UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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	37-1103704
(State or other jurisdiction of	(I.R.S. employer identification no.)
incorporation or organization)
1421 Charleston Avenue,
Mattoon, Illinois	61938
(Address of principal executive offices)	(Zip code)
(217) 234-7454
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]  No [  ]

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes [X ]  No [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer [  ]	Accelerated filer [X]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)	Smaller reporting company [  ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  [  ] Yes  [X] No

As of May 6, 2016, 8,459,854 common shares, $4.00 par value, were outstanding.

PART I

ITEM 1.  FINANCIAL STATEMENTS
First Mid-Illinois Bancshares, Inc.
Condensed Consolidated Balance Sheets	(Unaudited)
(In thousands, except share data)	March 31, 2016			December 31, 2015
Assets
Cash and due from banks:
Non-interest bearing	$	45,141		$	42,570
Interest bearing	34,067			72,722
Federal funds sold	491			492
Cash and cash equivalents	79,699			115,784
Certificates of deposit investments	34,730			25,000
Investment securities:
Available-for-sale, at fair value	518,339			518,848
Held-to-maturity, at amortized cost (estimated fair value of $98,362 and $85,737 at March 31, 2016 and December 31, 2015, respectively)	97,382			85,208
Loans held for sale	1,738			968
Loans	1,275,167			1,280,921
Less allowance for loan losses	(14,736		)	(14,576		)
Net loans	1,260,431			1,266,345
Interest receivable	7,592			8,085
Other real estate owned	347			477
Premises and equipment, net	30,034			31,340
Goodwill, net	41,007			41,007
Intangible assets, net	8,542			8,997
Bank owned life insurance	25,009			—
Other assets	14,794			12,440
Total assets	$	2,119,644		$	2,114,499
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	360,603		$	342,636
Interest bearing	1,379,751			1,389,932
Total deposits	1,740,354			1,732,568
Securities sold under agreements to repurchase	116,689			128,842
Interest payable	367			356
FHLB borrowings	20,000			20,000
Junior subordinated debentures	20,620			20,620
Dividends payable	1,100			550
Other liabilities	8,482			6,554
Total liabilities	1,907,612			1,909,490
Stockholders’ Equity:
Convertible preferred stock, no par value; authorized 1,000,000 shares; issued 5,500 shares in 2016 and 2015	27,400			27,400
Common stock, $4 par value; authorized 18,000,000 shares; issued 9,006,045 shares in 2016 and 9,003,710 shares in 2015	38,024			38,015
Additional paid-in capital	80,116			79,626
Retained earnings	75,968			71,712
Deferred compensation	2,728			3,245
Accumulated other comprehensive income	3,278			723
Less treasury stock at cost, 549,743 shares in 2016 and 549,743 shares in 2015	(15,482		)	(15,712		)
Total stockholders’ equity	212,032			205,009
Total liabilities and stockholders’ equity	$	2,119,644		$	2,114,499

See accompanying notes to unaudited condensed consolidated financial statements.

2

First Mid-Illinois Bancshares, Inc.
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except per share data)	Three months ended March 31,
	2016			2015
Interest income:
Interest and fees on loans	$	13,592		$	11,052
Interest on investment securities	3,221			2,361
Interest on certificates of deposit investments	73			—
Interest on deposits with other financial institutions	93			26
Total interest income	16,979			13,439
Interest expense:
Interest on deposits	579			532
Interest on securities sold under agreements to repurchase	18			14
Interest on FHLB borrowings	150			153
Interest on subordinated debentures	145			128
Total interest expense	892			827
Net interest income	16,087			12,612
Provision for loan losses	113			265
Net interest income after provision for loan losses	15,974			12,347
Other income:
Trust revenues	981			920
Brokerage commissions	448			278
Insurance commissions	1,333			635
Service charges	1,509			1,189
Securities gains, net	260			229
Mortgage banking revenue, net	95			167
ATM / debit card revenue	1,489			1,006
Bank owned life insurance	9			—
Other	520			375
Total other income	6,644			4,799
Other expense:
Salaries and employee benefits	7,847			6,056
Net occupancy and equipment expense	2,879			1,979
Net other real estate owned (income) expense	(19		)	(8		)
FDIC insurance	266			203
Amortization of intangible assets	455			155
Stationery and supplies	201			152
Legal and professional	784			582
Marketing and donations	962			217
Other	1,796			1,468
Total other expense	15,171			10,804
Income before income taxes	7,447			6,342
Income taxes	2,641			2,303
Net income	4,806			4,039
Dividends on preferred shares	550			550
Net income available to common stockholders	$	4,256		$	3,489
Per share data:
Basic net income per common share available to common stockholders	$	0.50		$	0.50
Diluted net income per common share available to common stockholders	$	0.49		$	0.48

See accompanying notes to unaudited condensed consolidated financial statements.

3

First Mid-Illinois Bancshares, Inc.
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)	Three months ended March 31,
	2016			2015
Net income	$	4,806		$	4,039
Other Comprehensive Income
Unrealized gains on available-for-sale securities, net of taxes of $(1,663) and $(1,871) for three months ended March 31, 2016 and 2015, respectively.	2,607			2,927
Amortized holding losses on held-to-maturity securities transferred from available-for-sale, net of taxes of $(69) and $(57) for three months ended March 31, 2016 and 2015, respectively.	107			90
Less: reclassification adjustment for realized (gains) losses included in net income net of taxes of $101 and $89 for three months ended March 31, 2016 and 2015, respectively.	(159		)	(140		)
Other comprehensive income, net of taxes	2,555			2,877
Comprehensive income	$	7,361		$	6,916

See accompanying notes to unaudited condensed consolidated financial statements.

4

First Mid-Illinois Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)	Three months ended March 31,
(In thousands)	2016			2015
Cash flows from operating activities:
Net income	$	4,806		$	4,039
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	113			265
Depreciation, amortization and accretion, net	1,720			876
Change in cash surrender value of bank owned life insurance	(9		)	—
Stock-based compensation expense	89			88
Gains on investment securities, net	(260		)	(229		)
Gain on sales of other real property owned, net	(23		)	(18		)
Donation of building	653			—
Loss on write down of fixed assets	13			64
Gains on sale of loans held for sale, net	(120		)	(189		)
Decrease in accrued interest receivable	493			819
Increase in accrued interest payable	11			20
Origination of loans held for sale	(9,997		)	(12,515		)
Proceeds from sale of loans held for sale	9,347			13,794
Increase in other assets	(3,846		)	(1,240		)
Increase in other liabilities	1,911			1,311
Net cash provided by operating activities	4,901			7,085
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments	3,228			—
Purchases of certificates of deposit investments	(12,958		)	—
Proceeds from sales of securities available-for-sale	8,510			9,453
Proceeds from maturities of securities available-for-sale	25,383			9,362
Proceeds from maturities of securities held-to-maturity	15,000			5,000
Purchases of securities available-for-sale	(29,756		)	(41,902		)
Purchases of securities held-to-maturity	(27,000		)	—
Net decrease in loans	5,775			7,277
Sale of premises and equipment	147			—
Purchases of premises and equipment	(127		)	(245		)
Proceeds from sales of other real property owned	179			80
Investment in bank owned life insurance	(25,000		)	—
Net cash used in investing activities	(36,619		)	(10,975		)
Cash flows from financing activities:
Net increase in deposits	7,786			7,026
Decrease in repurchase agreements	(12,153		)	(5,273		)
Proceeds from FHLB advances	—			5,000
Proceeds from other borrowings	—			2,000
Proceeds from issuance of common stock	—			210
Purchase of treasury stock	—			(836		)
Net cash provided by (used in) financing activities	(4,367		)	8,127
Increase (decrease) in cash and cash equivalents	(36,085		)	4,237
Cash and cash equivalents at beginning of period	115,784			51,730
Cash and cash equivalents at end of period	$	79,699		$	55,967

5

First Mid-Illinois Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited) (continued)	Three months ended March 31,
(In thousands)	2016		2015
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	881	$	807
Income taxes	1,525		160
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned	26		42
Net tax benefit related to option and deferred compensation plans	140		85

See accompanying notes to unaudited condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 --  Basis of Accounting and Consolidation

The unaudited condensed consolidated financial statements include the accounts of First Mid-Illinois Bancshares, Inc. (“Company”) and its wholly-owned subsidiaries:  First Mid-Illinois Bank & Trust, N.A. (“First Mid Bank”), Mid-Illinois Data Services, Inc. (“MIDS”) and The Checkley Agency, Inc. doing business as First Mid Insurance Group (“First Mid Insurance”).  All significant intercompany balances and transactions have been eliminated in consolidation.   The financial information reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended March 31, 2016 and 2015, and all such adjustments are of a normal recurring nature.  Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the March 31, 2016 presentation and there was no impact on net income or stockholders’ equity.  The results of the interim period ended March 31, 2016 are not necessarily indicative of the results expected for the year ending December 31, 2016. The Company operates as a one-segment entity for financial reporting purposes.

The 2015 year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and related footnote disclosures although the Company believes that the disclosures made are adequate to make the information not misleading.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2015 Annual Report on Form 10-K.

Website

The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission (“SEC”) can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC.

Branch Purchase and Assumption Agreement

On January 30, 2015, First Mid Bank, a wholly-owned subsidiary of the Company, entered into a Purchase and Assumption Agreement (the “Purchase Agreement”) with Old National Bank, a national banking association having its principal office in Evansville, Indiana, pursuant to which First Mid Bank purchased certain assets and assume certain liabilities of 12 branch offices of Old National Bank in Southern Illinois (the “ONB Branches”). Pursuant to the terms of the Purchase Agreement, First Mid Bank agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real property, furniture, and other fixed operating assets associated with the ONB Branches. The book value of loan and deposit balances assumed was approximately $156 million and $453 million, respectively. First Mid Bank also agreed to assume certain leases, and entered into certain subleases, relating to the ONB Branches. The completion of the Purchase was subject to regulatory approval required by the Office of the Comptroller of the Currency and normal customary closing conditions, including First Mid Bank, in conjunction with the Company, obtaining financing in connection with the acquisition. Following satisfaction of these conditions, First Mid Bank and Old National Bank closed the acquisition on August 14, 2015.

Capital Raise

On June 18, 2015, the Company entered into a securities purchase agreement with a limited number of institutional investors to sell, and accepted from certain other accredited investors, including certain directors of the Company, subscriptions for, an aggregate total of 1,392,859 newly issued shares of the Company's common stock at a purchase price of $21.00 per share, for an aggregate gross purchase price of approximately $29,250,039 (the "Offering"). The Offering closed on June 19, 2015. The Company used the net proceeds of the Offering to provide capital support for the purchase of the ONB Branches and for general corporate purposes.

7

Acquisition of Illiana

On December 1, 2015, First Mid Insurance Group, a wholly-owned subsidiary of the Company, acquired substantially all of the assets of Illiana, a health plan and life insurance and annuities business.

Rights Agreement

On January 21, 2015, the Company entered into an Amendment No. 1 to the Rights Agreement (the "Rights Agreement"), dated as of September 22, 2009, by and between the Company and Computershare Trust Company, N.A., as rights agent. This amendment accelerated the expiration of the Company's common stock purchase rights (the “Rights”) from 5:00 p.m., Mattoon, Illinois time, on September 22, 2019, to 5:00 p.m., Mattoon, Illinois time, on January 21, 2015, and had the effect of terminating the Rights Agreement on that date. At the time of the termination of the Rights Agreement, all of the Rights distributed to holders of the Company's common stock pursuant to the Rights Agreement expired.

Bank Owned Life Insurance

First Mid Bank has purchased life insurance policies on certain senior management. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts that are probable at settlement.

Stock Plans

At the Annual Meeting of Stockholders held May 23, 2007, the stockholders approved the First Mid-Illinois Bancshares, Inc. 2007 Stock Incentive Plan (“SI Plan”).  The SI Plan was implemented to succeed the Company’s 1997 Stock Incentive Plan, which had a ten-year term that expired October 21, 2007. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its subsidiaries, thereby advancing the interests of the Company and its stockholders.  Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of common stock of the Company on the terms and conditions established in the SI Plan.

On September 27, 2011, the Board of Directors passed a resolution relating to the SI Plan whereby they authorized and approved the Executive Long-Term Incentive Plan (“LTIP”). The LTIP was implemented to provide methodology for granting Stock Awards and Stock Unit Awards to select senior executives of the Company or any Subsidiary.

A maximum of 300,000 shares of common stock may be issued under the SI Plan.  As of March 31, 2016, the Company had awarded 59,500 shares as stock options under the SI plan.  There were no stock options awarded in 2016 or 2015. The Company awarded 12,925 shares as Stock Unit Awards and 18,002 as 50% Stock Awards and 50% Stock Unit Awards during 2015 and 2014, respectively, under the SI plan.

Series C Convertible Preferred Stock.  On February 11, 2011, the Company accepted from certain accredited investors, including directors, executive officers, and certain major customers and holders of the Company’s common stock (collectively, the “Investors”), subscriptions for the purchase of $27,500,000, in the aggregate, of a newly authorized series of preferred stock designated as Series C 8% Non-Cumulative Perpetual Convertible Preferred Stock (the “Series C Preferred Stock”). As of February 11, 2011, $11,010,000 of the Series C Preferred Stock had been issued and sold by the Company to certain Investors.  On March 2, 2011, three investors subsequently completed the required bank regulatory process and an additional $2,750,000 of Series C Preferred Stock was issued and sold by the Company to these investors. On May 13, 2011, four additional investors received the required bank regulatory approval and an additional $5,490,000 of Series C Preferred Stock was issued and sold by the Company to these investors. On June 28, 2012, the final $8,250,000 of the Company’s Series C Preferred Stock was issued and sold by the Company to Investors following their receipt of the required bank regulatory approval, for a total of $27,500,000 of outstanding Series C Preferred Stock. All of the Series C Preferred Stock subscribed for by investors has been issued.

8

The Series C Preferred Stock has an issue price of $5,000 per share and no par value per share.  The Series C Preferred Stock was issued in a private placement exempt from registration pursuant to Regulation D of the Securities Act of 1933, as amended.

The Series C Preferred Stock pays non-cumulative dividends semiannually in arrears, when, as and if authorized by the Board of Directors of the Company, at a rate of 8% per year.  Holders of the Series C Preferred Stock will have no voting rights, except with respect to certain fundamental changes in the terms of the Series C Preferred Stock and certain other matters.  In addition, if dividends on the Series C Preferred Stock are not paid in full for four dividend periods, whether consecutive or not, the holders of the Series C Preferred Stock, acting as a class with any other of the Company’s securities having similar voting rights, including the Company’s Series B Preferred Stock, will have the right to elect two directors to the Company’s Board of Directors.  The terms of office of these directors will end when the Company has paid or set aside for payment full semi-annual dividends for four consecutive dividend periods.

Each share of the Series C Preferred Stock may be converted at any time at the option of the holder into shares of the Company’s common stock.  The number of shares of common stock into which each share of the Series C Preferred Stock is convertible is the $5,000 liquidation preference per share divided by the Conversion Price of $20.29.  The Conversion Price is subject to adjustment from time to time pursuant to the terms of the Series C Certificate of Designation.  If at the time of conversion, there are any authorized, declared and unpaid dividends with respect to a converted share of Series C Preferred Stock, the holder will receive cash in lieu of the dividends, and a holder will receive cash in lieu of fractional shares of common stock following conversion.

After May 13, 2016 the Company may, at its option but subject to the Company’s receipt of any required prior approvals from the Board of Governors of the Federal Reserve System or any other regulatory authority, redeem the Series C Preferred Stock.  Any redemption will be in exchange for cash in the amount of $5,000 per share, plus any authorized, declared and unpaid dividends, without accumulation of any undeclared dividends.

The Company also has the right at any time after May 13, 2016 to require the conversion of all (but not less than all) of the Series C Preferred Stock into shares of common stock if, on the date notice of mandatory conversion is given to holders, (a) the tangible book value per share of the Company’s common stock equals or exceeds 115% of the tangible book value per share of the Company’s common stock at December 31, 2010, and (b) the NASDAQ Bank Index (denoted by CBNK:IND) equals or exceeds 115% of the NASDAQ Bank Index at December 31, 2010.  “Tangible book value per share of our common stock” at any date means the result of dividing the Company’s total common stockholders equity at that date, less the amount of goodwill and intangible assets, determined in accordance with U.S. generally accepted accounting principles, by the number of shares of common stock then outstanding, net of any shares held in the treasury. The tangible book value of the Company’s common stock at December 31, 2010 was $9.38, and 115% of this amount is approximately $10.79. The NASDAQ Bank Index value at December 31, 2010 was 1,847.35 and 115% of this amount is approximately 2,124.45. The tangible book value of the Company’s common stock at March 31, 2016 was $15.97 and the NASDAQ Bank Index value at March 31, 2016 was 2,853.15.

On March 25, 2016, the Company notified the holders of the Series C Preferred Stock that the Company is proceeding with the mandatory conversion of the Series C Preferred Stock on May 16, 2016. After this date, dividends will cease to accrue on the Series C Preferred Stock and certificates for shares of Series C Preferred Stock will only represent the right to receive the appropriate number of shares of common stock together with net accrued and unpaid dividends on the Series C Preferred Stock and cash in lieu of fractional share interests.

9

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income included in stockholders’ equity as of March 31, 2016 and December 31, 2015 are as follows (in thousands):

	Unrealized Gain (Loss) on Securities			Securities with Other-Than-Temporary Impairment Losses			Total
March 31, 2016
Net unrealized gains on securities available-for-sale	$	7,444		$	—		$	7,444
Unamortized losses on held-to-maturity securities transferred from available-for-sale	(658		)	—			(658		)
Securities with other-than-temporary impairment losses	—			(1,415		)	(1,415		)
Tax benefit (expense)	(2,645		)	552			(2,093		)
Balance at March 31, 2016	$	4,141		$	(863	)	$	3,278

December 31, 2015
Net unrealized gains on securities available-for-sale	$	3,243		$	—		$	3,243
Unamortized losses on held-to-maturity securities transferred from available-for-sale	(834		)	—			(834		)
Securities with other-than-temporary impairment losses	—			(1,224		)	(1,224		)
Tax benefit (expense)	(939		)	477			(462		)
Balance at December 31, 2015	$	1,470		$	(747	)	$	723

Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the three months ended March 31, 2016 and 2015, were as follows (in thousands):

	Amounts Reclassified from Other Comprehensive Income						Affected Line Item in the Statements of Income
	2016			2015
Unrealized gains on available-for-sale securities	$	260		229			Securities gains, net
							(Total reclassified amount before tax)
	(101		)	(89		)	Income taxes
Total reclassifications out of accumulated other comprehensive income	$	159		$	140		Net reclassified amount

See “Note 3 – Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.

10

Adoption of New Accounting Guidance

Accounting Standards Update 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). In March 2016, FASB issued ASU 2016-09. The objective of the simplification initiative is to identify, evaluate, and improve areas of US GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The new guidance will be effective for public companies for reporting periods beginning after December 15, 2016, and is not expected to have a significant impact on the Company’s financial statements.

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, 2018. Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2016. There are many aspects of the new accounting guidance that are still being interpreted, and the FASB has recently issued and proposed updates to certain aspects of the guidance. Management is evaluating the impact of ASU 2016-08 will have on the Company’s financial statements.

Accounting Standards Update 2016-02, Leases (Topic 842)("ASU 2016-02"). On February 25, 2016, FASB issued ASU 2016-02 which creates Topic 842, Leases and supersedes Topic 840, Leases. ASU 2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among organizations. Under the new guidance, a lessee will be required to all leases with lease terms of more than 12 months on their balance sheet as lease liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new guidance will be effective for public companies for fiscal years beginning on or after December 15, 2018, and for private companies for fiscal years beginning on or after December 15, 2019. Early adoption is permitted for all entities. Management is evaluating the impact ASU 2016-02 will have on the Company's financial statements.

Accounting Standards Update 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). In January 2016, FASB issued ASU 2016-01 which amends prior guidance to require an entity to measure its equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of same issuer. The new guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The new guidance will be effective for reporting periods after January 1, 2018 and is not expected to have a significant impact on the Company's financial statements.

Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606): ("ASU 2014-09"). In May 2014, FASB issued ASU 2014-09 which created a new topic in the FASB Accounting Standards Codification(R) ("ASC"), Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASU 2014-09 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the ASC, OtherAssets and Deferred Costs: Contracts with Customers ("ASC 340-40"), to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC

11

Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantee other than product or service warranties, and non-monetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

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, unless anti-dilutive.

The components of basic and diluted net income per common share available to common stockholders for the three-month period ended March 31, 2016 and 2015 were as follows:

	Three months ended March 31,
	2016			2015
Basic Net Income per Common Share
Available to Common Stockholders:
Net income	$	4,806,000		$	4,039,000
Preferred stock dividends	(550,000		)	(550,000		)
Net income available to common stockholders	$	4,256,000		$	3,489,000
Weighted average common shares outstanding	8,455,507			7,024,678
Basic earnings per common share	$	0.50		$	0.50
Diluted Net Income per Common Share
Available to Common Stockholders:
Net income available to common stockholders	$	4,256,000		$	3,489,000
Effect of assumed preferred stock conversion	550,000			550,000
Net income applicable to diluted earnings per share	$	4,806,000		$	4,039,000
Weighted average common shares outstanding	8,455,507			7,024,678
Dilutive potential common shares:
Assumed conversion of stock options	178			—
Restricted stock awarded	5,232			9,382
Assumed conversion of preferred stock	1,355,348			1,355,348
Dilutive potential common shares	1,360,758			1,364,730
Diluted weighted average common shares outstanding	9,816,265			8,389,408
Diluted earnings per common share	$	0.49		$	0.48

The following shares were not considered in computing diluted earnings per share for the three-month periods ended March 31, 2016 and 2015 because they were anti-dilutive:

	Three months ended March 31,
	2016	2015
Stock options to purchase shares of common stock	24,500	52,000

12

Note 3 -- Investment Securities

The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at March 31, 2016 and December 31, 2015 were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
March 31, 2016
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	81,370	$	284	$	(106	)	$	81,548
Obligations of states and political subdivisions	107,322		3,859		(53		)	111,128
Mortgage-backed securities: GSE residential	316,470		3,747		(325		)	319,892
Trust preferred securities	3,113		—		(1,415		)	1,698
Other securities	4,035		61		(23		)	4,073
Total available-for-sale	$	512,310	$	7,951	$	(1,922	)	$	518,339
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	97,382	$	1,020	$	(40	)	$	98,362
December 31, 2015
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	90,368	$	41	$	(268	)	$	90,141
Obligations of states and political subdivisions	107,164		3,608		(55		)	110,717
Mortgage-backed securities: GSE residential	312,132		1,374		(1,452		)	312,054
Trust preferred securities	3,130		—		(1,224		)	1,906
Other securities	4,035		29		(34		)	4,030
Total available-for-sale	$	516,829	$	5,052	$	(3,033	)	$	518,848
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	85,208	$	743	$	(214	)	$	85,737

Trust preferred securities represent one trust preferred pooled security issued by First Tennessee Financial (“FTN”). The unrealized loss of this security, which has a remaining maturity of twenty-one years, is primarily due to its long-term nature, a lack of demand or inactive market for the security, and concerns regarding the underlying financial institutions that have issued the trust preferred security. See the heading “Trust Preferred Securities” for further information regarding this security.

Realized gains and losses resulting from sales of securities were as follows during the three months endedMarch 31, 2016 and 2015 (in thousands):

	March 31, 2016		March 31, 2015
Gross gains	$	260	$	229
Gross losses	—		—

13

The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity presented at amortized cost, at March 31, 2016 and the weighted average yield for each range of maturities (dollars in thousands):

	One year or less			After 1 through 5 years			After 5 through 10 years			After ten years			Total
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	40,248		$	41,300		$	—		$	—		$	81,548
Obligations of state and political subdivisions	8,189			49,578			50,876			2,485			111,128
Mortgage-backed securities: GSE residential	1,974			270,007			47,911			—			319,892
Trust preferred securities	—			—			—			1,698			1,698
Other securities	—			3,986			—			87			4,073
Total available-for-sale investments	$	50,411		$	364,871		$	98,787		$	4,270		$	518,339
Weighted average yield	1.95		%	2.36		%	2.80		%	2.21		%	2.40		%
Full tax-equivalent yield	2.39		%	2.67		%	3.92		%	3.18		%	2.88		%
Held to Maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	67,782		$	24,514		$	5,086		$	—		$	97,382
Weighted average yield	1.85		%	2.11		%	2.06		%	—		%	1.93		%
Full tax-equivalent yield	1.85		%	2.11		%	2.06		%	—		%	1.93		%

The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent yields have been calculated using a 35% tax rate.  With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at March 31, 2016.

Investment securities carried at approximately $377 million and $404 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

14

The following table presents the aging of gross unrealized losses and fair value by investment category as of March 31, 2016 and December 31, 2015 (in thousands):

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2016
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	25,266	$	(80	)	$	9,973	$	(26	)	$	35,239	$	(106	)
Obligations of states and political subdivisions	3,194		(43		)	498		(10		)	3,692		(53		)
Mortgage-backed securities: GSE residential	13,908		(92		)	23,316		(233		)	37,224		(325		)
Trust preferred securities	—		—			1,698		(1,415		)	1,698		(1,415		)
Other securities	1,977		(23		)	—		—			1,977		(23		)
Total	$	44,345	$	(238	)	$	35,485	$	(1,684	)	$	79,830	$	(1,922	)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	17,441	$	(40	)	$	—	$	—		$	17,441	$	(40	)
December 31, 2015
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	34,942	$	(142	)	$	12,971	$	(126	)	$	47,913	$	(268	)
Obligations of states and political subdivisions	3,168		(32		)	979		(23		)	4,147		(55		)
Mortgage-backed securities: GSE residential	164,249		(841		)	20,011		(611		)	184,260		(1,452		)
Trust preferred securities	—		—			1,906		(1,224		)	1,906		(1,224		)
Other securities	1,966		(34		)	—		—			1,966		(34		)
Total	$	204,325	$	(1,049	)	$	35,867	$	(1,984	)	$	240,192	$	(3,033	)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	35,845	$	(214	)	$	—	$	—		$	35,845	$	(214	)

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At March 31, 2016, there were two available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $9,973,000 and unrealized losses of $26,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2015 there were six available-for-sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $12,971,000 and unrealized losses of $126,000 in a continuous unrealized loss position for twelve months or more. At March 31, 2016 and December 31, 2015 there were no held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more.

Obligations of states and political subdivisions.  At March 31, 2016 there were two obligations of states and political subdivisions with a fair value of $498,000 and unrealized losses of $10,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2015, there were two obligations of states and political subdivisions with a fair value of $979,000 and unrealized losses of $23,000 in a continuous unrealized loss position for twelve months or more.

Mortgage-backed Securities: GSE Residential. At March 31, 2016 there were six mortgage-backed securities with a fair value of $23,316,000 and unrealized losses of $233,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2015, there were seven mortgage-backed securities with a fair value of $20,011,000 and unrealized losses of $611,000 in a continuous unrealized loss position for twelve months or more.

15

Trust Preferred Securities. At March 31, 2016, there was one trust preferred security with a fair value of $1,698,000 and unrealized loss of $1,415,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2015, there was one trust preferred security with a fair value of $1,906,000 and unrealized loss of $1,224,000 in a continuous unrealized loss position for twelve months or more. The unrealized loss was primarily due to the long-term nature of the trust preferred security, a lack of demand or inactive market for the security, the impending change to the regulatory treatment of these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities.

The Company recorded no other-than-temporary impairment (OTTI) for these securities during 2016 or 2015.   Because it is not more-likely-than-not that the Company will be required to sell the remaining security before recovery of its new, lower amortized cost basis, which may be maturity, the Company does not consider the remainder of the investment to be other-than-temporarily impaired at March 31, 2016. However, future downgrades or additional deferrals and defaults in this security, could result in additional OTTI and consequently, have a material impact on future earnings.

Following are the details for the currently impaired trust preferred security (in thousands):

	Book Value		Market Value		Unrealized Gains (Losses)			Other-than- temporary Impairment Recorded To-date
PreTSL XXVIII	$	3,113	$	1,698	$	(1,415	)	$	(1,111	)

Other securities.At March 31, 2016 and December 31, 2015, there were no corporate bonds in a continuous unrealized loss position for twelve months or more.

The Company does not believe any other individual unrealized loss as of March 31, 2016 represents OTTI. However, given the continued disruption in the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the other-than-temporary impairment is identified.

Other-than-temporary Impairment. Upon acquisition of a security, the Company determines whether it is within the scope of the accounting guidance for investments in debt and equity securities or whether it must be evaluated for impairment under the accounting guidance for beneficial interests in securitized financial assets.

The Company conducts periodic reviews to evaluate its investment securities to determine whether OTTI has occurred. While all securities are considered, the securities primarily impacted by OTTI evaluation are pooled trust preferred securities. For the pooled trust preferred security currently in the investment portfolio, an extensive review is conducted to determine if any additional OTTI has occurred. The Company utilizes an independent third-party to perform the OTTI evaluation. The Company's management reviews the assumption inputs and methodology with the third-party to obtain an understanding of them and determine if they are appropriate for the evaluation. Economic models are used to project future cash flows for the security based on current assumptions for discount rate, prepayments, default and deferral rates and recoveries. These assumptions are determined based on the structure of the issuance, the specific collateral underlying the security, historical performance of trust preferred securities and general state of the economy. The OTTI test compares the present value of the cash flows from quarter to quarter to determine if there has been an adverse change which could indicate additional OTTI.

The discount rate assumption used in the cash flow model is equal to the current yield used to accrete the beneficial interest. The Company’s current trust preferred security investment has a floating rate coupon of 3-month LIBOR plus 90 basis points. Since the estimate of 3-month LIBOR is based on the forward curve on the measurement date, and is therefore variable, the discount assumption for this security is a range of projected coupons over the expected life of the security.

The Company considers the likelihood that issuers will prepay their securities which changes the amount of expected cash flows. Factors such as the coupon rates of collateral, economic conditions and regulatory changes, such as the Dodd-Frank Act and Basel III, are considered.

16

The trust preferred security includes collateral issued by financial institutions and insurance companies. To identify bank issuers with a high risk of near term default or deferral, a credit model developed by the third-party is utilized that scores each bank issuer based on 29 different ratios covering capital adequacy, asset quality, earnings, liquidity, the Texas Ratio, and sensitivity to interest rates. To account for longer term bank default risk not captured by the credit model, it is assumed that banks will default at a rate of 2% annually for the first two years of the cash flow projection, and 36 basis points in each year thereafter. To project defaults for insurance issuers, each issuer’s credit rating is mapped to its idealized default rate, which is AM Best’s estimate of the historical default rate for insurance companies with that rating.

Lastly, it is assumed that trust preferred securities issued by banks that have already failed will have no recoveries, and that banks projected to default will have recoveries of 10%. Additionally, the 10% recovery assumption, incorporates the potential for cures by banks that are currently in deferral.

If the Company determines that a given pooled trust preferred security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

Credit Losses Recognized on Investments. As described above, the Company’s investment in trust preferred security has experienced fair value deterioration due to credit losses but is not otherwise other-than-temporarily impaired. The following table provides information about the trust preferred security for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income (loss) for the three months ended March 31, 2016 and 2015 (in thousands).

	Accumulated Credit Losses
	March 31, 2016		March 31, 2015
Credit losses on trust preferred securities held
Beginning of period	$	1,111	$	1,111
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	$	1,111	$	1,111

17

Note 4 – 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 March 31, 2016 and December 31, 2015 follows (in thousands):

	March 31, 2016		December 31, 2015
Construction and land development	$	29,461	$	39,232
Agricultural real estate	119,508		122,579
1-4 Family residential properties	225,159		231,383
Multifamily residential properties	47,359		45,765
Commercial real estate	438,607		409,487
Loans secured by real estate	860,094		848,446
Agricultural loans	67,239		75,998
Commercial and industrial loans	298,588		305,851
Consumer loans	40,084		42,097
All other loans	11,700		11,317
Gross loans	1,277,705		1,283,709
Less:
Net deferred loan fees, premiums and discounts	2,538		2,788
Allowance for loan losses	14,736		14,576
Net loans	$	1,260,431	$	1,266,345

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 $1,738,000 and $968,000 at March 31, 2016 and December 31, 2015, respectively.

Most of the Company’s business activities are with customers located within central Illinois.  At March 31, 2016, the Company’s loan portfolio included $186.7 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $151.8 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased$11.9 million from $198.6 million at December 31, 2015 while loans concentrated in other grain farming decreased$9.7 million from $161.5 million at December 31, 2015 due to seasonal paydowns based upon timing of cash flow requirements.  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 $63.6 million of loans to motels and hotels.  The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region.  While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses. The Company also has $111.7 million of loans to lessors of non-residential buildings and $65.3 million of loans to lessors of residential buildings and dwellings.

The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the board of directors.  Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed.  The vast majority of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system.  Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint.  In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

18

The Company’s lending can be summarized into the following primary areas:

Commercial Real Estate Loans.  Commercial real estate loans are generally comprised of loans to small business entities to purchase or expand structures in which the business operations are housed, loans to owners of real estate who lease space to non-related commercial entities, loans for construction and land development, loans to hotel operators, and loans to owners of multi-family residential structures, such as apartment buildings.  Commercial real estate loans are underwritten based on historical and projected cash flows of the borrower and secondarily on the underlying real estate pledged as collateral on the debt.  For the various types of commercial real estate loans, minimum criteria have been established within the Company’s loan policy regarding debt service coverage while maximum limits on loan-to-value and amortization periods have been defined.  Maximum loan-to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while the desired minimum debt coverage ratio is 1.20x. Amortization periods for commercial real estate loans are generally limited to twenty years. The Company’s commercial real estate portfolio is well below the thresholds that would designate a concentration in commercial real estate lending, as established by the federal banking regulators.

Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund accounts receivable that are secured by business assets other than real estate.  These loans are generally written for one year or less. Also, equipment financing is provided to businesses with these loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years. Commercial loans are often accompanied by a personal guaranty of the principal owners of a business.  Like commercial real estate loans, the underlying cash flow of the business is the primary consideration in the underwriting process.  The financial condition of commercial borrowers is monitored at least annually with the type of financial information required determined by the size of the relationship.  Measures employed by the Company for businesses with higher risk profiles include the use of government-assisted lending programs through the Small Business Administration and U.S. Department of Agriculture.

Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment.  Agricultural real estate loans are primarily comprised of loans for the purchase of farmland.  Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices.  Operating lines are typically written for one year and secured by the crop. Loan-to-value ratios on loans secured by farmland generally do not exceed 65% and have amortization periods limited to twenty five years.  Federal government-assistance lending programs through the Farm Service Agency are used to mitigate the level of credit risk when deemed appropriate.

Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties consisting of one-to-four units and home equity loans and lines of credit.  The Company sells the vast majority of its long-term fixed rate residential real estate loans to secondary market investors.  The Company also releases the servicing of these loans upon sale.  The Company retains all residential real estate loans with balloon payment features.  Balloon periods are limited to five years. Residential real estate loans are typically underwritten to conform to industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit scores.  Loans secured by first liens on residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have amortization periods of twenty five years or less. The Company does not originate subprime mortgage loans.

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.

19

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.

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.

20

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 for the three-months ended March 31, 2016 and 2015 and for the year ended December 31, 2015 (in thousands):

	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated			Total
Three months ended March 31, 2016
Allowance for loan losses:
Balance, beginning of year	$	11,379		$	1,337		$	994		$	642		$	224		$	14,576
Provision charged to expense	225			(68		)	16			123			(183		)	113
Losses charged off	(40		)	—			(84		)	(113		)	—			(237		)
Recoveries	225			1			—			58			—			284
Balance, end of period	$	11,789		$	1,270		$	926		$	710		$	41		$	14,736
Ending balance:
Individually evaluated for impairment	$	298		$	—		$	—		$	—		$	—		$	298
Collectively evaluated for impairment	$	11,491		$	1,270		$	926		$	710		$	41		$	14,438
Loans:
Ending balance	$	821,856		$	186,266		$	226,675		$	42,108		$	—		$	1,276,905
Ending balance:
Individually evaluated for impairment	$	1,201		$	430		$	—		$	—		$	—		$	1,631
Collectively evaluated for impairment	$	820,655		$	185,836		$	226,675		$	42,108		$	—		$	1,275,274

21

	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated			Total
Three months ended March 31, 2015
Allowance for loan losses:
Balance, beginning of year	$	10,914		$	1,360		$	790		$	386		$	232		$	13,682
Provision charged to expense	358			(69		)	(13		)	4			(15		)	265
Losses charged off	(9		)	—			(25		)	(56		)	—			(90		)
Recoveries	196			—			1			52			—			249
Balance, end of period	$	11,459		$	1,291		$	753		$	386		$	217		$	14,106
Ending balance:
Individually evaluated for impairment	$	625		$	—		$	—		$	—		$	—		$	625
Collectively evaluated for impairment	$	10,834		$	1,291		$	753		$	386		$	217		$	13,481
Loans:
Ending balance	$	694,836		$	165,927		$	178,038		$	15,355		$	—		$	1,054,156
Ending balance:
Individually evaluated for impairment	$	3,392		$	—		$	—		$	—		$	—		$	3,392
Collectively evaluated for impairment	$	691,444		$	165,927		$	178,038		$	15,355		$	—		$	1,050,764
Year ended December 31, 2015
Allowance for loan losses:
Balance, beginning of year	$	10,914		$	1,360		$	790		$	386		$	232		$	13,682
Provision charged to expense	451			(25		)	267			633			(8		)	1,318
Losses charged off	(289		)	—			(64		)	(553		)	—			(906		)
Recoveries	303			2			1			176			—			482
Balance, end of year	$	11,379		$	1,337		$	994		$	642		$	224		$	14,576
Ending balance:
Individually evaluated for impairment	$	134		$	—		$	—		$	—		$	—		$	134
Collectively evaluated for impairment	$	11,245		$	1,337		$	994		$	642		$	224		$	14,442
Loans:
Ending balance	$	807,736		$	198,066		$	232,348		$	43,739		$	—		$	1,281,889
Ending balance:
Individually evaluated for impairment	$	744		$	430		$	—		$	—		$	—		$	1,174
Collectively evaluated for impairment	$	806,992		$	197,636		$	232,348		$	43,739		$	—		$	1,280,715

22

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

Credit Quality

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, collateral support, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Company uses the following definitions for risk ratings which are commensurate with a loan considered “criticized”:

Watch. Loans classified as watch have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current sound-worthiness and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered pass rated loans.

23

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2016 and December 31, 2015 (in thousands):

	Construction & Land Development				Agricultural Real Estate				1-4 Family Residential Properties				Multifamily Residential Properties
	2016		2015		2016		2015		2016		2015		2016		2015
Pass	$	29,316	$	39,067	$	115,439	$	118,103	$	219,754	$	224,552	$	46,785	$	45,180
Watch	—		—		1,807		2,282		1,435		1,454		241		243
Substandard	136		142		2,168		2,089		4,978		5,565		310		317
Doubtful	—		—		—		—		—		—		—		—
Total	$	29,452	$	39,209	$	119,414	$	122,474	$	226,167	$	231,571	$	47,336	$	45,740

	Commercial Real Estate (Nonfarm/Nonresidential)				Agricultural Loans				Commercial & Industrial Loans				Consumer Loans
	2016		2015		2016		2015		2016		2015		2016		2015
Pass	$	416,673	$	386,769	$	66,757	$	75,437	$	291,926	$	298,633	$	39,319	$	41,278
Watch	10,440		10,498		280		210		4,142		4,686		—		—
Substandard	11,177		11,905		106		239		1,817		1,741		309		301
Doubtful	—		—		—		—		—		—		—		—
Total	$	438,290	$	409,172	$	67,143	$	75,886	$	297,885	$	305,060	$	39,628	$	41,579

	All Other Loans				Total Loans
	2016		2015		2016		2015
Pass	$	11,590	$	11,198	$	1,237,559	$	1,240,217
Watch	—		—		18,345		19,373
Substandard	—		—		21,001		22,299
Doubtful	—		—		—		—
Total	$	11,590	$	11,198	$	1,276,905	$	1,281,889

24

The following table presents the Company’s loan portfolio aging analysis at March 31, 2016 and December 31, 2015 (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
March 31, 2016
Construction and land development	$	235	$	—	$	—	$	235	$	29,217	$	29,452	$	—
Agricultural real estate	419		106		—		525		118,889		119,414		—
1-4 Family residential properties	322		506		290		1,118		225,049		226,167		—
Multifamily residential properties	—		—		—		—		47,336		47,336		—
Commercial real estate	4,649		187		117		4,953		433,337		438,290		—
Loans secured by real estate	5,625		799		407		6,831		853,828		860,659		—
Agricultural loans	—		—		55		55		67,088		67,143		—
Commercial and industrial loans	661		52		189		902		296,983