other securities
Total available-for-sale
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government
corporations & agencies
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Fair Value
$
201,380
$
504
$
(3,235) $
193,195
304,372
2,278
1,224
486
96
(1,840)
(6,186)
—
198,649
192,579
298,672
2,374
$
$
701,225
$
2,310
$
(11,261) $
692,274
69,436
$
— $
(1,527) $
67,909
$
115,796
$
8
$
(2,034) $
165,037
295,778
2,893
2,039
2,254
493
—
145
(1,025)
(2,460)
(345)
—
113,770
166,266
293,811
2,548
2,184
$
$
581,543
$
2,900
$
(5,864) $
578,579
69,332
$
103
$
(978) $
68,457
Trust preferred securities at December 31, 2017, is a trust preferred pooled security issued by First Tennessee Financial (“FTN”). The unrealized loss of this
security, which had a maturity of twenty years, was 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. This security was sold during 2018. See the heading “Trust
Preferred Securities” below for further information regarding this security.
Proceeds from sales of investment securities, realized gains and losses and income tax expense were as follows during the years ended December 31,
2018, 2017 and 2016 (in thousands):
Proceeds from sales
Gross gains
Gross losses
Income tax expense
2018
2017
2016
$
13,152
$
159,663
$
941
(40)
261
773
(157)
216
70,757
1,192
—
465
61
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, 2018 and the weighted average yield for each range of maturities (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
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
$
148,656
$
23,282
622
—
49,993
89,930
160,900
2,010
$
— $
— $
78,294
137,150
—
1,073
—
364
198,649
192,579
298,672
2,374
$
172,560
$
302,833
$
215,444
$
1,437
$
692,274
2.57%
2.70%
2.83%
3.14%
2.93%
3.34%
3.10%
4.14%
2.80%
3.10%
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Weighted average yield
Full tax-equivalent yield
$
39,995
$
29,441
$
— $
— $
69,436
1.76%
1.76%
2.08%
2.08%
—%
—%
—%
—%
1.90%
1.90%
The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-
equivalent yields have been calculated using a 21% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies
and corporations, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at December 31,
2018.
Investment securities carried at approximately $628 million and $479 million at December 31, 2018 and 2017, respectively, were pledged to secure public
deposits and repurchase agreements and for other purposes as permitted or required by law.
The following table presents the aging of gross unrealized losses and fair value by investment category as of December 31, 2018 and 2017 (in thousands):
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or more
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
December 31, 2018
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
Total
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
December 31, 2017
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
Total
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
$
$
$
$
$
$
16,095
$
(148) $
105,549
$
(3,087) $
121,644
$
38,782
81,435
(450)
(1,150)
42,741
171,321
(1,390)
(5,036)
81,523
252,756
(3,235)
(1,840)
(6,186)
136,312
$
(1,748) $
319,611
$
(9,513) $
455,923
$
(11,261)
19,683
$
(147) $
48,226
$
(1,380) $
67,909
$
(1,527)
58,584
$
(540) $
47,972
$
(1,494) $
106,556
$
42,618
187,949
—
(769)
(1,942)
—
9,267
22,609
2,548
(256)
(518)
(345)
51,885
210,558
2,548
289,151
$
(3,251) $
82,396
$
(2,613) $
371,547
$
(2,034)
(1,025)
(2,460)
(345)
(5,864)
34,101
$
(525) $
14,540
$
(453) $
48,641
$
(978)
62
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At December 31, 2018, there were twenty-three available-
for-sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $105,549,000 and unrealized losses of
$3,087,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017, there were eleven available-for-sale U.S. Treasury
securities and obligations of U.S. government corporations and agencies with a fair value of $47,972,000 and unrealized losses of $1,494,000 in a
continuous unrealized loss position for twelve months or more. At December 31, 2018 there were nine held-to-maturity U.S. Treasury securities and
obligations of U.S. government corporations and agencies with a fair value of $48,226,000 and unrealized losses of $1,380,000 in a continuous unrealized
loss position for twelve months or more. At December 31, 2017 there were seven held-to maturity U.S. Treasury securities and obligations of U.S.
government corporations and agencies with a fair value of $14,540,000 and unrealized losses of $453,000 in a continuous unrealized loss position for twelve
months or more.
Obligations of states and political subdivisions. At December 31, 2018 there were eighty-four obligations of states and political subdivisions with a fair
value of $42,741,000 and unrealized losses of $1,390,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017, there
were thirty-nine obligations of states and political subdivisions with a fair value of $9,267,000 and unrealized losses of $256,000 in a continuous unrealized
loss position for twelve months or more.
Mortgage-backed Securities: GSE Residential. At December 31, 2018 there were sixty-nine mortgage-backed securities with a fair value of $171,321,000
and unrealized losses of $5,036,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017, there were twenty-six
mortgage-backed security with a fair value of $22,609,000 and unrealized losses of $518,000 in a continuous unrealized loss position for twelve months or
more.
Trust Preferred Securities. At December 31, 2017, there was one trust preferred securities with a fair value of $2,548,000 and unrealized losses of
$345,000 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 sold this security during 2018.
Other securities. At December 31, 2018 or 2017 there were no other securities in a continuous unrealized loss position for twelve months or more.
The Company does not believe any other individual unrealized loss as of December 31, 2018 represents OTTI. However, given the continued disruption in
the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities
portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of
any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the
other-than-temporary impairment is identified.
Other-than-temporary Impairment
Upon acquisition of a security, the Company determines whether it is within the scope of the accounting guidance for investments in debt and equity
securities or whether it must be evaluated for impairment under the accounting guidance for beneficial interests in securitized financial assets.
Credit Losses Recognized on Investments
As described above, the Company’s investments in trust preferred securities experienced fair value deterioration due to credit losses but were 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 were recorded in other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016 (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
End of period
Accumulated Credit Losses as of December 31:
2018
2017
2016
$
$
1,111
$
1,111
$
1,111
—
(1,111)
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
1,111
$
1,111
63
Maturities of investment securities were as follows at December 31, 2018 (in thousands):
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
Amortized
Cost
Estimated
Fair Value
$
174,049
$
142,357
79,095
1,352
396,853
304,372
701,225
39,995
29,441
—
—
171,938
141,933
78,294
1,437
393,602
298,672
692,274
38,790
29,119
—
—
$
69,436
$
67,909
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.
64
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, 2018 and 2017 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: Loans held for sale
Less:
Net deferred loan fees, premiums and discounts
Allowance for loan losses
Net loans
2018
2017
$
51,013
$
232,409
374,751
186,393
911,656
107,721
127,232
294,483
61,966
684,639
1,756,222
1,276,041
136,125
559,120
92,744
113,925
86,602
445,378
30,070
108,023
2,658,136
1,946,114
1,508
1,025
2,656,628
1,945,089
13,617
26,189
6,613
19,977
$
2,616,822
$
1,918,499
Net loans increased $698.3 million as of December 31, 2018 compared to December 31, 2017. 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
$1,508,000 and $1,025,000 at December 31, 2018 and 2017, respectively.
Most of the Company’s business activities are with customers located within central Illinois. At December 31, 2018, the Company’s loan portfolio included
$368.5 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $276.1 million was concentrated in other grain
farming. Total loans to borrowers whose businesses are directly related to agriculture increased $154.7 million from $213.8 million at December 31, 2017
while loans concentrated in other grain farming increased $105.3 million from $170.8 million at December 31, 2017. While the Company adheres to sound
underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on
crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and
potentially result in loan losses within the agricultural portfolio.
In addition, at December 31, 2018 the Company had $129.2 million of loans to motels and hotels compared to $131.7 million at December 31, 2017 . 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 had $250.5 million and $186.0 million of loans to lessors of
non-residential buildings at December 31, 2018 and 2017, respectively, $289.2 million and $131.8 million of loans to lessors of residential buildings and
dwellings at December 31, 2018 and 2017, respectively, and $105.3 million and $95.7 million of loans to other gambling industries at December 31, 2018
and 2017.
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
65
estate pledged as collateral on the debt. For the various types of commercial real estate loans, minimum criteria have been established within the
Company’s loan policy regarding debt service coverage while maximum limits on loan-to-value and amortization periods have been defined. Maximum loan-
to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while the desired minimum debt coverage ratio is 1.20x.
Amortization periods for commercial real estate loans are generally limited to twenty years. The Company’s commercial real estate portfolio is well below the
thresholds that would designate a concentration in commercial real estate lending, as established by the federal banking regulators.
Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund
accounts receivable that are secured by business assets other than real estate. These loans are generally written for one year or less. Also, equipment
financing is provided to businesses with these loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years.
Commercial loans are often accompanied by a personal guaranty of the principal owners of a business. Like commercial real estate loans, the underlying
cash flow of the business is the primary consideration in the underwriting process. The financial condition of commercial borrowers is monitored at least
annually with the type of financial information required determined by the size of the relationship. Measures employed by the Company for businesses with
higher risk profiles include the use of government-assisted lending programs through the Small Business Administration and U.S. Department of Agriculture.
Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and
harvest corn and soybeans and term loans to fund the purchase of equipment. Agricultural real estate loans are primarily comprised of loans for the
purchase of farmland. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for
each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically
written for one year and secured by the crop. Loan-to-value ratios on loans secured by farmland generally do not exceed 65% and have amortization periods
limited to twenty five years. Federal government-assistance lending programs through the Farm Service Agency are used to mitigate the level of credit risk
when deemed appropriate.
Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties
consisting of one-to-four units and home equity loans and lines of credit. The Company sells the vast majority of its long-term fixed rate residential real
estate loans to secondary market investors. The Company also releases the servicing of these loans upon sale. The Company retains all residential real
estate loans with balloon payment features. Balloon periods are limited to five years. Residential real estate loans are typically underwritten to conform to
industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit scores. Loans secured by first liens on
residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have amortization periods of twenty five years or
less. The Company does not originate subprime mortgage loans.
Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an
automobile or other living expenses. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio, employment
history, and collateral coverage. Typically, consumer loans are set up on monthly payments with amortization periods based on the type and age of the
collateral.
Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or equipment
purchases. Underwriting guidelines for these loans are consistent with those established for commercial loans with the additional repayment source of the
taxing authority of the municipality.
Purchase Credit-Impaired Loans. Loans acquired with evidence of credit deterioration since origination and for which it is probable that all contractually
required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include
information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchase credit-impaired ("PCI") loans
are accounted for under ASC 310-30, Receivables--Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), and are initially
measured at fair value, which includes the estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit
losses related to these loans is not carried over and recorded at the acquisition date. The cash flows expected to be collected were estimated using current
key assumptions, such as default rates, value of underlying collateral, severity and prepayment speeds.
Allowance for Loan Losses
The allowance for loan losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses existing in the
current portfolio. The provision for loan losses is the charge against current earnings that is determined by the Company as the amount needed to maintain
an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current
earnings, the Company relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit
exposure. The review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be
facing financial difficulty. Factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level
and composition of nonaccrual, past due and troubled debt restructurings, trends in volumes and terms of loans, effects of changes in risk selection and
underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the
region where the Company operates. The Company estimates the appropriate level of allowance for loan losses by separately evaluating large impaired
loans and nonimpaired loans.
The Company has loans acquired from business combinations with uncollected principal balances. These loans are carried net of a fair value adjustment for
credit risk and interest rates and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment.
However, as the acquired loans renew, it is necessary to establish an allowance which represents an amount that, in management’s opinion, will be
adequate to absorb probable credit losses inherent in such loans.
66
Impaired loans. The Company individually evaluates certain loans for impairment. In general, these loans have been internally identified via the
Company’s loan grading system as credits requiring management’s attention due to underlying problems in the borrower’s business or collateral
concerns. This evaluation considers expected future cash flows, the value of collateral and also other factors that may impact the borrower’s ability to make
payments when due. For loans greater than $250,000 impairment is individually measured each quarter using one of three alternatives: (1) the present
value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price, if available; or (3) the fair value of
the collateral less costs to sell for collateral dependent loans and loans for which foreclosure is deemed to be probable. A specific allowance is assigned
when expected cash flows or collateral do not justify the carrying amount of the loan. The carrying value of the loan reflects reductions from prior charge-offs.
Non-Impaired loans. Non-impaired loans comprise the vast majority of the Company’s total loan portfolio and include loans in accrual status and those
credits not identified as troubled debt restructurings. A small portion of these loans are considered “criticized” due to the risk rating assigned reflecting
elevated credit risk due to characteristics, such as a strained cash flow position, associated with the individual borrowers. Criticized loans are those assigned
risk ratings of Watch, Substandard, or Doubtful. Determining the appropriate level of the allowance for loan losses for all non-impaired loans is based on a
migration analysis of net losses over a rolling twelve quarter period by loan segment. A weighted average of the net losses is determined by assigning more
weight to the most recent quarters in order to recognize current risk factors influencing the various segments of the loan portfolio more prominently than past
periods. Environmental factors including changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of
credit risk associated with specific industries and markets are evaluated each quarter to determine if adjustments to the weighted average historical net
losses is appropriate given these current influences on the risk profile of each loan segment. Because the economic and business climate in any given
industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is periodically assessed and adjusted when
appropriate. Consumer loans are evaluated for adverse classification based primarily on the Uniform Retail Credit Classification and Account Management
Policy established by the federal banking regulators. Classification standards are generally based on delinquency status, collateral coverage, bankruptcy and
the presence of fraud.
Due to weakened economic conditions during recent years, the Company established qualitative factor adjustments for each of the loan segments at levels
above the historical net loss averages. Some of the economic factors included the potential for reduced cash flow for commercial operating loans from
reduction in sales or increased operating costs, decreased occupancy rates for commercial buildings, reduced levels of home sales for commercial land
developments, the uncertainty regarding grain prices and increased operating costs for farmers, and increased levels of unemployment and bankruptcy
impacting consumer’s ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the allowance for loan
losses.
The Company has not materially changed any aspect of its overall approach in the determination of the allowance for loan losses. However, on an on-going
basis the Company continues to refine the methods used in determining management’s best estimate of the allowance for loan losses.
The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment
method as of December 31, 2018, 2017 and 2016 (in thousands):
Commercial/
Commercial
Real Estate
Agricultural/
Agricultural
Real Estate
Residential
Real Estate
Consumer
Unallocated
Total
December 31, 2018
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 acquired with deteriorated credit quality
Loans:
Ending balance
Ending Balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$
$
$
$
$
$
$
$
$
16,546
$
1,742
$
886
$
6,070
(1,227)
167
548
(93)
—
1,447
(886)
57
21,556
$
2,197
$
1,504
$
1,816
18,514
1,226
$
$
$
— $
2,197
$
— $
225
1,270
9
$
$
$
803
602
(787)
314
932
3
929
$
$
$
$
— $
— $
—
—
—
19,977
8,667
(2,993)
538
— $
26,189
— $
— $
— $
2,044
22,910
1,235
1,784,741
$
367,211
$
392,526
$
100,041
$
— $
2,644,519
14,422
1,756,908
13,411
$
$
$
32
367,175
4
$
$
$
2,360
387,961
2,205
$
$
$
166
99,872
3
$
$
$
— $
16,980
— $
2,611,916
— $
15,623
67
December 31, 2017
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 acquired with deteriorated credit quality
Loans:
Ending balance
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
December 31, 2016
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Loans:
Ending balance
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Commercial/
Commercial
Real Estate
Agricultural/
Agricultural
Real Estate
Residential
Real Estate
Consumer
Unallocated
Total
$
12,901
$
2,249
$
6,884
(3,795)
556
153
(662)
2
16,546
$
1,742
$
586
15,951
$
$
9
$
$
2
1,740
0
$
$
$
$
874
100
(217)
129
886
25
861
0
$
$
$
$
693
361
(521)
270
803
1
802
0
36
$
(36)
—
—
16,753
7,462
(5,195)
957
— $
19,977
— $
— $
0
614
19,354
9
1,371,787
$
213,521
$
315,123
$
39,070
$
— $
1,939,501
11,372
1,360,156
259
$
$
$
488
213,033
$
$
1,026
314,097
$
$
200
38,870
$
$
— $
13,086
— $
1,926,156
— $
— $
— $
— $
259
11,379
$
1,337
$
1,467
(747)
802
933
(30)
9
$
994
113
(234)
1
12,901
$
2,249
$
874
$
192
12,695
$
$
14
660
1,589
$
$
0
$
$
6
868
0
642
501
(664)
214
693
$
$
— $
693
$
0
224
$
(188)
—
—
36
$
— $
36
$
0
14,576
2,826
(1,675)
1,026
16,753
858
15,881
14
1,204,799
$
212,513
$
366,823
$
41,857
$
— $
1,825,992
1,956
1,199,003
3,840
$
$
$
1,345
211,168
$
$
1,752
360,825
— $
4,246
$
$
$
213
41,644
$
$
— $
5,266
— $
1,812,640
— $
— $
8,086
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
68
mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180
days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency
thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur
regardless of delinquency status, need not be charged off.
Credit Quality
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current
financial information, historical payment experience, collateral support, credit documentation, public information, and current economic trends, among other
factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Company
uses the following definitions for risk ratings, which are commensurate with a loan considered "criticized":
Special Mention. Loans classified as special mention 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, 2018 and 2017 (in
thousands):
Pass
Special Mention
Substandard
Doubtful
Total
Pass
Special Mention
Substandard
Doubtful
Total
Pass
Special Mention
Substandard
Doubtful
Total
Construction &
Land Development
2017
2018
Farm Loans
1-4 Family Residential
Properties
Multifamily Residential
Properties
2018
2017
2018
2017
2018
2017
$
49,794
$
107,140
$
221,047
$
120,767
$
352,583
$
282,441
$
163,845
$
60,954
471
354
—
454
—
—
7,805
2,848
—
4,829
1,587
—
5,526
15,409
—
2,654
8,572
—
8,144
12,062
—
476
368
—
$
50,619
$
107,594
$
231,700
$
127,183
$
373,518
$
293,667
$
184,051
$
61,798
Commercial Real Estate
(Nonfarm/Nonresidential)
2018
2017
Agricultural Loans
2017
2018
Commercial & Industrial
Loans
2018
2017
Consumer Loans
2017
2018
$
861,086
$
647,208
$
127,863
$
83,469
$
535,186
$
425,846
$
90,133
$
29,375
16,035
29,729
—
16,941
17,608
—
7,581
433
—
2,304
858
—
9,967
11,858
—
11,492
6,925
—
177
1,206
—
5
369
—
$
906,850
$
681,757
$
135,877
$
86,631
$
557,011
$
444,263
$
91,516
$
29,749
All Other Loans
Total Loans
2018
2017
2018
2017
$
110,352
$
103,339
$ 2,511,889
$ 1,860,539
3,010
3,520
15
—
—
—
58,716
73,914
—
42,675
36,287
—
$
113,377
$
106,859
$ 2,644,519
$ 1,939,501
69
The following table presents the Company’s loan portfolio aging analysis at December 31, 2018 and 2017 (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, 2018
Construction and land development
$
460
$
43
$
— $
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, 2017
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
—
3,347
1,149
1,349
6,305
63
1,417
888
697
804
3,051
—
89
3,987
—
10
356
—
—
4,080
1,955
4,058
10,093
20
3,902
299
—
503
804
10,478
3,104
5,496
$
50,116
$
50,619
$
230,896
363,040
180,947
901,354
231,700
373,518
184,051
906,850
20,385
1,726,353
1,746,738
83
5,329
1,543
697
135,794
551,682
89,973
112,680
135,877
557,011
91,516
113,377
$
$
9,370
$
4,353
$
14,314
$
28,037
$ 2,616,482
$ 2,644,519
$
$
26
—
3,023
—
90
3,139
—
192
178
—
48
—
538
—
38
624
32
3
67
—
$
— $
74
$
107,520
$
107,594
$
396
1,767
—
3,566
5,729
158
770
27
—
396
5,328
—
3,694
9,492
190
965
272
—
126,787
288,339
61,798
678,063
127,183
293,667
61,798
681,757
1,262,507
1,271,999
86,441
443,298
29,477
106,859
86,631
444,263
29,749
106,859
$
3,509
$
726
$
6,684
$
10,919
$ 1,928,582
$ 1,939,501
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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.
70
The following tables present impaired loans as of December 31, 2018 and 2017 (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
2018
Unpaid
Principal
Balance
Recorded
Balance
Specific
Allowance
Recorded
Balance
2017
Unpaid
Principal
Balance
Specific
Allowance
$
2,559
$
2,559
$
—
4,565
4,465
12,517
24,106
36
8,292
169
—
—
4,952
4,465
12,804
24,780
504
8,723
171
—
14
—
234
—
1,553
1,801
—
1,475
3
—
$
— $
— $
276
1,026
313
5,544
7,159
212
5,774
200
—
276
1,347
313
5,565
7,501
1,009
6,037
200
—
—
—
25
—
531
556
2
64
1
—
$
$
$
$
32,603
$
34,178
$
3,279
$
13,345
$
14,747
$
623
48
$
48
$
— $
— $
— $
309
3,680
7,597
983
12,617
631
1,660
471
6
309
4,769
7,597
1,201
13,924
163
2,027
1,006
6
—
—
—
—
—
—
—
—
—
15
2,239
55
303
2,612
545
909
102
—
15
2,664
55
368
3,102
—
1,249
119
—
15,385
$
17,126
$
— $
4,168
$
4,470
$
2,607
$
2,607
$
309
8,245
12,062
13,500
36,723
667
9,952
640
6
309
9,721
12,062
14,005
38,704
667
10,750
1,177
6
14
—
234
—
1,553
1,801
—
1,475
3
—
$
— $
— $
291
3,265
368
5,847
9,771
757
6,683
302
—
291
4,011
368
5,933
10,603
1,009
7,286
319
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25
—
531
556
2
64
1
—
$
47,988
$
51,304
$
3,279
$
17,513
$
19,217
$
623
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.
71
The following tables present average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2018, 2017
and 2016 (in thousands):
2018
2017
2016
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
$
2,558
$
$
— $
— $
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
415
6,297
9,666
9,818
28,754
727
9,003
131
3
37
—
144
137
271
589
23
6
1
—
293
3,267
377
5,457
9,394
878
6,586
325
—
—
29
1
13
43
—
8
—
—
51
$
229
207
2,988
3,824
6,675
13,923
1,394
1,485
557
—
—
—
22
55
36
113
—
4
2
—
119
$
38,618
$
619
$
17,183
$
$
17,359
$
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 $7,237,000 of multifamily residential properties, $1,945,000 of construction & land development, $1,769,000 of 1-4 Family residential
properties, $676,000 of commercial real estate, and $962,000 of commercial and industrial loans at December 31, 2018 and $578,000 of 1-4 Family
residential properties, $251,000 of commercial real estate loans, and $25,000 of commercial and industrial loans at December 31, 2017. For the years ended
December 31, 2018, 2017 and 2016, 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, 2018 and December 31, 2017 (in thousands). This table
excludes purchased credit-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
2018
2017
$
$
377
309
5,762
2,105
8,457
17,010
667
8,990
625
6
—
291
2,687
368
5,596
8,942
757
6,658
302
—
$
27,298
$
16,659
The aggregate principal balances of nonaccrual, past due ninety days or more loans were $27.3 million and $16.7 million at December 31, 2018 and 2017,
respectively. Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $1,189,000, $471,000 and $133,000
in 2018, 2017 and 2016, respectively.
72
Purchased Credit-Impaired Loans
The Company acquired certain loans considered to be credit-impaired in its business combination with First Clover Leaf during the third quarter of 2016, First
Bank & Trust during the second quarter of 2018 and Soy Capital during the fourth quarter of 2018. At acquisition, these loans evidenced deterioration of
credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of
these loans is included in the consolidated balance sheet amounts for Loans. The Company had no PCI loans prior to the First Clover Leaf acquisition. The
amount of these loans at December 31, 2018 and 2017 are as follows (in thousands):
Construction and land development
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Carrying amount
Allowance for loan losses
Carrying amount, net of allowance
December 31,
2018
December 31,
2017
$
$
2,872 $
2,206 $
3,891
6,946
15,915
4
15
3
15,937
(1,235)
$
14,702 $
—
—
—
251
251
—
8
—
259
(9)
250
As of November 15, 2018 the Soy Capital acquisition date, the principal outstanding of PCI loans totaled $3,282,000 and the fair value of the PCI loans
totaled $2,594,000. As of May 1, 2018, the First Bank acquisition date, the principal outstanding of PCI loans totaled $20,357,000 and the fair value of PCI
loans totaled $16,126,000. For PCI loans, the difference between contractually required payments at acquisition and the cash flow expected to collected is
referred to as the non-accretable difference. Any excess of expected cash flows over the fair value is referred to as the accretable yield. As of December 31,
2018, approximately $910,000 was accreted on the PCI loans acquired due to paydowns on these loans. As of December 31, 2017, there was no accretion
on the PCI loans acquired. As of December 31, 2016 approximately $1.2 million was accreted on the PCI loans acquired due to sales and charge offs on
these loans. Subsequent decreases to the expected cash flows will result in a provision for loan and lease losses. Subsequent increases in expected cash
flows will result in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to accretable yield, which would
have a positive impact on interest income. As of December 31, 2018, subsequent changes in expected cash flows resulted in approximately $889,000 of
provision recorded and approximately $65,000 of provision reversed. As of December 31, 2016, there was one loan with a change in expected cash flows
and as a result, approximately $14,000 of provision was recorded.
The PCI loans acquired during the twelve months ended December 31, 2018 for which it was probable that all contractually required payments would not be
collected were as follows (in thousands):
Contractually required payments
Non-accretable difference
Cash flows expected to be collected at acquisition
Accretable yield
Fair value of acquired loans at acquisition
First Bank
Soy Capital
$
$
20,357 $
(4,231)
16,126
—
16,126 $
3,282
(688)
2,594
—
2,594
Income would not be recognized on certain PCI loans if cash flows could not be reasonably estimated. The Company had no purchased loans for which it
could not reasonably estimate cash flows to be collected.
Troubled Debt Restructuring
The balance of troubled debt restructurings ("TDRs") at December 31, 2018 and 2017 was $9,956,000 and $8,898,000, respectively. Approximately
$1,418,000 and $37,000 in specific reserves were established with respect to these loans as of December 31, 2018 and 2017, 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.
73
The following table presents the Company’s recorded balance of troubled debt restructurings at December 31, 2018 and 2017 (in thousands).
Troubled debt restructurings:
Construction and land development
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
Performing troubled debt restructurings:
Construction and Land Development
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Commercial and industrial loans
Consumer Loans
Total
$
$
$
2018
2017
— $
2,472
—
1,706
4,178
499
5,112
167
9,956
$
— $
1,769
—
676
2,445
—
6
$
2,451
$
—
874
—
1,376
2,250
757
5,690
201
8,898
—
578
—
251
829
25
—
854
The following table presents loans modified as TDRs during the years ended December 31, 2018 and 2017 as a result of various modified loan factors (in
thousands):
December 31, 2018
December 31, 2017
Number of
Modifications
Recorded
Investment
Type of
Modifications
Number of
Modifications
Recorded
Investment
Type of
Modifications
16
2
18
2
3
688
479
(b)(c)
(b)(d)
1,167
67
28
(b)(c)
(b)(c)
3
2
5
4
4
196
814
(b)(c)
(b)(c)
1,010
757
(b)(c)(d)
4,924
(b)(c)
23
$
1,262
13
$
6,691
1-4 Family residential properties
Commercial real estate
Loans secured by real estate
Agricultural Loans
Commercial and industrial loans
Total
Type of modifications:
(a) Reduction of stated interest rate of loan
(b) Change in payment terms
(c) Extension of maturity date
(d) Permanent reduction of the recorded investment
A loan is considered to be in payment default once it is ninety days past due under the modified terms. There was one loan modified as a troubled debt
restructuring during the prior twelve months that experienced a default during the year ended December 31, 2018 and one loan modified as troubled debt
restructuring during the prior twelve months that experienced a default as of December 31, 2017.
At December 31, 2018 and 2017, the balance of real estate owned includes $2,534,000 and $2,754,000, respectively of foreclosed real estate properties
recorded as a result of obtaining physical possession of the property. At December 31, 2018 and 2017, the recorded investment of consumer mortgage
loans secured by residential real estate properties for which formal foreclosure proceeds are in process was $425,000 and $404,000.
74
Note 6 -- Premises and Equipment, Net
Premises and equipment at December 31, 2018 and 2017 consisted of (in thousands):
Land
Buildings and improvements
Furniture and equipment
Leasehold improvements
Construction in progress
Subtotal
Accumulated depreciation and amortization
Total
2018
2017
14,734
$
52,129
19,718
3,580
321
90,482
31,365
59,117
$
9,933
37,229
16,145
4,109
29
67,445
29,179
38,266
$
$
Depreciation and amortization expense was $3.0 million, $2.7 million and $2.5 million for the years ended December 31, 2018, 2017 and 2016, 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 business lines acquired. The following table presents gross carrying amount and accumulated amortization by major
intangible asset class as of December 31, 2018 and 2017 (in thousands):
Goodwill not subject to amortization
Intangibles from branch acquisition
Core deposit intangibles
Customer list intangibles
2018
2017
Gross Carrying
Value
Accumulated
Amortization
Gross Carrying
Value
Accumulated
Amortization
$
$
109,037
$
3,760
$
63,910
$
3,015
32,355
16,029
3,015
14,017
2,648
3,015
19,862
3,731
160,436
$
23,440
$
90,518
$
3,760
3,015
11,473
2,285
20,533
Goodwill of $27.4 million was provisionally recorded for the acquisition and merger of First Bank during the second quarter of 2018. Goodwill was adjusted
to $26.5 million within the twelve month measurement period to reflect proper valuation of financial assets and liabilities. All of the goodwill was assigned to
the banking segment of the Company. The Company expects this goodwill will not be deductible for tax purposes.
The following table provides a reconciliation of the purchase price paid for First Bank and the amount of goodwill recorded (in thousands):
Unallocated purchase price
Less purchase accounting adjustments:
Fair value of securities
Fair value of loans
Fair value of OREO
Fair value of mortgage servicing rights
Fair value of premises and equipment
Fair value of time deposits
Fair value of FHLB advances
Fair value of subordinated debentures
Core deposit intangible
Other assets and other liabilities
Resulting goodwill from acquisition
75
320
3,463
12
(1,097)
689
1,301
(328)
(1,451)
(5,224)
1,860
$
26,946
(455)
26,491
$
Goodwill of $18.6 million was recorded for the acquisition and merger of Soy Capital during the fourth quarter of 2018. All of the goodwill was assigned to the
banking segment of the Company. The Company expects this goodwill will not be deductible for tax purposes. The following table provides a reconciliation of
the purchase price paid for the acquisition of Soy Capital and the amount of goodwill recorded (in thousands):
Unallocated purchase price
Less purchase accounting adjustments:
Fair value of securities
Fair value of loans
Fair value of OREO
Fair value of premises and equipment
Fair value of time deposits
Fair value of FHLB advances
Core deposit intangible
Customer list intangibles
Other assets and other liabilities
Resulting goodwill from acquisition
41
3,377
345
(1,228)
(343)
(29)
(7,269)
(12,298)
13,936
$
22,104
$
$
(3,468)
18,636
As part of the acquisition of First Bank acquisition, the Company acquired mortgage servicing rights valued at $1,558,000. The following table summarizes the
activity pertaining to the mortgage servicing rights included in intangible assets as of December 31, 2018 and 2017 (in thousands):
Beginning Balance
Acquired Balance
Mortgage Servicing rights capitalized
Mortgage Servicing rights amortized
Ending Balance
December 31, 2018
December 31, 2017
844
1,558
7
(308)
$
2,101
$
985
—
—
(141)
844
Total amortization expense for the years ended December 31, 2018, 2017 and 2016 was as follows (in thousands):
2018
2017
2016
Core deposit intangibles
Customer list intangibles
Mortgage Servicing Rights
2,544
363
308
1,829
183
141
$
3,215
$
2,153
$
Estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands):
For year ended 12/31/19
For year ended 12/31/20
For year ended 12/31/21
For year ended 12/31/22
For year ended 12/31/23
1,628
183
98
1,909
$
5,355
4,644
3,996
3,630
3,318
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, 2018 and 2017, 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.
76
Note 8 -- Deposits
As of December 31, 2018 and 2017, deposits consisted of the following (in thousands):
Demand deposits:
Non-interest bearing
Interest-bearing
Savings
Money market
Time deposits
Total deposits
2018
2017
$
575,784
$
903,426
432,319
485,388
591,769
480,283
700,376
359,065
390,880
344,035
$
2,988,686
$
2,274,639
Total interest expense on deposits for the years ended December 31, 2018, 2017 and 2016 was as follows (in thousands):
Interest-bearing demand
Savings
Money market
Time deposits
Total
2018
2017
2016
$
$
1,158
$
579
2,135
4,699
$
588
486
1,224
1,697
8,571
$
3,995
$
274
445
719
1,275
2,713
As of December 31, 2018, 2017 and 2016, the aggregate amount of time deposits in denominations of more than $250,000 was as follows (in thousands):
Time deposit balances in denominations of more than $250,000
$
87,517
$
52,598
$
55,768
2018
2017
2016
The following table shows the amount of maturities for all time deposits as of December 31, 2018 (in thousands):
Less than 1 year
1 year to 2 years
2 years to 3 years
3 years to 4 years
4 years to 5 years
Over 5 years
Total
$
318,879
185,814
48,953
21,714
14,976
1,433
$
591,769
In 2018 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of
approximately $94.8 million and $100.8 million in various checking accounts and time deposits as of December 31, 2018 and 2017, respectively. These
balances are subject to change depending upon the cash flow needs of the public entity.
77
Note 9 -- Repurchase Agreements and Other Borrowings
As of December 31, 2018 and 2017 borrowings consisted of the following (in thousands):
Securities sold under agreements to repurchase
Federal Home Loan Bank (FHLB) Fixed-term advances
Subordinated debentures
Other borrowings:
Due after one year
Total
2018
2017
$
192,330
$
119,745
29,000
7,724
$
348,799
$
155,388
60,038
24,000
10,313
249,739
Aggregate annual maturities of FHLB advances and subordinated debentures (excluding unamortized discounts and premiums) at December 31, 2018 are
(in thousands):
2019
2020
2021
2022
2023
Thereafter
Unamortized premium (discount)
FHLB
Subordinated
Debentures
$
56,000
$
39,000
15,000
5,000
5,000
—
$
$
$
120,000
$
(255) $
119,745
$
—
—
—
—
—
30,930
30,930
(1,930)
29,000
FHLB advances represent borrowings by First Mid Bank to fund loan demand. At December 31, 2018 the advances totaling $120 million were as follows:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
$4 million advance with a 3-year maturity, at 1.72% due April 12, 2019
$15 million advance with a 6-month maturity, at2.68% due May 13, 2019
$5 million advance with a 2-year maturity, at 1.56%, due June 28, 2019
$10 million advance with a 11-month maturity at 2.81%, due August 30, 2019
$5 million advance with a 15-month maturity, at 2.63%, due September 27, 2019
$2 million advance with a 5-year maturity, at 1.89%, due October 17, 2019
$10 million advance with a 14-month maturity at 2.88%, due November 29, 2019
$5 million advance with a 1.5-year maturity, at 2.67%, due December 27, 2019
$4 million advance with a 3-year maturity, at 2.40%, due January 9, 2020
$5 million advance with a 2.5-year maturity, at 1.67%, due January 31, 2020
$5 million advance with a 4-year maturity, at 1.79%, due April 13, 2020
$10 million advance with a 1.5 year maturity at 2.95%, due May 29, 2020
$5 million advance with a 2-year maturity, at 2.75%, due June 26, 2020
$5 million advance with a 3-year maturity, at 1.75%, due July 31, 2020
$5 million advance with a 6-year maturity, at 2.30%, due August 24, 2020
$5 million advance with a 3.5-year maturity, at 1.83%, due February 1, 2021
$5 million advance with a 5-year maturity, at 1.85%, due April 12, 2021
$5 million advance with a 7-year maturity, at 2.55%, due October 1, 2021
$5 million advance with a 5-year maturity, at 2.71%, due March 21, 2022
$5 million advance with a 8-year maturity, at 2.40%, due January 9, 2023
78
Securities sold under agreements to repurchase were $192.3 million at December 31, 2018, a increase of $37 million from $155.4 million at December 31,
2017 primarily due to addition of accounts acquired from Soy Capital. Securities sold under agreements to repurchase have overnight maturities and a
weighted average rate of .15%.
(in thousands)
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end
Average amount outstanding for the year
2018
2017
2016
$
192,330
$
163,626
$
140,622
144,674
185,763
129,734
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, 2018
December 31, 2017
$
$
130,893
61,437
192,330
$
$
100,895
54,493
155,388
At December 31, 2018, there was no outstanding loan balance on the revolving credit agreement with The Northern Trust Company. This loan was renewed
on April 13, 2018 for one year as a revolving credit agreement with a maximum available balance of $10 million. The interest rate (4.65% and 3.67% at
December 31, 2018 and 2017, respectively) is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of First Mid Bank. Management
believes that the Company and its subsidiary banks were in compliance with all the existing covenants at December 31, 2018 and 2017.
Also on September 7, 2016, the Company entered into a $15 million fixed-rate note with a maturity date of September 7, 2020. The interest rate is floating at
2.25% over the federal funds rate (4.65% and 3.67% at December 31, 2018 and 2017, respectively) and interest and principal payments are due quarterly. As
of December 31, 2018, the balance due was zero. The loan is secured by all of the stock of First Mid Bank, including requirements for operating and capital
ratios. Management believes the Company and its subsidiary bank were in compliance with all the existing covenants at December 31, 2018 and 2017.
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, 2018 and 2017 the rate was
5.19% and 4.21%, 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 (4.39% and 3.19% at December 31, 2018 and 2017). The net proceeds to the
Company were used for general corporate purposes, including the Company’s acquisition of Mansfield.
On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a
wholly owned unconsolidated subsidiary of First Clover Financial. The $4 million of trust preferred securities and an additional $124,000 additional
investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear
interest at three-month LIBOR plus 185 basis points (4.64% and 3.44% at December 31, 2018 and 2017, respectively) and resets quarterly.
On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly
owned unconsolidated subsidiary of First BancTrust Corporation. The $6 million of trust preferred securities and an additional $186,000 additional investment
in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear
interest at three-month LIBOR plus 170 basis points (4.49% and 3.29% at December 31, 2018 and 2017, respectively) and resets quarterly.
79
The trust preferred securities issued by Trust I, Trust II, CLST I, and FBTCSTI 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. Similarly, the final rule implementing the Basel III reforms allows
holding companies with less than $15 billion in consolidated assets as of December 31, 2009 to continue to count toward Tier 1 capital any trust preferred
securities issued before May 19, 2010. 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.
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 follow
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, 2018 and 2017, the Company, First Mid
Bank, and Soy Capital Bank met all capital adequacy requirements.
As of December 31, 2018 and 2017, the most recent notification from the primary regulators categorized First Mid Bank and Soy Capital Bank (prior to its
merger into 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, 2018, there were no conditions or events since the most recent notification that management believes have changed this
categorization.
80
December 31, 2018
Total Capital (to risk-weighted assets)
Company
First Mid Bank
Soy Capital Bank
Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Soy Capital Bank
Common Equity Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Soy Capital Bank
Tier 1 Capital (to average assets)
Company
First Mid Bank
Soy Capital Bank
December 31, 2017
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
Actual
Required Minimum For
Capital Adequacy Purposes
with Capital Buffer
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
Amount
(in thousands)
Ratio
Amount
(in thousands)
Ratio
Amount
(in thousands)
Ratio
13.63% $
299,148
> 9.875%
N/A
N/A
$
412,879
350,361
45,387
386,690
324,172
45,387
357,690
324,172
45,387
386,690
324,172
12.85%
14.33%
12.76%
11.89%
14.33%
11.81%
11.89%
14.33%
11.15%
9.92%
45,387
11.12%
269,171
> 9.875
31,283
> 9.875
$
$
272,578
> 10.00%
31,679
> 10.00%
238,561
> 7.875
N/A
N/A
214,655
> 7.875
218,063
> 8.00
24,947
> 7.875
25,343
> 8.00
193,121
> 6.375
N/A
N/A
173,769
> 6.375
177,176
> 6.50
20,195
> 6.375
20,591
> 6.50
138,765
130,716
16,322
> 4.00
> 4.00
> 4.00
N/A
N/A
163,396
20,403
> 5.00
> 5.00
$
290,843
282,621
12.70% $
211,848
> 9.25%
N/A
N/A
12.39%
211,064
> 9.25
$
228,177
> 10.00%
270,866
262,644
11.83%
11.51%
166,043
165,428
> 7.25
> 7.25
N/A
N/A
182,542
> 8.00
246,866
262,644
10.78%
11.51%
131,690
131,202
> 5.75
> 5.75
N/A
N/A
148,315
> 6.50
270,866
262,644
9.91%
9.63%
109,381
109,113
> 4.00
> 4.00
N/A
N/A
136,392
> 5.00
The Company's risk-weighted assets, capital and capital ratios for December 31, 2018 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. As of December 31, 2018 and 2017, the Company, First Mid Bank, and Soy Capital Bank had capital ratios above the
required minimums for regulatory capital adequacy, and First Mid Bank and Soy Capital Bank had capital ratios that qualified it for treatment as well-
capitalized under the regulatory framework for prompt corrective action with respect to banks.
81
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, 2017 was 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 was not reliable for purposes of determining fair value at December 31, 2017,
• An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of
unobservable inputs was 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 were classified within Level 3 of the fair value hierarchy because we determined that significant
adjustments were required to determine fair value at the measurement date.
82
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, 2018 and 2017 (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, 2018
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
Other securities
Total available-for-sale securities
December 31, 2017
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
$
$
$
198,649
$
— $
198,649
$
192,579
298,672
2,374
692,274
$
—
—
364
364
191,612
298,672
2,010
$
690,943
$
113,770
$
— $
113,770
$
166,266
293,811
2,548
2,184
—
—
—
172
172
166,266
293,811
—
2,012
$
575,859
$
—
967
—
—
967
—
—
—
2,548
—
2,548
Total available-for-sale securities
$
578,579
$
The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2018
and 2017 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
Obligations of State and
Political Subdivisions
Trust Preferred Securities
December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
$
— $
— $
2,548 $
1,652
967
—
—
—
—
—
—
—
$
$
967 $
— $
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
18
—
—
(2,522)
(44)
— $
—
—
—
1,053
—
—
—
(157)
2,548
— $
—
83
Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for
impairment. Allowable methods for determining the amount of impairment and estimating fair value include using the fair value of the collateral for
collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method
requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral
dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
Management establishes a specific allowance for loans that have an estimated fair value that is below the carrying value. The total carrying amount of
loans for which a change in specific allowance has occurred as of December 31, 2018 was $19,481,000 and a fair value of $16,437,000 resulting in
specific loss exposures of $3,044,000. As of December 31, 2017, the total carrying amount of loans for which a change specific allowance has occurred
was $3,665,000. These loans had a fair value of $3,053,000 which resulted in specific loss exposures of $612,000.
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, 2018 was
$2,534,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted
to $836,000. The total carrying amount of other real estate owned as of December 31, 2017 was $2,754,000. Other real estate owned included in the total
carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $91,000.
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value
hierarchy in which the fair value measurements fall at December 31, 2018 and 2017 (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
$
$
16,437
$
836
3,053
$
91
— $
—
— $
—
— $
—
— $
—
16,437
836
3,053
91
December 31, 2018
Impaired loans (collateral dependent)
Foreclosed assets held for sale
December 31, 2017
Impaired loans (collateral dependent)
Foreclosed assets held for sale
Sensitivity of Significant Unobservable Inputs
The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable
inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the
fair value measurement.
Trust Preferred Securities. The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities were
offered quotes and comparability adjustments. Significant increases (decreases) in any of those inputs in isolation resulted in a significantly lower (higher)
fair value measurement. Generally, changes in either of those inputs would not affect the other input.
84
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other
than goodwill at December 31, 2018.
Impaired loans (collateral dependent)
Foreclosed assets held for sale
Fair Value
(in thousands)
16,437
836
Valuation
Technique
Third party
valuations
Third party
valuations
Unobservable Inputs
Discount to reflect realizable value
Discount to reflect realizable value
less estimated selling costs
Range (Weighted Average)
0% - 40%
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, 2017.
Trust Preferred Securities
Fair Value
(in thousands)
$
2,548
Valuation
Technique
Discounted
cash flow
Impaired loans (collateral dependent)
Foreclosed assets held for sale
$
3,053
91
Third party
valuations
Third party
valuations
(1) Every five years
Unobservable Inputs
Range (Weighted Average)
Discount rate
Constant prepayment rate (1)
Cumulative projected prepayments
Probability of default
Projected cures given deferral
Loss severity
Discount to reflect realizable value
Discount to reflect realizable value
less estimated selling costs
12.7%
1.3%
21.6%
0.5%
0.0%
97.7%
0%
0%
-
-
40% (
20% )
40% (
35% )
The methods utilized to estimate the fair value of financial instruments at December 31, 2017 did not necessarily represent an exit price. In accordance
with the Company’s adoption of ASU 2016-01 as of January 1, 2018, the methods utilized to measure the fair value of financial instruments at December
31, 2018 represent an approximation of exit price; however, an actual exit price may differ. The following tables present estimated fair values of the
Company’s financial instruments at December 31, 2018 and 2017 in accordance with FAS 107-1 and APB 28-1, codified with ASC 820 (in thousands):
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
December 31, 2018
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
$
140,735
$
140,735
$
140,735
$
— $
665
7,569
692,274
69,436
1,508
665
7,569
692,274
67,909
1,508
Loans net of allowance for loan losses
2,616,822
2,541,037
Interest receivable
Federal Reserve Bank stock
Federal Home Loan Bank stock
Financial Liabilities
Deposits
Securities sold under agreements to repurchase
Interest payable
Federal Home Loan Bank borrowings
Other borrowings
Junior subordinated debentures
16,881
7,390
3,095
16,881
7,390
3,095
2,988,686
2,991,177
192,179
1,758
119,704
7,724
24,418
192,330
1,758
119,745
7,724
29,000
85
665
—
364
—
—
—
—
—
—
—
—
—
—
—
—
—
7,569
690,943
67,909
1,508
—
16,881
7,390
3,095
—
—
—
967
—
—
2,541,037
—
—
—
2,396,917
594,260
192,179
1,758
119,704
7,724
24,418
—
—
—
—
—
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
$
88,388
$
88,388
$
88,388
$
— $
December 31, 2017
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
491
1,685
578,579
69,332
1,025
491
1,692
578,579
68,457
1,025
Loans net of allowance for loan losses
1,918,499
1,899,678
Interest receivable
Federal Reserve Bank stock
Federal Home Loan Bank stock
Financial Liabilities
Deposits
10,832
5,160
2,407
10,832
5,160
2,407
2,274,639
2,272,868
Securities sold under agreements to repurchase
155,388
155,394
Interest payable
Federal Home Loan Bank borrowings
Other borrowings
Junior subordinated debentures
602
60,038
10,313
24,000
602
59,968
10,313
18,050
—
1,692
575,859
68,457
1,025
—
—
—
2,548
—
—
—
1,899,678
10,832
5,160
2,407
1,930,604
155,394
602
59,968
10,313
18,050
—
—
—
342,264
—
—
—
—
—
491
—
172
—
—
—
—
—
—
—
—
—
—
—
—
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, 2018, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately
$3,548,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $3,548,000 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 2018 and 2017 the Company issued 9,043 common shares and 6,875 common shares, respectively,
pursuant to the DCP.
The Company also maintains deferred compensation arrangements that were acquired in the Soy Capital acquisition. Individual participants in the
agreements are primarily business development employees in the First Mid Insurance and First Mid Wealth Management divisions. The total liabilities
associated with these agreements is included in other liabilities on the Company's consolidated balance sheet as of December 31, 2018.
Note 13 -- Stock Incentive Plan
At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented
to succeed the Company's 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees,
consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development
and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and
selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions
established in the SI Plan.
A maximum of 149,983 shares are authorized under the SI Plan. There have been no options awarded since 2008. The Company awarded 28,700, 18,391
and 13,912 (under the 2007 Stock Incentive Plan) shares during 2018, 2017, 2016, respectively as stock and stock unit awards.
86
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 2018, 2017 or 2016.
The following table summarizes the compensation cost, net of forfeitures, related to stock-based compensation for the years ended December 31, 2018,
2017 and 2016 (in thousands):
Stock and stock unit awards:
Pre-tax compensation expense
Income tax benefit
Total share-based compensation expense, net of income taxes
2018
2017
2016
$
$
314
$
(66)
248
$
954
$
(334)
620
$
384
(134)
250
During 2017, the Board changed its award process and subsequently approved the acceleration of the vesting of all remaining outstanding restricted stock
units. This resulted in total compensation expense for the year ended December 31, 2017 of approximately, $954,000.
A summary of option activity under the SI Plan and the 1997 Stock Incentive Plan as of December 31, 2018, 2017 and 2016, 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
2018
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
$23.00
0.00
23.00
0.00
$0.00
$0.00
0.00
0.00
$
$
—
—
Shares
10,500
0
(10,500)
0
0
0
The total intrinsic value of options exercised during 2018 was $176,000. As of December 31, 2018 there were no outstanding options.
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
2017
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
$24.65
0.00
25.42
23.00
$23.00
$23.00
0.96
0.96
$
$
163,170
163,170
Shares
40,500
0
(27,500)
(2,500)
10,500
10,500
The total intrinsic value of options exercised during 2017 was $259,000. There were no stock options for shares of common stock not considered in
computing the aggregate intrinsic value of outstanding shares and exercisable shares for 2017 because they were anti-dilutive.
87
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
2016
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
$24.67
0.00
24.86
24.86
$24.65
$24.65
1.42
1.42
$
$
378,850
378,850
Shares
45,500
0
(2,500)
(2,500)
40,500
40,500
There were no options exercised during 2016. Stock options for 14,000 shares of common stock were not considered in computing the aggregate intrinsic
value of outstanding shares and exercisable shares for 2016 because they were anti-dilutive.
The following table summarizes non-vested stock and stock unit activity for the years ended December 31, 2018, 2017 and 2016:
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
Fair value of shares vested
2018
Weighted-avg
Grant-date Fair
Value
$0.00
38.92
38.92
0.00
$38.92
Shares
0
28,700
(4,420)
0
24,280
2017
Weighted-avg
Grant-date
Fair Value
$22.64
30.65
25.54
0.00
$0.00
Shares
32,338
18,391
(50,729)
0
0
2016
Weighted-avg
Grant-date
Fair Value
$20.87
26.09
22.18
0.00
$22.64
Shares
30,169
13,912
(11,743)
0
32,338
$
172,026
$
260,483
$
260,483
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, 2018, 2017 and 2016, there was $795,000, $0, and $344,000, respectively, of total unrecognized compensation
cost related to unvested stock and stock unit awards under the SI Plan.
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 $1,881,000,
$1,630,000 and $1,383,000 in 2018, 2017 and 2016, 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 $36,000, $40,000 and $43,000 in 2018, 2017 and 2016, respectively. The current liability
recorded for these two agreements was $533,000 and $597,000, as of December 31, 2018 and 2017, respectively.
88
Note 15 -- Income Taxes
The components of federal and state income tax expense for the years ended December 31, 2018, 2017 and 2016 were as follows (in thousands):
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Total
2018
2017
2016
$
4,841
$
9,825
$
2,781
7,622
2,818
1,465
4,283
2,719
12,544
2,047
451
2,498
$
11,905
$
15,042
$
11,375
2,953
14,328
(1,940)
(448)
(2,388)
11,940
Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. federal tax rate of 21% for 2018
and 35% for 2017 and 2016 to income before income taxes). During 2018, 2017 and 2016, the Company was in a graduated tax rate position. The principal
reasons for the difference are as follows (in thousands):
Expected income taxes
Effects of:
Tax-exempt income from bank owned life insurance
Other tax exempt income
Nondeductible interest expense
State taxes, net of federal taxes
Other items
Adjustment of deferred tax assets and liabilities for enacted change in tax laws
Effect of marginal tax rate
Total
2018
2017
2016
$
10,186
$
14,604
$
11,823
(283)
(1,598)
43
3,354
218
—
(15)
(573)
(2,223)
28
2,062
(266)
1,410
—
(235)
(1,577)
21
1,628
280
—
—
$
11,905
$
15,042
$
11,940
On December 22, 2017, the United States enacted certain tax reforms through the Tax Cuts and Jobs Act, which changes existing tax laws, most
significantly a change in the statutory corporate tax rate from 35% to 21%. As a result of this enactment, the Company incurred additional one-time income
tax expense of approximately $1.4 million during the fourth quarter of 2017, primarily due to re-measurement of deferred tax assets and liabilities.
Tax expense recorded by the Company during 2018, 2017 and 2016 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 2015.
89
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, 2018
and 2017 are presented below (in thousands):
Deferred tax assets:
Allowance for loan losses
Available-for-sale investment securities
Deferred compensation
Supplemental retirement
Core deposit premium and other intangible assets
Pass thru activities
Other-than-temporary impairment on securities
Stock compensation expense
Purchase accounting
Acquisition costs
Other
Total gross deferred tax assets
Deferred tax liabilities:
Deferred loan costs
Intangibles amortization
Prepaid expenses
FHLB stock dividend
Depreciation
Deferred revenue
Purchase accounting
Accumulated accretion
Mortgage servicing rights
Total gross deferred tax liabilities
Net deferred tax assets
2018
2017
$
7,251
$
5,694
2,644
3,593
152
657
—
—
43
—
190
977
15,507
126
4,135
297
232
2,149
81
6,066
199
578
13,863
$
1,644
$
941
749
170
664
126
317
—
475
210
596
9,942
26
3,685
232
158
1,207
58
—
112
240
5,718
4,224
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, 2018 and 2017 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 and Soy Capital
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 their minimum capital requirements under applicable
guidelines as of December 31, 2018. As of December 31, 2018, approximately $28.8 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.
90
Note 17 -- Commitments and Contingent Liabilities
First Mid Bank and Soy Capital Bank enter 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, 2018 and 2017 were as follows (in thousands):
Unused commitments and lines of credit:
Commercial real estate
Commercial operating
Home equity
Other
Total
Standby letters of credit
2018
2017
$
$
$
102,015
$
298,657
43,026
110,226
553,924
10,183
$
$
73,268
223,960
38,318
69,333
404,879
10,626
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, 2018 and 2017. The Company's
deferred revenue under standby letters of credit was nominal.
The Company is also subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the
disposition of ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of
operations and cash flows of the Company.
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 $94,006,000 and
$76,835,000 at December 31, 2018 and 2017, respectively. Activity during 2018 and 2017 was as follows (in thousands):
Beginning balance
New loans
Loan repayments
Ending balance
2018
2017
76,835
$
24,957
(7,786)
94,006
$
54,502
29,725
(7,392)
76,835
$
$
Deposits from related parties held by First Mid Bank at December 31, 2018 and 2017 totaled $96,624,000 and $110,324,000, respectively.
91
Note 19 -- Business Combinations
SCB Bancorp, Inc.
On June 12, 2018, The Company and Project Almond Merger Sub LLC, a newly formed Illinois limited liability company and wholly-owned subsidiary of the
Company (“Almond Merger Sub”), entered into an Agreement and Plan of Merger (the “SCB Merger Agreement”) with SCB Bancorp, Inc., an Illinois corporation
(“SCB”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of SCB pursuant to a business
combination whereby SCB merged with and into Almond Merger Sub, whereupon the separate corporate existence of SCB ceased and Merger Sub continued
as the surviving company and a wholly-owned subsidiary of the Company (the “SCB Merger”).
Subject to the terms and conditions of the SCB Merger Agreement, at the effective time of the SCB Merger, each share of common stock, par value $7.50 per
share, of SCB issued and outstanding immediately prior to the effective time of the SCB Merger were converted into and became the right to receive, at the
election of each stockholder, either $307.93 in cash or 8.0228 shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional
shares, less any applicable taxes required to be withheld. In addition, immediately prior to the closing of the proposed merger, SCB will paid a special dividend
to its shareholders in the aggregate amount of approximately $25 million. The SCB Merger was subject to customary closing conditions, including the approval
of the appropriate regulatory authorities and of the stockholders of SCB. The SCB Merger was completed November 15, 2018 and an aggregate of 1,330,571
shares of common stock were issued, and approximately $19,046,000 was paid, to the stockholders of SCB, including cash in lieu of fractional shares.
It is anticipated that SCB’s wholly-owned bank subsidiary, Soy Capital Bank and Trust Company (“Soy Capital Bank”), will be merged with and into First Mid
Bank on April 6, 2019. At the time of the bank merger, Soy Capital Bank’s banking offices will become branches of First Mid Bank. As a result of the acquisition,
the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies
of scale.
The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations ("ASC 805"),” and
accordingly the assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Fair values are subject to refinement for up to
one year after the closing date of November 15, 2018 as additional information regarding the closing date fair values become available. The total
consideration paid was used to determine the amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets
acquired, goodwill of $18.6 million was recorded for the acquisition. Goodwill recorded in the transaction, which reflects the synergies and economies of
scale expected from combining operations and the enhanced revenue opportunities from the Company’s service capabilities, is not tax deductible, and was
all assigned to the banking segment of the Company.
92
The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of the Soy Capital Bank acquisition (in
thousands).
Acquired Book
Value
Adjustments
As Recorded by
First Mid Bank
Assets
Cash & due from banks
Investment Securities
Loans
Allowance for loan losses
Other real estate owned
Premises and equipment
Goodwill
Core deposit intangible
Other Intangibles
Other assets
Total assets acquired
Liabilities and Stockholders' Equity
Deposits
Securities sold under agreements to repurchase
FHLB advances
Other borrowings
Other liabilities
Total liabilities assumed
Net assets acquired
Consideration Paid
Cash
Common stock
Total consideration paid
$
$
65,112
97,545
255,429
(4,491)
783
10,115
6,782
—
1,228
24,821
457,324
348,314
21,180
19,000
7,724
15,904
412,122
45,202
$
— $
(41)
(7,868)
4,491
(345)
1,228
11,854
7,269
11,070
(5,926)
21,732
$
(343)
—
(29)
—
—
(372)
22,104
65,112
97,504
247,561
—
438
11,343
18,636
7,269
12,298
18,895
479,056
347,971
21,180
18,971
7,724
15,904
411,750
67,306
19,046
48,260
67,306
The Company has recognized approximately $907,000, pre-tax, of acquisition costs for the Soy Capital Bank acquisition. These costs are included in legal
and professional and other expense. Of the$7.9 million fair value adjustment to loans, approximately $7.2 million is being accreted to interest income over
the remaining term of the loans. The differences between fair value and acquired value of the assumed time deposits of $(343,000), of the assumed FHLB
advances of $(29,000), are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible asset, with a fair value of
$7.3 million, will be amortized on an accelerated basis over its estimated life of 10 years. In addition, the Company recorded a $4.2 million intangible asset
for the customer list of Soy Bank's Ag services business line and $8.1 million intangible asset for the customer list for Soy Bank's Insurance business line.
These intangibles are being amortized over the estimated life of 12 years and 11 years, respectively.
93
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 Soy Capital Bank acquisition taken place at the beginning of the period (in thousands,
except share data):
Twelve months ended December 31,
2018
2017
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
123,161
8,667
52,257
112,246
54,505
12,711
Net income available to common stockholders
$
41,794
$
105,925
7,462
47,719
100,933
45,249
16,352
28,897
$2.08
$2.08
$2.67
$2.67
15,646,359
15,659,818
13,862,230
13,867,105
Earnings per share
Basic
Diluted
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
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 Soy Capital Bank 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.
First BancTrust Corporation
On December 11, 2017, the Company and Project Hawks Merger Sub LLC (formerly known as Project Hawks Merger Sub Corp.), a newly formed Delaware
limited liability company and wholly-owned subsidiary of the Company (“Hawks Merger Sub”), entered into an Agreement and Plan of Merger (as amended
as of January 18, 2018, the “First Bank Merger Agreement") with First BancTrust Corporation, a Delaware corporation (“First Bank”), pursuant to which,
among other things, the Company agreed to acquire 100% of the issued and outstanding shares of First Bank pursuant to a business combination whereby
First Bank will merge with and into Hawks Merger Sub, with Hawks Merger Sub as the surviving entity and a wholly-owned subsidiary of the Company (the
“First Bank Merger”).
At the effective time of the First Bank Merger, each share of common stock, par value $0.01 per share, of First Bank issued and outstanding immediately
prior to the effective time of the First Bank Merger (other than shares held in treasury by First Bank and shares held by stockholders who had properly made
and not withdrawn a demand for appraisal rights under Delaware law) converted into and become the right to receive, (a) $5.00 in cash and (b) 0.800 shares
of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld and
subject to certain adjustments, all as set forth in the First Bank Merger Agreement.
On May 1, 2018, the Company issued an aggregate total of 1,643,900 shares of common stock valued at $37.32 per share and paid approximately
$10,275,000, including cash in lieu of fractional shares. First Bank’s wholly-owned bank subsidiary, First Bank & Trust, IL (“First Bank & Trust”), merged with
and into First Mid Bank on August 10, 2018. At the time of the bank merger, First Bank & Trust’s banking offices became branches of First Mid Bank. As a
result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to
reduce costs through economies of scale.
The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations ("ASC 805"),” and
accordingly the assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Fair values are subject to refinement for up to
one year after the closing date of May 1, 2018 as additional information regarding the closing date fair values become available. The total consideration paid
was used to determine the amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets acquired, goodwill of
$26.5 million was recorded for the acquisition. Goodwill recorded in the transaction, which reflects the synergies and economies of scale expected from
combining operations and the enhanced revenue opportunities from the Company’s service capabilities, is not tax deductible, and was all assigned to the
banking segment of the Company.
94
The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of the First Bank acquisition (in thousands).
Acquired
Book Value
Adjustments
As Recorded by
First Bank & Trust
Assets
Cash & due from banks
Investment Securities
Loans
Allowance for loan losses
Other real estate owned
Premises and equipment
Goodwill
Core deposit intangible
Other assets
Total assets acquired
Liabilities and Stockholders' Equity
Deposits
FHLB advances
Subordinated debentures
Other liabilities
Total liabilities assumed
Net assets acquired
Consideration Paid
Cash
Common stock
Total consideration paid
$
$
$
$
20,598
59,906
371,156
(4,412)
547
10,126
543
—
16,389
474,853 $
384,323 $
31,000
6,186
8,665
430,174
44,679 $
$
(320)
(7,875)
4,412
(12)
(689)
25,948
5,224
(256)
26,432 $
1,301 $
(328)
(1,451)
(36)
(514)
26,946 $
$
$
20,598
59,586
363,281
—
535
9,437
26,491
5,224
16,133
501,285
385,624
30,672
4,735
8,629
429,660
71,625
10,275
61,350
71,625
The Company has recognized approximately $7.3 million, pre-tax, of acquisition costs for the First Bank acquisition. These costs are included in legal and
professional and other expense. Of the $7.9 million fair value adjustment to loans, approximately $3.6 million is being accreted to interest income over the
remaining term of the loans. The differences between fair value and acquired value of the assumed time deposits of $1.3 million, of the assumed FHLB
advances of $(328,000) and of the assumed subordinated debentures of $(1,451,000), are being amortized to interest expense over the remaining life of the
liabilities. The core deposit intangible asset, with a fair value of $5.2 million, will be amortized on an accelerated basis over its estimated life of 10 years.
The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the
purchase accounting adjustments and acquisition expenses, had the First Bank acquisition taken place at the beginning of the period (in thousands, except
share data):
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income available to common stockholders
Earnings per share
Basic
Diluted
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
Twelve months ended December 31,
2018
2017
$
117,450
8,867
36,526
94,464
50,645
12,456
38,189
$
$2.60
$2.59
14,704,888
14,721,708
110,990
8,365
34,060
94,843
41,842
15,849
25,993
$1.83
$1.83
14,175,559
14,180,434
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 First Bank 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.
95
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 $2,833,000,
$2,720,000 and $2,620,000 for the years ended December 31, 2018, 2017 and 2016, respectively. Future minimum lease payments under operating leases
are (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Note 21 -- Parent Company Only Financial Statements
Presented below are condensed balance sheets, statements of income and cash flows for the Company (in thousands):
First Mid-Illinois Bancshares, Inc. (Parent Company)
Operating Leases
2,880
2,495
2,279
2,223
2,197
33,255
45,329
$
$
December 31,
2018
2017
$
$
18,571
$
3,127
498,544
4,637
524,879
$
29,000
20,015
49,015
475,864
8,296
2,654
328,830
3,555
343,335
34,313
1,058
35,371
307,964
343,335
Balance Sheets
Assets
Cash
Premises and equipment, net
Investment in subsidiaries
Other assets
Total Assets
Liabilities and Stockholders’ equity
Liabilities
Debt
Other liabilities
Total Liabilities
Stockholders’ equity
Total Liabilities and Stockholders’ equity
$
524,879
$
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Income and Comprehensive Income
Income:
Dividends from subsidiaries
Other income
Total income
Operating expenses
Income 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
Comprehensive income
96
Years ended December 31,
2018
2017
2016
$
$
21,694
171
21,865
5,424
16,441
1,274
17,715
18,885
36,600
(4,169)
32,431
$
$
18,925
1,227
20,152
3,902
16,250
864
17,114
9,570
26,684
3,525
30,209
$
$
19,475
66
19,541
3,491
16,050
1,073
17,123
4,717
21,840
(6,484)
15,356
First Mid-Illinois Bancshares, Inc. (Parent Company)
Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, accretion, net
Dividends received from subsidiary
Equity in undistributed earnings of subsidiaries
Increase in other assets
Increase in other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Investment in subsidiary
Net cash from business acquisition
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Repayment of short-term debt
Proceeds from short-term debt
Repayment of long-term debt
Proceeds from long-term debt
Proceeds from issuance of common stock
Payment to repurchase common stock
Direct expense related to capital transactions
Dividends paid on preferred stock
Dividends paid on common stock
Net cash provided by (used in) financing activities
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Years ended December 31,
2018
2017
2016
$
36,600
$
26,684
$
21,840
90
21,694
(18,885)
(1,645)
79
37,933
(13,430)
(29,321)
(42,751)
—
—
(10,313)
—
36,645
(138)
(2,309)
—
(8,792)
15,093
10,275
8,296
82
18,925
(9,570)
(19,348)
733
17,506
—
—
—
(4,000)
—
(3,750)
—
4,399
(797)
(216)
—
(7,228)
(11,592)
5,914
2,382
$
18,571
$
8,296
$
87
19,475
(4,717)
(111,379)
153
(74,541)
(5,000)
68,798
63,798
(3,000)
7,000
(938)
15,000
195
—
(229)
(1,286)
(5,277)
11,465
722
1,660
2,382
97
Note 22 -- Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the two years ended December 31, 2018 and 2017 (in thousands):
Quarters ended in 2018
March 31
June 30
September 30
December 31
Selected operations data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expense
Income before income taxes
Income taxes
$
25,158
$
30,131
$
33,488
$
1,963
23,195
1,055
22,140
7,487
18,374
11,253
2,863
2,677
27,454
1,877
25,577
8,361
20,796
13,142
3,105
3,401
30,087
2,551
27,536
7,919
24,490
10,965
2,731
Net income available to common stockholders
$
8,390
$
10,037
$
8,234
$
Basic earnings per common share
Diluted earnings per common share
$0.66
0.66
$0.72
0.72
$0.54
0.54
35,788
4,786
31,002
3,184
27,818
11,647
26,320
13,145
3,206
9,939
$0.62
0.62
Quarters ended in 2017
March 31
June 30
September 30
December 31
Selected operations data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expense
Income before income taxes
Income taxes
Net income
Dividends on preferred shares
Net income available to common stockholders
Basic earnings per common share
Diluted earnings per common share
25,313
1,838
23,475
2,411
21,064
7,210
19,152
9,122
4,497
4,625
—
4,625
0.37
0.37
$
24,182
$
25,446
$
24,614
$
1,410
22,772
1,722
21,050
7,496
19,202
9,344
3,080
6,264
—
6,264
0.50
0.50
$
$
1,493
23,953
1,840
22,113
7,969
17,955
12,127
3,927
8,200
—
8,200
0.66
0.66
$
$
1,741
22,873
1,489
21,384
7,661
17,912
11,133
3,538
7,595
—
7,595
0.61
0.61
$
$
$
$
98
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid-Illinois Bancshares, Inc.
Mattoon, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Mid-Illinois Bancshares, Inc. (the “Company”) as of December 31, 2018 and 2017,
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, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and
the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s
internal control over financial reporting as of December 31, 2018, 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 5, 2019, expressed an unqualified opinion.
Basis for Opinion
The financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2005.
Decatur, Illinois
March 5, 2019
99
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, 2018. 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, 2018, 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, 2018 based on the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control—Integrated Framework (2013).” As permitted,
the Company excluded the operations of First BancTrust Corporation, acquired on May 1, 2018, and SCB Bancorp Inc., acquired on November 15, 2018,
from the scope of the assessment. Based on the assessment, management determined that, as of December 31, 2018, 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, 2018 has been audited by BKD, LLP, an independent registered public accounting firm, as stated in their report following.
March 5, 2019
Joseph R. Dively
President and Chief Executive Officer
Matthew K. Smith
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 2018 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
100
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid-Illinois Bancshares, Inc.
Mattoon, Illinois
Opinion on the Internal Control over Financial Reporting
We have audited First Mid-Illinois Bancshares, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework: (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
financial statements of the Company and our report dated March 4, 2019 expressed an unqualified opinion.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definitions and Limitations of Internal Control over Financial Reporting
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.
As permitted, the Company excluded the operations of First BancTrust Corporation, acquired on May 1, 2018, and SCB Bancorp, Inc., acquired on
November 15, 2018, from the scope of management's report on internal control over financial reporting. As such, these entities have also been excluded
from the scope of our audit of internal control over financial reporting.
Decatur, Illinois
March 5, 2019
101
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
2019 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 2019 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
2019 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 2019
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 2019 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.”
102
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)
—
— (2)
—
—
$
$
—
— (3)
—
—
339,228 (1)
113,378 (4)
—
452,606
(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 options, restricted stock and/or restricted stock units.
(5) The Company does not maintain any equity compensation plans not approved by stockholders.
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 2019 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 2019 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 2019 Annual Meeting of the Company’s
shareholders under the caption “Fees of Independent Auditors.”
103
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, 2018 and 2017
Consolidated Statements of Income -- For the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income -- For the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Equity -- For the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2018, 2017 and 2016.
•
•
•
•
•
(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.
ITEM 16.
FORM 10-K SUMMARY
None.
104
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 5, 2019
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 2nd day of March 2018, 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)
Matthew K. Smith, 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
Ray A. Sparks, Director
Mary J. Westerhold, Director
James Zimmer, Director
105
Exhibit Index to Annual Report on Form 10-K
Exhibit
Number
2.1
Description and Filing or Incorporation Reference
Agreement and Plan of Merger by and between First Mid-Illinois Bancshares, Inc. and First Clover Leaf Financial Corp., dated as of April 26,
2016
Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on April 26, 2016.
2.2
2.3
2.4
2.5
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
First Amendment to Agreement and Plan of Merger by and between First Mid-Illinois Bancshares, Inc. and First Clover Leaf Financial Corp.,
dated as of June 6, 2016
Incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q filed August 5, 2016.
Agreement and Plan of Merger by and between First Mid-Illinois Bancshares, Inc. and Project Hawks Merger Sub LLC and First BancTrust
Corporation, dated December 11, 2017
Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed December 12, 2017.
First Amendment to Agreement and Plan of Merger by and between First Mid-Illinois Bancshares, Inc. and Project Hawks Merger Sub LLC
and First BancTrust Corporation, dated January 18, 2018
Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed January 19, 2018.
Agreement and Plan of Merger by and between First Mid-Illinois Bancshares, Inc. and Project Almond Merger Sub LLC and SCB Bancorp,
Inc, dated June 12, 2018
Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed June 12, 2018.
Restated Certificate of Incorporation of First Mid-Illinois Bancshares, Inc. Incorporated by reference to Exhibit 3.2 to the Company's Current
Report on Form 8-K filed with the SEC on April 26, 2018.
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.
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.
Sales Agency Agreement, dated August 16, 2017, by and among the Company, Sandler O'Neill & Partners, and FIG Partners, LLC
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 August 17, 2017.
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 March 2, 2017.
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 July 27, 2017.
Employment Agreement between the Company and Matthew K. Smith
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 July 27, 2017.
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 10.7 to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2016.
Employment Agreement between the Company and Bradley L. Beesley
Incorporated by reference to Exhibit 10.8 to First Mid-Illinois Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2016.
First Amendment to the First Mid-Illinois Bancshares, Inc. Amended and Restated Deferred Compensation 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 September 26, 2018.
2017 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 1, 2017.
10.10
Form of 2017 Incentive Plan Stock Unit 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 May 25, 2017.
10.11
Form Agreement to Accelerate the Vesting of the First Mid-Illinois Bancshares, Inc. Stock Unit Awards
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 19, 2017.
10.12
Form of Restricted Stock 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 January 29, 2018.
106
Exhibit
Number
10.13
Exhibit Index to Annual Report on Form 10-K
Description and Filing or Incorporation Reference
Form of Stock Unit/Restricted Stock Award Agreement
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 January 29, 2018.
10.14
2007 Stock Incentive Plan
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on May 23, 2007.
10.15
First Amendment to 2007 Stock Incentive Plan
Incorporated by reference to Exhibit 10.12 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the for the year ended
December 31, 2009.
10.16
Form of 2007 Stock Incentive Plan Stock Option Agreement
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on December 12, 2007.
10.17
Form of Stock Award/Stock Unit Award Agreement
Incorporated by reference to Exhibit 10.1 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on September 27, 2011.
10.18
Form of Stock Unit Award Agreement
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 September 27, 2011.
10.19
10.20
10.21
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.
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.
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.
10.22
Description of Incentive Compensation Plan
Incorporated by reference to Exhibit 10.22 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017.
10.23
Fifth Amended and Restated Credit 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 April 13, 2018.
10.24
First Amendment to Fifth Amended and Restated Credit 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 October 23, 2018.
11.1
Statement re: Computation of Earnings Per Share
Incorporated by reference to Exhibit 11.1 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017.
21.1
Subsidiaries of the Company
Incorporated by reference to Exhibit 21.1 to First Mid-Illinois Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017.
23.1
Consent of BKD LLP
(Filed herewith)
31.1
Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
31.2
32.1
32.2
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)
107
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. 333-161582 on Form S-3
Registration No. 333-207199 on Form S-3
Registration No. 333-216855 on Form S-3
Registration No. 333-227595 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
Registration No. 333-218691 on Form S-8
Registration No. 333-224508 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 5, 2019, on our audits of the consolidated financial statements of First Mid-Illinois Bancshares, Inc. as of December 31, 2018 and 2017 and for each
of three years in the period ended December 31, 2018, and the effectiveness of the Company's internal control over financial reporting as of December 31,
2018 which reports appear in the December 31, 2018 annual report on Form 10-K of First Mid-Illinois Bancshares, Inc.
Decatur, Illinois
March 5, 2019
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 5, 2019
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, Matthew K. Smith, 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 5, 2019
By:
Matthew K. Smith
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, 2018 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 5, 2019
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, 2018 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew K. Smith, 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 5, 2019
Matthew K. Smith
Chief Financial Officer
Stockholder Information
DIVIDEND REINVESTMENT PLAN TRANSFER AND DIVIDEND PAYING AGENT
For information concerning the Company’s Dividend Reinvestment Plan or for stockholder
inquiries concerning dividend checks or their stockholder records, contact:
REGULAR MAIL
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Louisville, KY 40202
STREET ADDRESS FOR OVERNIGHT DELIVERY
Computershare
462 South 4th Street, Suite 1600
312-360-5377 | 877-373-6374
www.computershare.com/contactus
Annual Meeting of Stockholders
The annual meeting of stockholders will be Wednesday, April 24, 2019 at 4:00 p.m. in the
lobby of First Mid Bank & Trust, 1515 Charleston Avenue, Mattoon, Illinois.
FORM 10-K
A copy of the 2018 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
“About First Mid.” 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.
P.O. Box 499
Mattoon, Illinois, 61938
or by email to: aholt@firstmid.com
clicking on “Investor Relations” under
1421 Charleston Avenue
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.
Corporate Profile
First Mid-Illinois Bancshares, Inc. (“First Mid”) is the parent
company of First Mid Bank & Trust, N.A. (“First Mid Bank”),
First Mid Wealth Management Co., First Mid Insurance Group, Inc.,
Mid-Illinois Data Services, Inc., and Soy Capital Bank and Trust Co.,
which is anticipated to merge with and into First Mid Bank
and Trust on or about April 5, 2019. 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 is a $3.8 billion community-focused organization that
provides a full suite of financial services including banking, wealth
management, brokerage, ag services, and insurance through a
sizeable network of locations throughout Illinois and eastern
Missouri and a loan production office in the greater Indianapolis
area. Together, our First Mid team takes great pride in their work
and their ability to serve our customers well over the last 154 years.
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.”
Executive Management Team
JOSEPH R. DIVELY
Chairman, President and
Chief Executive Officer,
First Mid-Illinois Bancshares, Inc.
President and Chief Executive Officer,
First Mid Bank & Trust, N.A.
BRADLEY L. BEESLEY
Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Executive Officer,
First Mid Wealth Management Co.
CHRISTOPHER L. SLABACH
Senior Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Risk Officer,
First Mid Bank & Trust, N.A.
MICHAEL L. TAYLOR
Senior Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Operating Officer,
First Mid Bank & Trust, N.A.
MATTHEW K. SMITH
Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Financial Officer,
First Mid Bank & Trust, N.A.
LAUREL G. ALLENBAUGH
Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Operations & IT Officer,
First Mid Bank & Trust, N.A.
CLAY M. DEAN
Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Executive Officer,
First Mid Insurance Group, Inc.
RHONDA R. GATONS
Senior Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Human Resources Officer,
First Mid Bank & Trust, N.A.
ERIC S. MCRAE
Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Credit Officer,
First Mid Bank & Trust, N.A.
DAVID R. HIDEN
Senior Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Information Officer,
First Mid Bank & Trust, N.A.
AMANDA D. LEWIS
Executive Vice President,
First Mid-Illinois Bancshares, Inc.
Chief Deposit Services Officer,
First Mid Bank & Trust, N.A.
Board of Directors
HOLLY A. BAILEY
President, Howell Asphalt Company
President, Howell Paving, Inc.
STEVEN L. GRISSOM
Chief Executive Officer,
SKL Investment Group, LLC
ROBERT S. COOK
Managing Partner,
TAR CO Investments, LLC
GARY W. MELVIN
Consultant and Director,
Rural King Stores
JOSEPH R. DIVELY
Chairman, President
and Chief Executive Officer,
First Mid-Illinois Bancshares, Inc.
RAY A. SPARKS
Private Investor,
Sparks Investment Group, LP
MARY J. WESTERHOLD
Chief Financial Officer,
Madison Communications Company
JAMES E. ZIMMER
Owner,
Zimmer Real Estate Properties, LLC
Co-Founder, Bio-Enzyme
2018 Annual Report
Turning the page on a new chapter.
1421 Charleston Avenue | Mattoon IL 61938
firstmid.com