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 September 30, 2019
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 BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware	37-1103704
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)
1421 Charleston Avenue,
Mattoon, Illinois	61938
(Address of principal executive offices)	(Zip code)
(217) 234-7454
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	FMBH	NASDAQ Global Market

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

As of November 5, 2019, 16,665,284 common shares, $4.00 par value, were outstanding.

PART I

ITEM 1.  FINANCIAL STATEMENTS
First Mid Bancshares, Inc.
Condensed Consolidated Balance Sheets	(Unaudited)
(In thousands, except share data)	September 30, 2019			December 31, 2018
Assets
Cash and due from banks:
Non-interest bearing	$	98,584		$	63,593
Interest bearing	8,722			77,142
Federal funds sold	923			665
Cash and cash equivalents	108,229			141,400
Certificates of deposit investments	5,360			7,569
Investment securities:
Available-for-sale, at fair value	736,698			692,274
Held-to-maturity, at amortized cost (estimated fair value of $69,492 and $67,909 at September 30, 2019 and December 31, 2018, respectively)	69,515			69,436
Loans held for sale	4,603			1,508
Loans	2,618,955			2,643,011
Less allowance for loan losses	(26,741		)	(26,189		)
Net loans	2,592,214			2,616,822
Interest receivable	17,749			16,881
Other real estate owned	4,348			2,534
Premises and equipment, net	59,724			59,117
Goodwill, net	104,992			105,277
Intangible assets, net	29,469			33,820
Bank owned life insurance	66,786			65,484
Right of use lease assets	12,544			—
Other assets	25,498			27,612
Total assets	$	3,837,729		$	3,839,734
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	596,518		$	575,784
Interest bearing	2,392,407			2,412,902
Total deposits	2,988,925			2,988,686
Securities sold under agreements to repurchase	174,530			192,330
Interest payable	2,632			1,758
FHLB borrowings	80,862			119,745
Other borrowings	—			7,724
Junior subordinated debentures	29,126			29,000
Lease liabilities	12,557			—
Other liabilities	27,138			24,627
Total liabilities	3,315,770			3,363,870
Stockholders’ Equity:
Common stock, $4 par value; authorized 30,000,000 shares; issued 17,272,899 and 17,219,012 shares in 2019 and 2018, respectively	71,092			70,876
Additional paid-in capital	295,534			293,937
Retained earnings	161,359			131,392
Deferred compensation	2,506			2,761
Accumulated other comprehensive income (loss)	9,422			(6,473		)
Less treasury stock at cost, 609,804 shares in 2019 and 574,377 shares in 2018	(17,954		)	(16,629		)
Total stockholders’ equity	521,959			475,864
Total liabilities and stockholders’ equity	$	3,837,729		$	3,839,734

See accompanying notes to unaudited condensed consolidated financial statements.

2

First Mid Bancshares, Inc.
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except per share data)	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019		2018
Interest income:
Interest and fees on loans	$	31,976		$	28,850		$	95,619	$	75,219
Interest on investment securities	5,297			4,511			15,942		13,271
Interest on certificates of deposit investments	33			13			108		34
Interest on federal funds sold	4			2			11		5
Interest on deposits with other financial institutions	268			112			1,520		248
Total interest income	37,578			33,488			113,200		88,777
Interest expense:
Interest on deposits	5,174			2,217			14,492		5,149
Interest on securities sold under agreements to repurchase	196			72			671		196
Interest on FHLB borrowings	683			559			2,102		1,309
Interest on other borrowings	8			148			9		374
Interest on subordinated debentures	392			405			1,236		1,013
Total interest expense	6,453			3,401			18,510		8,041
Net interest income	31,125			30,087			94,690		80,736
Provision for loan losses	2,658			2,551			3,696		5,483
Net interest income after provision for loan losses	28,467			27,536			90,994		75,253
Other income:
Wealth management revenues	3,311			1,579			10,543		4,920
Insurance commissions	3,242			877			12,557		3,202
Service charges	2,091			2,009			5,852		5,447
Securities gains, net	51			—			323		901
Mortgage banking revenue, net	582			368			1,167		939
ATM / debit card revenue	2,173			1,979			6,391		5,443
Bank owned life insurance	439			342			1,316		933
Other	1,028			765			2,995		1,982
Total other income	12,917			7,919			41,144		23,767
Other expense:
Salaries and employee benefits	14,497			11,600			46,636		32,851
Net occupancy and equipment expense	4,377			3,530			13,375		10,308
Net other real estate owned expense	172			(61		)	413		22
FDIC insurance	(87		)	174			389		740
Amortization of intangible assets	1,373			838			4,552		2,059
Stationery and supplies	284			328			835		725
Legal and professional	1,215			1,071			3,713		3,925
Marketing and donations	523			468			1,458		1,253
Other	3,540			6,542			13,020		11,777
Total other expense	25,894			24,490			84,391		63,660
Income before income taxes	15,490			10,965			47,747		35,360
Income taxes	3,820			2,731			11,780		8,699
Net income	$	11,670		$	8,234		$	35,967	$	26,661
Per share data:
Basic net income per common share available to common stockholders	$	0.70		$	0.54		$	2.16	$	1.91
Diluted net income per common share available to common stockholders	0.70			0.54			2.15		1.90
Cash dividends declared per common share	—			—			0.36		0.34

See accompanying notes to unaudited condensed consolidated financial statements.

3

First Mid Bancshares, Inc.
Condensed Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Net income	$	11,670		$	8,234		$	35,967		$	26,661
Other Comprehensive Income (Loss)
Unrealized gains (losses) on available-for-sale securities, net of taxes of $(909) and $1,191 for three months ended September 30, 2019 and 2018, respectively and $(6,562) and $3,796 for nine months ended September 30, 2019 and 2018, respectively.	2,221			(2,919		)	16,062			(9,289		)
Amortized holding losses on held-to-maturity securities transferred from available-for-sale, net of taxes of $(8) for both three months ended September 30, 2019 and 2018 and $(25) for both nine months ended September 30, 2019 and 2018.	21			20			62			60
Less: reclassification adjustment for realized gains included in net income, net of taxes of $15 and $0 for three months ended September 30, 2019 and 2018, respectively and $94 and $261 for nine months ended September 30, 2019 and 2018, respectively.	(36		)	—			(229		)	(640		)
Other comprehensive income (loss), net of taxes	2,206			(2,899		)	15,895			(9,869		)
Comprehensive income	$	13,876		$	5,335		$	51,862		$	16,792

See accompanying notes to unaudited condensed consolidated financial statements.

4

First Mid Bancshares, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the three months ended September 30, 2019 and 2018
	Common Stock		Additional Paid-In-Capital					Deferred Compensation		Accumulated Other Comprehensive Income (Loss)
(in thousands)						Retained Earnings							Treasury Stock
																Total
June 30, 2019	$	71,075	$	295,415		$	149,688	$	2,323	$	7,216		$	(16,759	)	$	508,958
Net income	—		—			11,670		—		—			—			11,670
Other comprehensive income, net of tax	—		—			—		—		2,206			—			2,206
Cash dividends on common stock (.36/share)	—		—			1		—		—			—			1
Issuance of 2,230 common shares pursuant to Deferred Compensation Plan	9		66			—		—		—			—			75
Issuance of 1,976 common shares pursuant to the Employee Stock Purchase Plan	8		53			—		—		—			—			61
Purchase of 35,427 shares of treasury stock	—		—			—		—		—			(1,129		)	(1,129		)
Deferred Compensation	—		—			—		66		—			(66		)	—
Vested restricted shares/units compensation expense	—		—			—		117		—			—			117
September 30, 2019	$	71,092	$	295,534		$	161,359	$	2,506	$	9,422		$	(17,954	)	$	521,959
June 30, 2018	$	65,433	$	250,433		$	118,721	$	2,403	$	(9,274	)	$	(16,390	)	$	411,326
Net income	—		—			8,234		—		—			—			8,234
Other comprehensive loss, net of tax	—		—			—		—		(2,899		)	—			(2,899		)
Issuance of 1,779 common shares pursuant to Deferred Compensation Plan	7		66			—		—		—			—			73
Issuance of 8,000 common shares pursuant to the exercise of stock options	32		152			—		—		—			—			184
Adjustment to issuance of common shares pursuant to acquisition of First Banctrust Corporation, net proceeds	—		(183		)	—		—		—			—			(183		)
Adjustment to issuance of common shares pursuant to capital raise	—		17			—		—		—			—			17
Deferred Compensation	—		—			—		68		—			(68		)	—
Tax benefit related to deferred compensation distributions	—		(1		)	—		—		—			—			(1		)
Vested restricted shares/units compensation expense	—		—			—		82		—			—			82
September 30, 2018	$	65,472	$	250,484		$	126,955	$	2,553	$	(12,173	)	$	(16,458	)	$	416,833

See accompanying notes to unaudited condensed consolidated financial statements.

5

First Mid Bancshares, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the nine months ended September 30, 2019 and 2018
	Common Stock		Additional Paid-In-Capital						Deferred Compensation			Accumulated Other Comprehensive Income (Loss)
(in thousands)						Retained Earnings									Treasury Stock
																		Total
December 31, 2018	$	70,876	$	293,937		$	131,392		$	2,761		$	(6,473	)	$	(16,629	)	$	475,864
Net income	—		—			35,967			—			—			—			35,967
Other comprehensive income, net of tax	—		—			—			—			15,895			—			15,895
Cash dividends on common stock (.36/share)	—		—			(6,000		)	—			—			—			(6,000		)
Issuance of 13,475 common shares pursuant to Dividend Reinvestment Plan	54		419			—			—			—			—			473
Issuance of 9,628 common shares pursuant to Deferred Compensation Plan	39		284			—			—			—			—			323
Issuance of 25,950 restricted shares pursuant to the 2017 Stock Incentive Plan	104		760			—			—			—			—			864
Issuance of 4,834 common shares pursuant to the Employee Stock Purchase Plan	19		130			—			—			—			—			149
Purchase of 35,427 shares of treasury stock	—		—			—			—			—			(1,129		)	(1,129		)
Deferred Compensation	—		—			—			196			—			(196		)	—
Tax benefit related to deferred compensation distributions	—		56			—			—			—			—			56
Grant of restricted units pursuant to 2017 Stock Incentive Plan	—		(52		)	—			(814		)	—			—			(866		)
Vested restricted shares/units compensation expense	—		—			—			363			—			—			363
September 30, 2019	$	71,092	$	295,534		$	161,359		$	2,506		$	9,422		$	(17,954	)	$	521,959
December 31, 2017	$	54,925	$	163,603		$	104,683		$	3,540		$	(2,304	)	$	(16,483	)	$	307,964
Net income	—		—			26,661			—			—			—			26,661
Other comprehensive loss, net of tax	—		—			—			—			(9,869		)	—			(9,869		)
Cash dividends on common stock (.34/share)	—		—			(4,389		)	—			—			—			(4,389		)
Issuance of 14,626 common shares pursuant to Dividend Reinvestment Plan	59		474			—			—			—			—			533
Issuance of 7,121 common shares pursuant to Deferred Compensation Plan	28		249			—			—			—			—			277
Issuance of 13,250 restricted shares pursuant to the 2017 Stock Incentive Plan	53		463			—			—			—			—			516
Issuance of 10,500 common shares pursuant to the exercise of stock options	42		200			—			—			—			—			242
Issuance of 1,643,900 common shares pursuant to acquisition of First Banctrust Corporation, net proceeds	6,576		54,527			—			—			—			—			61,103
Issuance of 947,368 common shares pursuant to capital raise	3,789		30,214			—			—			—			—			34,003
Purchase of 2,588 shares of treasury stock	—		—			—			—			—			(95		)	(95		)
Deferred Compensation	—		—			—			(120		)	—			120			—
Tax benefit related to deferred compensation distributions	—		160			—			—			—			—			160
Grant of restricted units pursuant to 2017 Stock Incentive Plan	—		594			—			(1,109		)	—			—			(515		)
Vested restricted shares/units compensation expense	—		—			—			242			—			—			242
September 30, 2018	$	65,472	$	250,484		$	126,955		$	2,553		$	(12,173	)	$	(16,458	)	$	416,833

See accompanying notes to unaudited condensed consolidated financial statements.

6

First Mid Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)	Nine months ended September 30,
(In thousands)	2019			2018
Cash flows from operating activities:
Net income	$	35,967		$	26,661
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	3,696			5,483
Depreciation, amortization and accretion, net	8,189			5,431
Change in cash surrender value of bank owned life insurance	(1,316		)	(933		)
Stock-based compensation expense	381			242
Operating lease payments	(2,019		)	—
Gains on investment securities, net	(323		)	(901		)
Loss (gain) on sales of repossessed assets, net	86			(62		)
Loss on write down of premises and equipment	7			26
Gains on sale of loans held for sale, net	(978		)	(796		)
Increase in accrued interest receivable	(868		)	(1,767		)
Increase in accrued interest payable	1,117			541
Origination of loans held for sale	(68,022		)	(48,214		)
Proceeds from sale of loans held for sale	65,905			49,095
(Increase) decrease in other assets	1,230			575
Decrease in other liabilities	(896		)	(8,941		)
Net cash provided by operating activities	42,156			26,440
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments	2,209			747
Proceeds from sales of securities available-for-sale	20,052			13,152
Proceeds from maturities of securities available-for-sale	89,643			40,476
Purchases of securities available-for-sale	(132,424		)	(30,082		)
Net decrease (increase) in loans	18,277			(99,308		)
Purchases of premises and equipment	(3,313		)	(1,765		)
Proceeds from sales of other real property owned	700			1,490
Net cash provided by acquisition	—			10,323
Net cash used in investing activities	(4,856		)	(64,967		)
Cash flows from financing activities:
Net increase (decrease) in deposits	239			(8,866		)
Increase in federal funds purchased	—			22,000
Decrease in repurchase agreements	(17,800		)	(56,513		)
Proceeds from FHLB advances	—			45,000
Repayment of FHLB advances	(39,000		)	(15,000		)
Repayment of long-term debt	(7,724		)	(2,813		)
Proceeds from issuance of common stock	470			36,519
Direct expenses related to capital transactions	—			(2,243		)
Purchase of treasury stock	(1,129		)	(95		)
Dividends paid on common stock	(5,527		)	(3,856		)
Net cash (used in) provided by financing activities	(70,471		)	14,133
Decrease in cash and cash equivalents	(33,171		)	(24,394		)
Cash and cash equivalents at beginning of period	141,400			88,879
Cash and cash equivalents at end of period	$	108,229		$	64,485

7

First Mid Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)	Nine months ended September 30,
(In thousands)	2019		2018
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	17,636	$	7,243
Income taxes	11,541		7,919
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned	2,635		224
Initial recognition of right-of-use assets	14,116		—
Initial recognition of lease liabilities	14,116		—
Dividends reinvested in common stock	473		533
Net tax benefit related to option and deferred compensation plans	56		160
Supplemental disclosure of purchase of capital stock of First Bank
Fair value of assets acquired			501,285
Consideration paid:
Cash paid			10,275
Common stock issued			61,350
Total consideration paid			71,625
Fair value of liabilities assumed			$	429,660

See accompanying notes to unaudited condensed consolidated financial statements.

8

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 Bancshares, Inc. (“Company”) formerly known as First Mid-Illinois Bancshares, Inc., and its wholly-owned subsidiaries:  First Mid Bank & Trust, N.A. (“First Mid Bank”), First Mid Wealth Management Company, Mid-Illinois Data Services, Inc. (“MIDS”) and First Mid Insurance Group, Inc. (“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 September 30, 2019 and 2018, and all such adjustments are of a normal recurring nature.  Certain amounts in the prior year’s consolidated financial statements may have been reclassified to conform to the September 30, 2019 presentation and there was no impact on net income or stockholders’ equity.  The results of the interim period ended September 30, 2019 are not necessarily indicative of the results expected for the year ending December 31, 2019. The Company operates as a one-segment entity for financial reporting purposes.

The 2018 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2018 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.

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.

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”).

9

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 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 paying 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 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 paid 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 on 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. Soy Capital Bank and Trust Company (“Soy Capital Bank”), merged with and into First Mid Bank on April 6, 2019. At the time of the bank merger, Soy Capital Bank’s banking offices became branches of First Mid Bank.

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 the nine months ended September 30, 2019, the company sold no shares of common stock under the program. As of September 30, 2019, approximately $16.53 million of common stock remained available for issuance under the At The Market program.

Stock Repurchase Plan

On August 16, 2019, the Company adopted a repurchase plan under Rule 10b5-1 and Rule 10b-18 of the Exchange Act. The Company implemented the repurchase plan in connection with its previously announced stock repurchase program. Under the repurchase plan, up to approximately $6.2 million worth of shares of the Company’s common stock may be repurchased. During the quarter, the Company repurchased approximately $1.1 million in common stock, or 35,427 shares.  The Company has approximately $5.1 million in remaining capacity under the plan. Although the Company adopted the repurchase plan, the Company may make discretionary repurchases in the open market or in privately negotiated transactions from time to time. The timing, manner, price and amount of any such repurchases will be determined by the Company at its discretion and will depend upon a variety of factors including economic and market conditions, price, applicable legal requirements and other factors.

10

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 April 26, 2017, the stockholders approved the First Mid-Illinois Bancshares, Inc. 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. There have been no stock options awarded under any Company plan since 2008. The Company has awarded 25,950 and 13,250 shares of restricted stock during 2019 and 2018, respectively and 15,540 and 28,700 restricted stock units during 2019 and 2018, respectively.

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.  As of September 30, 2019, 4,834 shares were issued pursuant to 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 to ASC 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 of the revenue-generating activities that are within the scope of ASC 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 subsidiary, First Mid Wealth Management Company. 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.

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Insurance commissions. The Company’s insurance agency subsidiary, First Mid Insurance, receives commissions on premiums of new and renewed business policies. First Mid Insurance records commission revenue on direct bill policies as the cash is received. For agency bill policies, First Mid Insurance 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 of loans and the sale of OREO 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.

Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of September 30, 2019, substantially all of the Company's leases are operating leases for real estate property for bank branches, ATM locations, and office space. For leases in effect at January 1, 2019 and for leases commencing thereafter, the Company recognizes a lease liability and a right-of-use asset, based on the present value of lease payments over the lease term. The discount rate used in determining present value was the Company's incremental borrowing rate which is the FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the commencement date for leases subsequently entered into.

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) included in stockholders’ equity as of September 30, 2019 and December 31, 2018 are as follows (in thousands):

	Unrealized Gain (Loss) on Securities
September 30, 2019
Net unrealized gains on securities available-for-sale	$	13,350
Unamortized losses on held-to-maturity securities transferred from available-for-sale	(79		)
Tax expense	(3,849		)
Balance at September 30, 2019	$	9,422

December 31, 2018
Net unrealized losses on securities available-for-sale	$	(8,951	)
Unamortized losses on held-to-maturity securities transferred from available-for-sale	(166		)
Tax benefit	2,644
Balance at December 31, 2018	$	(6,473	)

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Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the three and nine months ended September 30, 2019 and 2018, were as follows (in thousands):

	Amounts Reclassified from Other Comprehensive Income											Affected Line Item in the Statements of Income
	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019			2018
Realized gains on available-for-sale securities	$	51		$	—	$	323		$	901		Securities gains, net
												(Total reclassified amount before tax)
	(15		)	—		(94		)	(261		)	Income taxes
Total reclassifications out of accumulated other comprehensive income	$	36		$	—	$	229		$	640		Net reclassified amount

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

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. The amendments should be applied on a prospective basis to an award modified on or after adoption date. ASU 2017-09 did not have a significant 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 was permitted, including adoption in an interim period. The Company 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 consolidated financial statements. The current accounting policies and procedures of the Company are not anticipated to change, except for the elimination of the Step 2 analysis.

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Pending New Accounting Guidance

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. 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 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 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. The team also keeps current on evolving interpretations and industry practices related to ASU 2016-13. The committee is currently focusing on data and model validation and began parallel processing with the existing allowance for loan losses model during the third quarter of 2019.The committee is currently focusing on evaluating the analysis output and refining the model assumptions.The committee is still evaluating the impact ASU 2016-13 will have on the Company's consolidated financial statements. In addition, the committee is contemplating required changes to current accounting policies, developing procedures and related controls, and determining required reporting disclosures.

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.

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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 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 and nine-month period ended September 30, 2019 and 2018 were as follows:

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Basic Net Income per Common Share
Available to Common Stockholders:
Net income	$	11,670,000	$	8,234,000	$	35,967,000	$	26,661,000
Weighted average common shares outstanding	16,684,395		15,290,539		16,677,932		13,982,339
Basic earnings per common share	$	0.70	$	0.54	$	2.16	$	1.91
Diluted Net Income per Common Share
Available to Common Stockholders:
Net income applicable to diluted earnings per share	$	11,670,000	$	8,234,000	$	35,967,000	$	26,661,000
Weighted average common shares outstanding	16,684,395		15,290,539		16,677,932		13,982,339
Dilutive potential common shares:
Assumed conversion of stock options	—		2,429		—		3,570
Restricted stock awarded	34,780		13,250		34,780		13,250
Dilutive potential common shares	34,780		15,679		34,780		16,820
Diluted weighted average common shares outstanding	16,719,175		15,306,218		16,712,712		13,999,159
Diluted earnings per common share	$	0.70	$	0.54	$	2.15	$	1.90

There were no shares not considered in computing diluted earnings per share for the three and nine-month periods ended September 30, 2019 and 2018 because they were anti-dilutive.

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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 September 30, 2019 and December 31, 2018 were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
September 30, 2019
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	165,765	$	1,481	$	(144	)	$	167,102
Obligations of states and political subdivisions	181,038		6,303		(11		)	187,330
Mortgage-backed securities: GSE residential	373,267		5,832		(255		)	378,844
Other securities	3,278		144		—			3,422
Total available-for-sale	$	723,348	$	13,760	$	(410	)	$	736,698
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	69,515	$	104	$	(127	)	$	69,492
December 31, 2018
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	201,380	$	504	$	(3,235	)	$	198,649
Obligations of states and political subdivisions	193,195		1,224		(1,840		)	192,579
Mortgage-backed securities: GSE residential	304,372		486		(6,186		)	298,672
Other securities	2,278		96		—			2,374
Total available-for-sale	$	701,225	$	2,310	$	(11,261	)	$	692,274
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	69,436	$	—	$	(1,527	)	$	67,909

Realized gains and losses resulting from sales of securities were as follows during the nine months endedSeptember 30, 2019 and 2018 (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019			2018
Gross gains	$	51	$	—	$	365		$	941
Gross losses	—		—		(42		)	(40		)

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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 September 30, 2019 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	$	136,829		$	30,273		$	—		$	—		$	167,102
Obligations of state and political subdivisions	30,912			76,032			79,380			1,006			187,330
Mortgage-backed securities: GSE residential	1,887			355,026			21,931			—			378,844
Other securities	2,005			1,006			—			411			3,422
Total available-for-sale investments	$	171,633		$	462,337		$	101,311		$	1,417		$	736,698
Weighted average yield	2.64		%	2.82		%	3.02		%	3.07		%	2.80		%
Full tax-equivalent yield	2.83		%	3.00		%	3.94		%	4.08		%	3.09		%
Held to Maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	59,510		$	10,005		$	—		$	—		$	69,515
Weighted average yield	1.83		%	1.04		%	—		%	—		%	1.72		%
Full tax-equivalent yield	1.83		%	1.04		%	—		%	—		%	1.72		%

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 September 30, 2019.

Investment securities carried at approximately $662 million and $628 million at September 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

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The following table presents the aging of gross unrealized losses and fair value by investment category as of September 30, 2019 and December 31, 2018 (in thousands):

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2019
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	30,404	$	(109	)	$	8,979	$	(35	)	$	39,383	$	(144	)
Obligations of states and political subdivisions	4,945		(9		)	643		(2		)	5,588		(11		)
Mortgage-backed securities: GSE residential	28,622		(66		)	21,950		(189		)	50,572		(255		)
Total	$	63,971	$	(184	)	$	31,572	$	(226	)	$	95,543	$	(410	)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	2,487	$	(13	)	$	29,451	$	(114	)	$	31,938	$	(127	)
December 31, 2018
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	16,095	$	(148	)	$	105,549	$	(3,087	)	$	121,644	$	(3,235	)
Obligations of states and political subdivisions	38,782		(450		)	42,741		(1,390		)	81,523		(1,840		)
Mortgage-backed securities: GSE residential	81,435		(1,150		)	171,321		(5,036		)	252,756		(6,186		)
Total	$	136,312	$	(1,748	)	$	319,611	$	(9,513	)	$	455,923	$	(11,261	)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	19,683	$	(147	)	$	48,226	$	(1,380	)	$	67,909	$	(1,527	)

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At September 30, 2019 there were three available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $8,979,000 and unrealized losses of $35,000 in a continuous unrealized loss position for twelve months or more. 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 September 30, 2019, there were five held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $29,451,000 and unrealized losses of $114,000 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.

Obligations of states and political subdivisions.  At September 30, 2019, there were two obligations of states and political subdivisions with a fair value of $643,000 and unrealized losses of $2,000 in a continuous loss position for twelve months or more. 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.

Mortgage-backed Securities: GSE Residential. At September 30, 2019, there were fourteen mortgage-backed securities with a fair value of $21,950,000 and unrealized losses of $189,000 in a continuous unrealized loss position for twelve months or more. 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.

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The Company does not believe any other individual unrealized loss as of September 30, 2019 represents other than temporary impairment ("OTTI"). However, given the uncertainty of 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.

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

Credit Losses Recognized on Investments. The following table provides information about the trust preferred security for which only a credit loss was recognized in income and other losses were recorded in other comprehensive income (loss) for the nine months ended September 30, 2019 and 2018 (in thousands).

	Accumulated Credit Losses
	September 30, 2019		September 30, 2018
Credit losses on trust preferred securities held
Beginning of period	$	—	$	1,111
Additions related to OTTI losses not previously recognized	—		—
Reductions due to sales / (recoveries)	—		(1,111		)
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	$	—	$	—

On May 29, 2018 the Company sold its trust preferred security. This sale resulted in recovery of all of the book value of the security. The net proceeds exceeded the aggregate book value of these securities by approximately $846,000 and this amount was recorded as a security gain during the second quarter of 2018.

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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 September 30, 2019 and December 31, 2018 follows (in thousands):

	September 30, 2019		December 31, 2018
Construction and land development	$	69,153	$	51,013
Agricultural real estate	230,068		232,409
1-4 Family residential properties	347,797		374,751
Multifamily residential properties	156,209		186,393
Commercial real estate	957,422		911,656
Loans secured by real estate	1,760,649		1,756,222
Agricultural loans	121,569		136,125
Commercial and industrial loans	543,976		559,120
Consumer loans	83,703		92,744
All other loans	119,305		113,925
Total Gross loans	2,629,202		2,658,136
Less: Loans held for sale	4,603		1,508
	2,624,599		2,656,628
Less:
Net deferred loan fees, premiums and discounts	5,644		13,617
Allowance for loan losses	26,741		26,189
Net loans	$	2,592,214	$	2,616,822

Net loans decreased$24.6 million as of September 30, 2019 compared to December 31, 2018. The primary reason for the decrease was due to seasonal paydowns in agriculture operating loans and declines in 1-4 Family residential properties, multifamily residential properties, and commercial and industrial loans due to higher payoffs of acquired loans. 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 fair value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties. 

Most of the Company’s business activities are with customers located near the Company's branch locations in Illinois and Missouri.  At September 30, 2019, the Company’s loan portfolio included $351.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $270.5 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased$16.9 million from $368.5 million at December 31, 2018 due to seasonal paydowns based upon timing of cash flow requirements. Loans concentrated in other grain farming decreased$5.6 million from $276.1 million at December 31, 2018.  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 $126.0 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 $264.7 million of loans to lessors of non-residential buildings, $289.0 million of loans to lessors of residential buildings and dwellings, and $116.6 million of loans to other gambling industries.

20

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 and the vast majority of borrowers are below regulatory thresholds. The Company can occasionally have outstanding balances to one borrower up to but not exceeding the regulatory threshold should underwriting guidelines warrant. The vast majority of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system.  Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint.  In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

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

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

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.

21

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.

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.

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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 Special Mention, 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 historical 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 for the three and nine-months ended September 30, 2019 and 2018 and for the year ended December 31, 2018 (in thousands):

	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated		Total
Three months ended September 30, 2019
Allowance for loan losses:
Balance, beginning of period	$	20,663		$	2,957		$	1,649		$	1,090		$	—	26,359
Provision charged to expense	1,351			766			427			114			—		2,658
Losses charged off	(1,745		)	(15		)	(353		)	(347		)	—		(2,460		)
Recoveries	56			—			55			73			—		184
Balance, end of period	$	20,325		$	3,708		$	1,778		$	930		$	—	$	26,741
Ending balance:
Individually evaluated for impairment	$	400		$	—		$	480		$	1		$	—	881
Collectively evaluated for impairment	19,236			3,708			1,292			929			—		25,165
Acquired with deteriorated credit quality	689			—			6			—			—		695

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	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated		Total
Three months ended September 30, 2018
Allowance for loan losses:
Balance, beginning of period	$	18,663		$	1,900		$	554		$	928		$	—	$	22,045
Provision charged to expense	1,197			247			942			165			—		2,551
Losses charged off	(439		)	(93		)	(181		)	(133		)	—		(846		)
Recoveries	5			—			2			82			—		89
Balance, end of period	$	19,426		$	2,054		$	1,317		$	1,042		$	—	$	23,839
Ending balance:
Individually evaluated for impairment	$	858		$	—		$	249		$	1		$	—	$	1,108
Collectively evaluated for impairment	18,157			2,054			1,068			1,041			—		22,320
Acquired with deteriorated credit quality	411			—			—			—			—		411
	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated		Total
Nine months ended September 30, 2019
Allowance for loan losses:
Balance, beginning of year	$	21,556		$	2,197		$	1,504		$	932		$	—	$	26,189
Provision charged to expense	893			1,547			681			575			—		3,696
Losses charged off	(2,218		)	(45		)	(472		)	(835		)	—		(3,570		)
Recoveries	94			9			65			258			—		426
Balance, end of period	$	20,325		$	3,708		$	1,778		$	930		$	—	$	26,741
Ending balance:
Individually evaluated for impairment	$	400		$	—		$	480		$	1		$	—	$	881
Collectively evaluated for impairment	19,236			3,708			1,292			929			—		25,165
Acquired with deteriorated credit quality	689			—			6			—			—		695
Loans:
Individually evaluated for impairment	$	9,229		$	104		$	3,834		$	138		$	—	$	13,305
Collectively evaluated for impairment	1,805,283			350,917			356,227			91,140			—		2,603,567
Acquired with deteriorated credit quality	5,021			—			1,665			—			—		6,686
Ending balance	$	1,819,533		$	351,021		$	361,726		$	91,278		$	—	$	2,623,558

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	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated		Total
Nine months ended September 30, 2018
Allowance for loan losses:
Balance, beginning of year	$	16,546		$	1,742		$	886		$	803		$	—	$	19,977
Provision charged to expense	3,467			405			1,211			400			—		5,483
Losses charged off	(715		)	(93		)	(836		)	(397		)	—		(2,041		)
Recoveries	128			—			56			236			—		420
Balance, end of period	$	19,426		$	2,054		$	1,317		$	1,042		$	—	$	23,839
Ending balance:
Individually evaluated for impairment	$	858		$	—		$	249		$	1		$	—	$	1,108
Collectively evaluated for impairment	18,157			2,054			1,068			1,041			—		22,320
Acquired with deteriorated credit quality	411			—			—			—			—		411
Loans:
Individually evaluated for impairment	$	14,924		$	42		$	2,708		$	159		$	—	$	17,833
Collectively evaluated for impairment	1,605,717			312,145			381,012			69,048			—		2,367,922
Acquired with deteriorated credit quality	11,435			4			2,961			5			—		14,405
Ending balance	$	1,632,076		$	312,191		$	386,681		$	69,212		$	—	$	2,400,160
Year ended December 31, 2018
Allowance for loan losses:
Balance, beginning of year	$	16,546		$	1,742		$	886		$	803		$	—	$	19,977
Provision charged to expense	6,070			548			1,447			602			—		8,667
Losses charged off	(1,227		)	(93		)	(886		)	(787		)	—		(2,993		)
Recoveries	167			—			57			314			—		538
Balance, end of year	$	21,556		$	2,197		$	1,504		$	932		$	—	$	26,189
Ending balance:
Individually evaluated for impairment	$	1,816		$	—		$	225		$	3		$	—	$	2,044
Collectively evaluated for impairment	18,514			2,197			1,270			929			—		22,910
Acquired with deteriorated credit quality	1,226			—			9			—			—		1,235
Loans:
Individually evaluated for impairment	$	14,422		$	32		$	2,360		$	166		$	—	$	16,980
Collectively evaluated for impairment	1,756,908			367,175			387,961			99,872			—		2,611,916
Acquired with deteriorated credit quality	13,411			4			2,205			3			—		15,623
Ending balance	$	1,784,741		$	367,211		$	392,526		$	100,041		$	—	$	2,644,519

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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”:

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.

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The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2019 and December 31, 2018 (in thousands):

	Construction & Land Development				Agricultural Real Estate				1-4 Family Residential Properties				Multifamily Residential Properties
	2019		2018		2019		2018		2019		2018		2019		2018
Pass	$	67,941	$	49,794	$	217,562	$	221,047	$	323,757	$	352,583	$	138,351	$	163,845
Special Mention	418		471		10,260		7,805		5,584		5,526		5,619		8,144
Substandard	462		354		1,893		2,848		18,029		15,409		10,889		12,062
Doubtful	—		—		—		—		—		—		—		—
Total	$	68,821	$	50,619	$	229,715	$	231,700	$	347,370	$	373,518	$	154,859	$	184,051

	Commercial Real Estate (Nonfarm/Nonresidential)				Agricultural Loans				Commercial & Industrial Loans				Consumer Loans
	2019		2018		2019		2018		2019		2018		2019		2018
Pass	$	923,345	$	861,086	$	113,116	$	127,863	$	527,005	$	535,186	$	81,828	$	90,133
Special Mention	8,783		16,035		3,980		7,581		3,504		9,967		148		177
Substandard	22,542		29,729		4,554		433		13,428		11,858		1,198		1,206
Doubtful	322		—		—		—		—		—		—		—
Total	$	954,992	$	906,850	$	121,650	$	135,877	$	543,937	$	557,011	$	83,174	$	91,516

	All Other Loans				Total Loans
	2019		2018		2019		2018
Pass	$	116,286	$	110,352	$	2,509,191	$	2,511,889
Special Mention	2,754		3,010		41,050		58,716
Substandard	—		15		72,995		73,914
Doubtful	—		—		322		—
Total	$	119,040	$	113,377	$	2,623,558	$	2,644,519

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The following table presents the Company’s loan portfolio aging analysis at September 30, 2019 and December 31, 2018 (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
September 30, 2019
Construction and land development	$	—	$	—	$	—	$	—	$	68,821	$	68,821	$	—
Agricultural real estate	758		1,962		801		3,521		226,194		229,715		—
1-4 Family residential properties	4,848		1,131		4,509		10,488		336,882		347,370		—
Multifamily residential properties	47		—		1,292		1,339		153,520		154,859		—
Commercial real estate	674		—		2,946		3,620		951,372		954,992		—
Loans secured by real estate	6,327		3,093		9,548		18,968		1,736,789		1,755,757		—
Agricultural loans	459		137		307		903		120,747		121,650		—
Commercial and industrial loans	434		1,173		2,824		4,431		539,506		543,937		—
Consumer loans	423		100		193		716		82,458		83,174		—
All other loans	—		—		—		—		119,040		119,040		—
Total loans	$	7,643	$	4,503	$	12,872	$	25,018	$	2,598,540	$	2,623,558	$	—
December 31, 2018
Construction and land development	$	460	$	43	$	—	$	503	$	50,116	$	50,619	$	—
Agricultural real estate	—		804		—		804		230,896		231,700		—
1-4 Family residential properties	3,347		3,051		4,080		10,478		363,040		373,518		—
Multifamily residential properties	1,149		—		1,955		3,104		180,947		184,051		—
Commercial real estate	1,349		89		4,058		5,496		901,354		906,850		—
Loans secured by real estate	6,305		3,987		10,093		20,385		1,726,353		1,746,738		—
Agricultural loans	63		—		20		83		135,794		135,877		—
Commercial and industrial loans	1,417		10		3,902		5,329		551,682		557,011		—
Consumer loans	888		356		299		1,543		89,973		91,516		—
All other loans	697		—		—		697		112,680		113,377		—
Total loans	$	9,370	$	4,353	$	14,314	$	28,037	$	2,616,482	$	2,644,519	$	—

Impaired Loans

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.

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The Company’s policy is to discontinue the accrual of interest income on all loans for which principal or interest is ninety days past due.  The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal.  Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Interest on loans determined to be troubled debt restructurings is recognized on an accrual basis in accordance with the restructured terms if the loan is in compliance with the modified terms.  Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

The following tables present impaired loans as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019						December 31, 2018
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans with a specific allowance:
Construction and land development	$	263	$	263	$	—	$	2,559	$	2,559	$	14
Agricultural real estate	—		—		—		—		—		—
1-4 Family residential properties	5,499		5,696		486		4,565		4,952		234
Multifamily residential properties	2,556		2,556		—		4,465		4,465		—
Commercial real estate	6,039		6,643		928		12,517		12,804		1,553
Loans secured by real estate	14,357		15,158		1,414		24,106		24,780		1,801
Agricultural loans	104		688		—		36		504		—
Commercial and industrial loans	5,392		6,249		161		8,292		8,723		1,475
Consumer loans	138		138		1		169		171		3
Total loans	$	19,991	$	22,233	$	1,576	$	32,603	$	34,178	$	3,279
Loans without a specific allowance:
Construction and land development	$	180	$	180	$	—	$	48	$	48	$	—
Agricultural real estate	289		289		—		309		309		—
1-4 Family residential properties	3,676		4,051		—		3,680		4,769		—
Multifamily residential properties	—		—		—		7,597		7,597		—
Commercial real estate	1,533		1,284		—		983		1,201		—
Loans secured by real estate	5,678		5,804		—		12,617		13,924		—
Agricultural loans	752		169		—		631		163		—
Commercial and industrial loans	856		2,447		—		1,660		2,027		—
Consumer loans	521		716		—		471		1,006		—
All other loans	—		—		—		6		6		—
Total loans	$	7,807	$	9,136	$	—	$	15,385	$	17,126	$	—
Total loans:
Construction and land development	$	443	$	443	$	—	$	2,607	$	2,607	$	14
Agricultural real estate	289		289		—		309		309		—
1-4 Family residential properties	9,175		9,747		486		8,245		9,721		234
Multifamily residential properties	2,556		2,556		—		12,062		12,062		—
Commercial real estate	7,572		7,927		928		13,500		14,005		1,553
Loans secured by real estate	20,035		20,962		1,414		36,723		38,704		1,801
Agricultural loans	856		857		—		667		667		—
Commercial and industrial loans	6,248		8,696		161		9,952		10,750		1,475
Consumer loans	659		854		1		640		1,177		3
All other loans	—		—		—		6		6		—
Total loans	$	27,798	$	31,369	$	1,576	$	47,988	$	51,304	$	3,279

29

The following tables present average recorded investment and interest income recognized on impaired loans for the three and nine-month periods ended September 30, 2019 and 2018 (in thousands):

	For the three months ended
	September 30, 2019				September 30, 2018
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Construction and land development	$	755	$	8	$	395	$	22
Agricultural real estate	932		—		620		—
1-4 Family residential properties	9,521		21		7,574		137
Multifamily residential properties	1,559		14		3,164		126
Commercial real estate	6,232		43		11,932		188
Loans secured by real estate	18,999		86		23,685		473
Agricultural loans	852		1		752		—
Commercial and industrial loans	6,479		4		8,909		5
Consumer loans	698		—		234		—
All other loans	—		—		8		—
Total loans	$	27,028	$	91	$	33,588	$	478

	For the nine months ended
	September 30, 2019				September 30, 2018
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Construction and land development	$	765	$	24	$	167	$	29
Agricultural real estate	935		—		182		—
1-4 Family residential properties	9,629		63		5,672		188
Multifamily residential properties	1,561		42		1,414		169
Commercial real estate	7,522		128		8,595		256
Loans secured by real estate	20,412		257		16,030		642
Agricultural loans	800		2		642		—
Commercial and industrial loans	7,897		7		8,109		7
Consumer loans	764		1		—		—
All other loans	—		—		—		—
Total loans	$	29,873	$	267	$	24,781	$	649

The amount of interest income recognized by the Company within the periods stated above was due to loans modified in troubled debt restructurings that remained on accrual status.  The balance of loans modified in troubled debt restructurings included in the impaired loans at September 30, 2019 stated above that were still accruing was $1,478,000 of 1-4 Family residential properties, $1,101,000 of commercial real estate, $131,000 of commercial and industrial, $59,000 of agricultural loans, and $5,000 of consumer. The balance of loans modified in a troubled debt restructurings at September 30, 2018 included in the impaired loans stated above that were still accruing was $1,908,000 of 1-4 family residential properties, $679,000 of commercial real estate, and $4,000 of consumer loans. For the nine months ended September 30, 2019 and 2018, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

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Non Accrual Loans

The following table presents the Company’s recorded balance of nonaccrual loans as of September 30, 2019 and December 31, 2018 (in thousands). This table excludes performing troubled debt restructurings and purchased impaired loans.

	September 30, 2019		December 31, 2018
Construction and land development	$	180	$	377
Agricultural real estate	289		309
1-4 Family residential properties	7,631		5,762
Multifamily residential properties	1,437		2,105
Commercial real estate	4,324		8,457
Loans secured by real estate	13,861		17,010
Agricultural loans	797		667
Commercial and industrial loans	6,117		8,990
Consumer loans	654		625
All other loans	—		6
Total loans	$	21,429	$	27,298

Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $915,000 and $1,096,000 for the nine months ended September 30, 2019 and 2018, respectively.

Purchased Credit-Impaired Loans

The Company acquired certain loans considered to be credit-impaired ("PCI") in its business combinations with First Clover Leaf Bank during the third quarter of 2016, First Bank & Trust during the second quarter of 2018, and SCB 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 Bank acquisition. The amount of these loans at September 30, 2019 and December 31, 2018 are as follows (in thousands):

	September 30, 2019			December 31, 2018
Construction and land development	$	263		$	2,558
Agricultural real estate	—			—
1-4 Family residential properties	1,665			2,206
Multifamily residential properties	2,289			3,891
Commercial real estate	2,469			6,946
Loans secured by real estate	6,686			15,601
Agricultural loans	—			4
Commercial and industrial loans	—			15
Consumer loans	—			3
Carrying amount	6,686			15,623
Allowance for loan losses	(695		)	(1,235		)
Carrying amount, net of allowance	$	5,991		$	14,388

For PCI loans, the difference between contractually required payments at acquisition and the cash flow expected to be 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. 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

31

September 30, 2019, there were five loans with a change in expected cash flows and as a result, approximately $695,000 of provision was recorded and approximately $101,000 of provision reversed. As of December 31, 2018, subsequent changes in expected cash flows resulted in approximately $1,235,000 of provision recorded and approximately $65,000 of provision reversed.

Troubled Debt Restructuring

The balance of troubled debt restructurings ("TDRs") at September 30, 2019 and December 31, 2018 was $5.9 million and $10.0 million, respectively.  There was $249,000 and $1,418,000 in specific reserves established with respect to these loans as of September 30, 2019 and December 31, 2018, respectively. As troubled debt restructurings, these loans are included in nonperforming loans and are classified as impaired which requires that they be individually measured for impairment. The modification of the terms of these loans included one or a combination of the following: a reduction of stated interest rate of the loan; an extension of the maturity date and change in payment terms; or a permanent reduction of the recorded investment in the loan.

The following table presents the Company’s recorded balance of troubled debt restructurings at September 30, 2019 and December 31, 2018 (in thousands).

Troubled debt restructurings:	September 30, 2019		December 31, 2018
1-4 Family residential properties	$	1,979	$	2,472
Commercial real estate	1,708		1,706
Loans secured by real estate	3,687		4,178
Agricultural loans	688		499
Commercial and industrial loans	1,431		5,112
Consumer loans	138		167
Total	$	5,944	$	9,956
Performing troubled debt restructurings:
1-4 Family residential properties	$	1,478	$	1,769
Commercial real estate	1,101		676
Loans secured by real estate	2,579		2,445
Agricultural Loans	59		—
Commercial and industrial loans	131		—
Consumer loans	5		6
Total	$	2,774	$	2,451

The following table presents loans modified as TDRs during the nine months endedSeptember 30, 2019 and 2018, as a result of various modified loan factors (in thousands):

	September 30, 2019				September 30, 2018
	Number of Modifications	Recorded Investment		Type of Modifications	Number of Modifications	Recorded Investment		Type of Modifications
1-4 Family residential properties	1	$	44	(b)(c)	15	$	604	(b)(c)
Commercial real estate	3	1,462		(b)(c)(d)	1	437		(b)(d)
Loans secured by real estate	4	1,506			16	1,041
Agricultural loans	1	59		(b)	—	—
Commercial and industrial loans	4	131		(b)(c)(d)	2	99		(b)(c)
Consumer Loans	1	12		(c)	1	4		(b)(c)
Total	10	$	1,708		19	$	1,144

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

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A loan is considered to be in payment default once it is 90 days past due under the modified terms.  There were no loans modified as troubled debt restructurings during the prior twelve months that experienced defaults for nine months ended September 30, 2019. There was one loan modified as troubled debt restructuring during the prior twelve months that experienced defaults as of December 31, 2018.

The balance of real estate owned includes $4,348,000 and $2,534,000 of foreclosed real estate properties recorded as a result of obtaining physical possession of the property at September 30, 2019 and December 31, 2018, respectively. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure procedures are in process was $1,939,000 and $425,000 at September 30, 2019 and December 31, 2018, respectively.

Note 5 -- 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 First Mid Insurance. The following table presents gross carrying value and accumulated amortization by major intangible asset class as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019				December 31, 2018
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Goodwill not subject to amortization (effective 1/1/02)	$	108,752	$	3,760	$	109,037	$	3,760
Intangibles from branch acquisition	3,015		3,015		3,015		3,015
Core deposit intangibles	32,355		16,884		32,355		14,017
Other intangibles	16,029		3,600		16,029		2,648
	$	160,151	$	27,259	$	160,436	$	23,440

Goodwill of $26.5 million was recorded for the acquisition and merger of First Bank during 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 First Bank and the amount of goodwill recorded (in thousands):

Purchase price (in excess of net book value)				$	26,946
Purchase accounting adjustments:
Fair value of securities	$	320
Fair value of loans, net	3,463
Fair value of OREO	12
Fair value of mortgage servicing rights	(1,097		)
Fair value of premises and equipment	689
Fair value of time deposits	1,301
Fair value of FHLB advances	(328		)
Fair value of subordinated debentures	(1,451		)
Core deposit intangible	(5,224		)
Other assets and other liabilities, net	1,860
				(455		)
Resulting goodwill from acquisition				$	26,491

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Goodwill of $18.6 million was provisionally recorded for the acquisition and merger of SCB during the fourth quarter of 2018. All of the goodwill was assigned to the banking segment of the Company. Goodwill was subsequently adjusted to $18.4 million to reflect proper valuation of financial assets and liabilities. 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 SCB and the amount of goodwill recorded (in thousands):

Purchase price (in excess of net book value)				$	21,694
Purchase accounting adjustments:
Fair value of securities	$	41
Fair value of loans, net	3,377
Fair value of OREO	345
Fair value of premises and equipment	(953		)
Fair value of time deposits	(343		)
Fair value of FHLB advances	(29		)
Core deposit intangible	(7,269		)
Customer list intangible	(12,298		)
Other assets and other liabilities, net	13,786
				(3,343		)
Resulting goodwill from acquisition				$	18,351

During 2018, as part of the First Bank and SCB acquisitions, the Company acquired mortgage servicing rights valued at $1,558,000. There have been no mortgage servicing rights added during 2019. The following table summarizes the activity pertaining to mortgage servicing rights included in intangible assets as of September 30, 2019, September 30, 2018 and December 31, 2018 (in thousands):

	September 30, 2019			September 30, 2018			December 31, 2018
Beginning Balance	$	2,101			$844		$	844
Mortgage servicing rights acquired during period	—			1,522			1,558
Mortgage servicing rights capitalized	—			7			7
Valuation reserve	(384		)	—			—
Mortgage servicing rights amortized	(293		)	(242		)	(308		)
I/O Strip	145			—			—
Ending Balance	$	1,569			$2,131		$	2,101

Total amortization expense for the nine months ended September 30, 2019 and 2018 was as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Core deposit intangibles	935		669		$	2,868	$	1,680
Customer list intangibles	317		46		952		137
Mortgage servicing rights	121		123		732		242
	$	1,373	$	838	$	4,552	$	2,059

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Aggregate amortization expense for the current year and estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands):

Aggregate amortization expense:
For period 01/01/19-09/30/19	$	4,552
Estimated amortization expense:
For period 10/01/19-12/31/19	1,396
For year ended 12/31/20	4,836
For year ended 12/31/21	4,192
For year ended 12/31/22	3,826
For year ended 12/31/23	3,510
For year ended 12/31/24	2,910

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” codified within ASC 350, the Company performed testing of goodwill for impairment as of September 30, 2019 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.

Note 6 -- Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase were $174.5 million at September 30, 2019, a decrease of $17.8 million from $192.3 million at December 31, 2018. The decrease during the first nine months of 2019 was primarily due to decreases in balances of customers due to changes in cash flow needs for their businesses. All of the transactions have overnight maturities with a weighted average rate of 0.60%.

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.

Collateral pledged by class for repurchase agreements are as follows (in thousands):

	September 30, 2019		December 31, 2018
US Treasury securities and obligations of U.S. government corporations & agencies	$	93,338	$	130,893
Mortgage-backed securities: GSE: residential	81,192		61,437
Total	$	174,530	$	192,330

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FHLB borrowings were $81 million and $120 million at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019 the advances were as follows:

• $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

Note 7 -- Fair Value of Assets and Liabilities

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 Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

36

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 independent sources of 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.

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.

Derivatives. The fair value of derivatives is based on models using observable market data as of the measurement date and are therefore classified in Level 2 of the valuation hierarchy.

The following table presents the Company’s assets and liabilities 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 September 30, 2019 and December 31, 2018 (in thousands):

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets  (Level 1)		Significant Other Observable Inputs  (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2019
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	167,102	$	—	$	167,102	$	—
Obligations of states and political subdivisions	187,330		—		186,358		972
Mortgage-backed securities	378,844		—		378,844		—
Other securities	3,422		217		3,205		—
Total available-for-sale securities	$	736,698	$	217	$	735,509	$	972
Derivative liability:
Interest rate swap	$	605	$	—	$	605	$	—
December 31, 2018
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	198,649	$	—	$	198,649	$	—
Obligations of states and political subdivisions	192,579		—		191,612		967
Mortgage-backed securities	298,672		—		298,672		—
Other securities	2,374		364		2,010		—
Total available-for-sale securities	$	692,274	$	364	$	690,943	$	967

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The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the nine months endedSeptember 30, 2019 and 2018 is summarized as follows (in thousands):

	Trust Preferred Securities
	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Beginning balance	$	—	$	—	$	—	$	2,548
Transfers into Level 3	—		—		—		—
Transfers out of Level 3	—		—		—		—
Total gains or losses:
Included in net income	—		—		—		—
Included in other comprehensive income (loss)	—		—		—		18
Purchases, issuances, sales and settlements:					—
Purchases	—		—		—		—
Issuances	—		—		—		—
Sales	—		—		—		(2,522		)
Settlements	—		—		—		(44		)
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	$	—	$	—	$	—	$	—

	Obligation of State and Political Subdivisions
	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Beginning balance	$	970	$	—	$	967	$	—
Transfers into Level 3	—		—		—		—
Transfers out of Level 3	—		—		—		—
Total gains or losses:			—				—
Included in net income	2		—		5		—
Included in other comprehensive income (loss)	—		—		—		—
Purchases, issuances, sales and settlements:
Purchases	—		—		—		—
Issuances	—		—		—		—
Sales	—		—		—		—
Settlements	—		—		—		—
Ending balance	$	972	$	—	$	972	$	—
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	$	—	$	—	$	—	$	—

38

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 impaired 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 September 30, 2019 was $9,388,000 and a fair value of $7,816,000 resulting in specific loss exposures of $1,572,000.

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 September 30, 2019 was $4,348,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $1,007,000.

Mortgage Servicing Rights. As of September 30, 2019 , mortgage servicing rights had a carrying value of $1,808,000 and a fair value of $1,569,000 resulting in a valuation reserve of $239,000. The fair value used to determine the valuation reserve for mortgage servicing rights was estimated using the discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the fair value hierarchy.

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 September 30, 2019 and December 31, 2018 (in thousands):

	Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs  (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2019
Impaired loans (collateral dependent)	$	7,816	$	—	$	—	$	7,816
Foreclosed assets held for sale	1,007		—		—		1,007
Mortgage servicing rights	1,569		—		—		1,569
December 31, 2018
Impaired loans (collateral dependent)	$	16,437	$	—	$	—	$	16,437
Foreclosed assets held for sale	836		—		—		836

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Sensitivity of Significant Unobservable Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill at September 30, 2019 and December 31, 2018 (in thousands).

September 30, 2019	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans (collateral dependent)	$	7,816	Third party valuations	Discount to reflect realizable value	0	%	-	40%	(	20%	)
Foreclosed assets held for sale	1,007		Third party valuations	Discount to reflect realizable value less estimated selling costs	0	%	-	40%	(	35%	)
Mortgage servicing rights	1,569		Third party valuations	Discount to reflect realizable value	9.5	%	-	12.5%	(	9.7%	)

December 31, 2018	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans (collateral dependent)	$	16,437	Third party valuations	Discount to reflect realizable value	0	%	-	40%	(	20%	)
Foreclosed assets held for sale	836		Third party valuations	Discount to reflect realizable value less estimated selling costs	0	%	-	40%	(	35%	)

The following tables present estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018 in accordance with ASC 825 (in thousands):

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2019
Financial Assets
Cash and due from banks	$	107,306	$	107,306	$	107,306	$	—	$	—
Federal funds sold	923		923		923		—		—
Certificates of deposit investments	5,360		5,360		—		5,360		—
Available-for-sale securities	736,698		736,698		217		735,509		972
Held-to-maturity securities	69,515		69,492		—		69,492		—
Loans held for sale	4,603		4,603		—		4,603		—
Loans net of allowance for loan losses	2,592,214		2,537,394		—		—		2,537,394
Interest receivable	17,749		17,749		—		17,749		—
Federal Reserve Bank stock	9,401		9,401		—		9,401		—
Federal Home Loan Bank stock	3,295		3,295		—		3,295		—
Financial Liabilities
Deposits	$	2,988,925	$	2,997,180	$	—	$	2,363,295	$	633,885
Securities sold under agreements to repurchase	174,530		174,572		—		174,572		—
Interest payable	2,632		2,632		—		2,632		—
Federal Home Loan Bank borrowings	80,862		81,525		—		81,525		—
Junior subordinated debentures	29,126		23,893		—		23,893		—

40

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
December 31, 2018
Financial Assets
Cash and due from banks	$	140,735	$	140,735	$	140,735	$	—	$	—
Federal funds sold	665		665		665		—		—
Certificates of deposit investments	7,569		7,569		—		7,569		—
Available-for-sale securities	692,274		692,274		364		690,943		967
Held-to-maturity securities	69,436		67,909		—		67,909		—
Loans held for sale	1,508		1,508		—		1,508		—
Loans net of allowance for loan losses	2,616,822		2,541,037		—		—		2,541,037
Interest receivable	16,881		16,881		—		16,881		—
Federal Reserve Bank stock	7,390		7,390		—		7,390		—
Federal Home Loan Bank stock	3,095		3,095		—		3,095		—
Financial Liabilities
Deposits	$	2,988,686	$	2,991,177	$	—	$	2,396,917	$	594,260
Securities sold under agreements to repurchase	192,330		192,179		—		192,179		—
Interest payable	1,758		1,758		—		1,758		—
Federal Home Loan Bank borrowings	119,745		119,704		—		119,704		—
Other borrowings	7,724		7,724		—		7,724		—
Junior subordinated debentures	29,000		24,418		—		24,418		—

Note 8 -- 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 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 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 paid 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 on 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.

Soy Capital Bank and Trust Company ("Soy Capital Bank") merged with and into First Mid Bank on April 6, 2019. At the time of the bank merger, Soy Capital Bank'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.

41

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “BusinessCombinations ("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 $18.4 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.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of the SCB acquisition (in thousands).

	Acquired Book Value			Fair Value Adjustments			As Recorded by SCB
Assets
Cash and due from banks	$	65,095		$	—		$	65,095
Investment Securities	97,545			(41		)	97,504
Loans	255,429			(7,868		)	247,561
Allowance for loan losses	(4,491		)	4,491			—
Other real estate owned	783			(345		)	438
Premises and equipment	10,115			953			11,068
Goodwill	6,745			11,606			18,351
Core deposit intangible	—			7,269			7,269
Other Intangibles	1,228			11,070			12,298
Other assets	24,858			(5,813		)	19,045
Total assets acquired	$	457,307		$	21,322		$	478,629
Liabilities
Deposits	$	348,314		$	(343	)	$	347,971
Securities sold under agreements to repurchase	21,180			—			21,180
FHLB advances	19,000			(29		)	18,971
Other borrowings	7,724			—			7,724
Junior subordinated debentures	—			—			—
Other liabilities	15,477			—			15,477
Total liabilities assumed	411,695			(372		)	411,323
Net assets acquired	$	45,612		$	21,694		$	67,306
Consideration Paid
Cash							$	19,046
Common Stock							48,260
Total consideration paid							$	67,306

The Company has recognized approximately $3.6 million, pre-tax, of acquisition costs for the SCB acquisition. Of this amount, $2.7 million was recognized during 2019. 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), and the assumed FHLB advances $(29,000), are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible assets, 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 customer list of Soy Bank's Ag service 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.

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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 SCB acquisition taken place at the beginning of the period (dollars in thousands):

	Three months ended		Nine months ended
	September 30, 2018		September 30, 2018
Net interest income	$	33,435	$	90,803
Provision for loan losses	2,551		5,483
Non-interest income	11,285		36,754
Non-interest expense	30,460		81,108
Income before income taxes	11,709		40,966
Income tax expense	2,882		10,119
Net income	$	8,827	$	30,847
Earnings per share
Basic	$	0.53	$	2.01
Diluted	0.53		2.01
Basic weighted average shares outstanding	16,621,110		15,312,910
Diluted weighted average shares outstanding	16,636,789		15,329,730

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 SCB 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 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.

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The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “BusinessCombinations ("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.

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			Fair Value Adjustments			As Recorded by First Bank
Assets
Cash & due from banks	$	20,598		$	—		$	20,598
Investment Securities	59,906			(320		)	59,586
Loans	371,156			(7,875		)	363,281
Allowance for loan losses	(4,412		)	4,412			—
Other real estate owned	547			(12		)	535
Premises and equipment	10,126			(689		)	9,437
Goodwill	543			25,948			26,491
Core deposit intangible	—			5,224			5,224
Other assets	16,389			(256		)	16,133
Total assets acquired	$	474,853		$	26,432		$	501,285
Liabilities and Stockholders' Equity
Deposits	$	384,323		$	1,301		$	385,624
FHLB advances	31,000			(328		)	30,672
Subordinated debentures	6,186			(1,451		)	4,735
Other liabilities	8,665			(36		)	8,629
Total liabilities assumed	430,174			(514		)	429,660
Net assets acquired	$	44,679		$	26,946		$	71,625
Consideration Paid
Cash							$	10,275
Common stock							61,350
Total consideration paid							$	71,625

The Company has recognized approximately $5.2 million, pre-tax, of acquisition costs for the First Bank acquisition. Of this amount, $172,000 was recognized during 2019. 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.

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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 (dollars in thousands):

	Three months ended		Nine months ended
	9/30/2018		9/30/2018
Net interest income	$	30,087	$	86,813
Provision for loan losses	2,551		5,683
Non-interest income	7,919		24,879
Non-interest expense	24,490		68,144
Income before income taxes	10,965		37,865
Income tax expense	2,731		9,356
Net income	$	8,234	$	28,509
Earnings per share
Basic	$	0.54	$	1.94
Diluted	0.54		1.94
Basic weighted average shares outstanding	15,290,539		14,704,888
Diluted weighted average shares outstanding	15,306,218		14,721,708

Note 9 -- Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of September 30, 2019, substantially all of the Company's leases are operating leases for real estate property for bank branches, ATM locations, and office space. These leases are generally for periods of 1 to 25 years with various renewal options. The Company elected the optional transition method permitted by Topic 842. Under this method, an entity recognizes and measures leases that exist at the application date and prior comparative periods are not adjusted. In addition, the Company elected the package of practical expedients:

1. An entity need not reassess whether any expired or existing contracts contain leases.

2. An entity need not reassess the lease classification for any expired or existing leases.

3. An entity need not reassess initial direct costs for any existing leases.

The Company has also elected the practical expedient, which may be elected separately or in conjunction with the package noted above, to use hindsight in determining the lease term and in assessing the right-of-use assets. This expedient must be applied consistently to all leases. Lastly, the Company has elected to use the practical expedient to include both lease and non-lease components as a single component and account for it as a lease.

In addition, The Company has elected to not include short-term leases (i.e.leases with terms of twelve months or less) or equipment leases (primarily copiers) deemed immaterial, on the consolidated balance sheets.

For leases in effect at January 1, 2019 and for leases commencing thereafter, the Company recognizes a lease liability and a right-of-use asset, based on the present value of lease payments over the lease term. The discount rate used in determining present value was the Company's incremental borrowing rate which is the FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the commencement date for leases subsequently entered into.

45

The following table contains supplemental balance sheet information related to leases (dollars in thousands):

	September 30, 2019
Operating lease right-of-use assets	$	12,544
Operating lease liabilities	12,557
Weighted-average remaining lease term	5.3 years
Weighted-average discount rate	3.21		%

Certain of the Company's leases contain options to renew the lease; however, not all renewal options are included in the calculation of lease liabilities as they are not reasonably certain to be exercised. The Company's leases do not contain residual value guarantees or material variable lease payments. The Company does not have any other material restrictions or covenants imposed by leases that would impact the Company's ability to pay dividends or cause the Company to incur additional financial obligations.

Maturities of lease liabilities were as follows (in thousands):

Year ending December 31,
2019 (excluding the nine months ended September 30, 2019)	$	690
2020	2,623
2021	2,388
2022	2,085
2023	1,306
Thereafter	5,362
Total lease payments	14,454
Less imputed interest	(1,897		)
Total lease liability	$	12,557

The components of lease expense for the three and six months ended September 30, 2019 were as follows (in thousands):

	Three months ended September 30,			Nine months ended September 30,
	2019			2019
Operating lease cost	$	466		$	1,802
Short-term lease cost	221			266
Variable lease cost	103			741
Total lease cost	790			2,809
Income from subleases	(189		)	(650		)
Net lease cost	$	601		$	2,159

As the Company elected not to separate lease and non-lease components, the variable lease cost primarily represents variable payment such as common area maintenance and copier expense. The Company does not have any material sub-lease agreements. Cash paid for amounts included in the measurement of lease liabilities was (in thousands):

	September 30, 2019
Operating cash flows from operating leases	$	2,019

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Note 10 -- Derivatives

The Company utilizes an interest rate swap, designated as a fair value hedge, to mitigate the risk of changing interest rates on the fair value of a fixed rate commercial real estate loan. For derivative instruments that are designed and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting loss or gain in the hedged asset attributable to the hedged risk, is recognized in current earnings.

A summary of the Company's fair value hedge as of September 30, 2019, is as follows (in thousands):

	September 30, 2019
Derivative	Balance Sheet Location	Weighted Average Remaining Maturity (Years)	Pay Rate		Received Rate	Notional Amount		Estimated Value
Interest rate swap agreement	Other liabilities	9.7 years	4.5	%	1 month LIBOR + 231.5bps	$	9,731	$	605

The effects of the fair value hedge on the Company's income statement during the three and nine months endedSeptember 30, 2019 were as follows (in thousands):

		Three months ended September 30,			Nine months ended September 30,
Derivative	Location of Gain (Loss) on Derivative	2019			2019
Interest rate swap agreement	Interest income on loans	$	(312	)	$	(605	)
		Three months ended September 30,			Nine months ended September 30,
Derivative	Location of Gain (Loss) on Hedged Item	2019			2019
Interest rate swap agreement	Interest income on loans	$	312		$	605

As of September 30, 2019, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges (in thousands):

Line Item in the Balance Sheet in Which the Hedge Item is Included	Carrying Amount of the Hedged Asset			Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset
Loans		$	9,126		$	605

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ITEM 2.   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 as of, and for the three and nine-month periods ended September 30, 2019 and 2018.  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 1995. 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 and effecting and integrating acquisitions, 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. Further information concerning the Company and its business, including  a discussion of these and additional factors that could materially affect the Company’s financial results, is included in the Company’s 2018 Annual Report on Form 10-K under the headings “Item 1. Business" and “Item 1A. Risk Factors."

Acquisitions

On May 1, 2018, the Company completed its acquisition of First Bank. Financial results for 2018 include the income and expenses of First Bank & Trust for the period May 1 through December 31, 2018. At the date of the acquisition, the fair value of First Bank's total assets was $501 million, including $363 million of loans. The fair value of First Bank's deposits was $386 million. Net income before taxes was positively impacted by $3,018,000 due to First Bank's purchase accounting net accretion and amortization expense of intangibles during 2018. For the nine months ended September 30, 2019, net income before taxes was positively impacted by $2.6 million due to purchase accounting net accretion and amortization related to First Bank. During 2018, the Company also incurred $5 million of pre-tax acquisition expenses related to the acquisition of First Bank, comprised primarily of legal, consulting and change-in-control costs. During the nine months ended September 30, 2019, pre-tax expenses related to this acquisition totaled $172,000.

On November 15, 2018, the Company completed its acquisition of SCB. Financial results for 2018 include the income and expenses of SCB for the period November 15 through December 31, 2018. At the date of the acquisition, the fair value of SCB's total assets was $479 million, including $248 million of loans. The fair value of SCB's deposits was $348 million. Net income before taxes was positively impacted by $462,000 due to SCB's purchase accounting net accretion and amortization expense of intangibles during 2018. For the nine months ended September 30, 2019, net income before taxes was positively impacted by $1.7 million due to purchase accounting net accretion and amortization related to SCB. During 2018, the Company also incurred $908,000 of pre-tax acquisition expenses related to the acquisition of SCB, comprised primarily of legal, consulting and change-in-control costs. During the nine months ended September 30, 2019, pre-tax expenses related to this acquisition totaled $2.7 million.

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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 which have an impact on the Company’s financial condition and results of operations you should carefully read this entire document.

Net income was $35,967,000 and $26,661,000 for the nine months ended September 30, 2019 and 2018, respectively. Diluted net income per common share available to common stockholders was $2.15 and $1.90 for the nine months ended September 30, 2019 and 2018.

The following table shows the Company’s annualized performance ratios for the nine months ended September 30, 2019 and 2018, compared to the performance ratios for the year ended December 31, 2018:

	Nine months ended				Year ended
	September 30, 2019		September 30, 2018		December 31, 2018
Return on average assets	1.25	%	1.14	%	1.13	%
Return on average common equity	9.60	%	9.84	%	9.59	%
Average equity to average assets	13.03	%	11.58	%	11.77	%

Total assets were $3.8 billion at September 30, 2019, compared to $3.8 billion as of December 31, 2018. From December 31, 2018 to September 30, 2019, cash and interest bearing deposits decreased$33.2 million, net loan balances decreased$24.6 million and investment securities increased$44.5 million. Net loan balances were $2.59 billion at September 30, 2019 compared to $2.62 billion at December 31, 2018.

Net interest margin, on a tax effected basis, defined as net interest income divided by average interest-earning assets, was 3.66% for the nine months ended September 30, 2019, down from 3.80% for the same period in 2018. This decrease was primarily due to higher costs of deposits and borrowings offset by higher yields on loans and investments, and accretion income from previous acquisitions. Net interest income before the provision for loan losses was $94.7 million compared to net interest income of $80.7 million for the same period in 2018. The increase in net interest income was primarily due to the growth in average earnings assets as a result of loans and investment securities acquired from First Bank and SCB partially offset by an increase in cost of deposits and borrowings.

Total non-interest income of $41.1 millionincreased $17.3 million or 73.1% from $23.8 million for the same period last year. Wealth management revenues increased $5.6 million, primarily due the addition of farm management and brokerage revenues from the SCB acquisition, insurance commissions increased approximately $9.4 million, primarily due to revenues from the acquisition of SCB, and revenue from ATM and debit cards increased $948,000 primarily due to an increase in electronic transactions from the acquisitions of First Bank & SCB.

Total non-interest expense of $84.4 millionincreased$20.7 million or 32.6% from $63.7 million for the same period last year. This increase was primarily due to costs associated with the acquisitions of First Bank and SCB.

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Following is a summary of the factors that contributed to the changes in net income (in thousands):

	Change in Net Income 2019 versus 2018
	Three months ended September 30,			Nine months ended September 30,
Net interest income	$	1,038		$	13,954
Provision for loan losses	(107		)	1,787
Other income, including securities transactions	4,998			17,377
Other expenses	(1,404		)	(20,731		)
Income taxes	(1,089		)	(3,081		)
Increase in net income	$	3,436		$	9,306

Credit quality is an area of importance to the Company. Total nonperforming loans were $24.2 million at September 30, 2019, compared to $27.9 million at September 30, 2018 and $29.8 million at December 31, 2018. See the discussion under the heading “Loan Quality and Allowance for Loan Losses” for a detailed explanation of these balances. Repossessed asset balances totaled $4.4 million at September 30, 2019 compared to $2.1 million at September 30, 2018 and $2.6 million at December 31, 2018. The Company’s provision for loan losses for the nine months ended September 30, 2019 and 2018 was $3,696,000 and $5,483,000, respectively.  Total loans past due 30 days or more were 0.95% of loans at September 30, 2019 compared to 1.17% at September 30, 2018, and 1.06% of loans at December 31, 2018.  At September 30, 2019, the composition of the loan portfolio remained similar to the same period last year. Loans secured by both commercial and residential real estate comprised approximately 67.0% of the loan portfolio as of September 30, 2019 and 66.1% as of December 31, 2018.

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 to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at September 30, 2019 and 2018 and December 31, 2018 was 14.39%, 13.73% and 12.76%, respectively. The Company’s total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at September 30, 2019 and 2018 and December 31, 2018 was 15.30%, 14.62% and 13.63%, respectively. The increase in these ratios from December 31, 2018 was primarily due to net income added to retained earnings.

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 the discussion under the heading “Liquidity” for a full listing of 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 September 30, 2019 and 2018 were $591 million and $481 million, respectively.  

Federal Deposit Insurance Corporation Insurance Coverage. As a FDIC-insured institution First Mid Bank is required to pay deposit insurance premium assessments to the FDIC.  A number of requirements with respect to the FDIC insurance system have affected results, including insurance assessment rates. The Company expensed $377,000 and $668,000 for this assessment during the first nine months of 2019 and 2018, respectively. During the third quarter of 2019, the First Mid Bank received a $257,000 credit for its June 30, 2019 assessment. This amount was reversed from previously accrued expense.

In addition to its insurance assessment, through March 29, 2019, 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 $12,000 and $72,000 during the first nine months of 2019 and 2018 for this assessment, respectively.

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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.

As included in the proposed rule of June 2012, the final rule includes new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and refines the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and First Mid Bank beginning in 2015 are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement is being 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 makes three changes to the proposed rule of June 2012 that impact the Company. First, the proposed rule would have required banking organizations to include accumulated other comprehensive income (“AOCI”) in common equity tier 1 capital. AOCI includes accumulated unrealized gains and losses on certain assets and liabilities that have not been included in net income. Under existing general risk-based capital rules, most components of AOCI are not included in a banking organization's regulatory capital calculations. The final rule allows community banking organizations to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital.

Second, the proposed rule would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposure into two categories in order to determine the applicable risk weight. The final rule, however, retains the existing treatment for residential mortgage exposures under the general risk-based capital rules.

Third, the proposed rule would have required banking organizations with total consolidated assets of less than $15 billion as of December 31, 2009, such as the Company, to phase out over ten years any trust preferred securities and cumulative perpetual preferred securities from its Tier 1 capital regulatory capital. The final rule, however, permanently grandfathers into Tier 1 capital of depository institution holding companies with total consolidated assets of less than $15 billion as of December 31, 2009 any trust preferred securities or cumulative perpetual preferred stock issued before May 19, 2010.

See discussion under the heading "Capital Resources" for a description of the Company's and First Mid Bank's risk-based capital.

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 included in the Company’s 2018 Annual Report on Form 10-K. 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.

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Allowance for Loan Losses. The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. An estimate of potential losses inherent in the loan portfolio are determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, the Company use organizational history and experience with credit decisions and related outcomes. The allowance for loan losses represents the best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The Company formally 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 non-impaired 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 non-impaired loan is more subjective. Generally, the allowance assigned to non-impaired loans is determined based on migration analysis of historical net losses on each loan segment 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.

Mortgage Servicing Rights. The Company has elected to measure mortgage servicing rights under the amortization method. Using this method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation reserve, to the extent that fair value is less than the carrying amount of the servicing assets. Fair value in excess of the carrying amount of servicing assets is not recognized.

Investment in Debt and Equity Securities. The Company classifies its investments in debt and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting  Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which was codified into ASC 320. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of the Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income.

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Deferred Income Tax Assets/Liabilities. The Company’s net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If the Company were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.

Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes,” codified within ASC 740. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.

Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the Company’s balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment as of September 30, 2018 as part of the goodwill impairment test and no impairment was identified.

As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the consolidated 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.

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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 7 – Fair Value of Assets and Liabilities.

Results of Operations

Net Interest Income

The largest source of 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.  

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is presented on a full tax equivalent (TE) basis in the table that follows. The federal statutory rate in effect of 21% for 2019 and 2018 was used. The TE analysis portrays the income tax benefits associated with the tax-exempt assets. The year-to-date net yield on interest-earning assets excluding the TE adjustments of $1,619,000 and $1,481,000 for 2019 and 2018, respectively were 3.59% at September 30, 2019 and 3.73% at September 30, 2018.

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The Company’s average balances fully tax equivalent, interest income and interest expense and rates earned or paid for major balance sheet categories are set forth for the three and nine months ended September 30, 2019 and 2018 in the following table (dollars in thousands):

:

	Three months ended September 30, 2019							Three months ended September 30, 2018
	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Assets
Interest-bearing deposits with other financial institutions	$	33,991		$	268	3.13	%	$	22,426		$	112	1.98	%
Federal funds sold	921			4		1.72	%	672			2		1.18	%
Certificates of deposit investments	5,685			33		2.30	%	2,605			13		1.98	%
Investment securities
Taxable	638,628			3,958		2.48	%	514,414			3,201		2.49	%
Tax-exempt (Municipals)(TE)	186,962			1,695		3.63	%	175,415			1,658		3.78	%
Loans (Net of Unearned Income)(TE)	2,577,901			32,154		4.95	%	2,375,303			29,019		4.85	%
Total earning assets	3,444,088			38,112		4.39	%	3,090,835			34,005		4.35	%
Cash and due from banks	92,106							48,794
Premises and equipment	59,951							47,343
Other assets	248,392							184,508
Allowance for loan losses	(26,726		)					(22,782		)
Total assets	$	3,817,811						$	3,348,698
Liabilities and Stockholders' Equity
Interest-bearing deposits
Demand deposits	$	1,291,555		$	1,803	0.55	%	$	1,232,282		$	904	0.29	%
Savings deposits	436,002			156		0.14	%	401,731			147		0.15	%
Time deposits	646,346			3,215		1.97	%	514,004			1,166		0.90	%
Total Interest Bearing Deposits	2,373,903			5,174		0.86	%	2,148,017			2,217		0.41	%
Securities sold under agreements to repurchase	150,026			196		0.52	%	121,443			72		0.24	%
FHLB advances	105,784			683		2.56	%	100,897			559		2.20	%
Fed Funds Purchased	1,247			8		2.55	%	7,584			58		3.03	%
Junior subordinated debt	29,098			392		5.34	%	28,815			405		5.58	%
Other debt	—			—		—	%	10,622			90		3.36	%
Total borrowings	286,155			1,279		1.77	%	269,361			1,184		1.74	%
Total interest-bearing liabilities	2,660,058			6,453		0.96	%	2,417,378			3,401		0.56	%
Non interest-bearing demand deposits	597,524					0.79	%	504,274					0.46	%
Other liabilities	44,126							10,984
Stockholders' equity	516,103							416,062
Total liabilities & equity	$	3,817,811						$	3,348,698
Net interest income				$	31,659						$	30,604
Net interest spread						3.43	%						3.79	%
Impact of non-interest bearing funds						0.17	%						0.10	%
TE Net yield on interest- earning assets						3.60	%						3.89	%
(1) The tax-exempt income is not recorded on a tax equivalent basis. (2) Nonaccrual loans and loans held for sale are included in the average balances. Balances are net of unaccreted discount related to loans acquired.

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	Nine months ended September 30, 2019							Nine months ended September 30, 2018
	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Assets
Interest-bearing deposits with other financial institutions	$	75,779		$	1,520	2.68	%	$	18,860		$	248	1.76	%
Federal funds sold	765			11		1.92	%	599			5		1.17	%
Certificates of deposit investments	6,583			108		2.19	%	2,273			34		1.99	%
Investment securities:
Taxable	622,849			11,863		2.54	%	505,062			9,495		2.51	%
Tax-exempt (1)	183,711			5,164		3.75	%	169,896			4,779		3.75	%
Loans net of unearned income (TE) (2)	2,588,061			96,153		4.97	%	2,193,568			75,696		4.61	%
Total earning assets	3,477,748			114,819		4.41	%	2,890,258			90,257		4.17	%
Cash and due from banks	77,066							47,745
Premises and equipment	59,576							43,333
Other assets	247,022							161,267
Allowance for loan losses	(26,902		)					(22,458		)
Total assets	$	3,834,510						$	3,120,145
Liabilities and Stockholders' Equity
Interest-bearing deposits
Demand deposits	$	1,303,735		$	5,070	0.52	%	$	1,155,724		$	2,036	0.24	%
Savings deposits	438,450			463		0.14	%	388,223			429		0.15	%
Time deposits	641,911			8,959		1.87	%	438,869			2,683		0.82	%
Total Interest Bearing Deposits	2,384,096			14,492		0.81	%	1,982,816			5,148		0.35	%
Securities sold under agreements to repurchase	162,003			671		0.55	%	143,707			196		0.16	%
FHLB advances	111,145			2,102		2.53	%	89,527			1,309		1.81	%
Fed Funds Purchased	459			9		2.62	%	4,883			93		1.95	%
Junior subordinated debt	29,057			1,236		5.69	%	26,858			1,013		4.74	%
Other debt	2,440			—		—	%	10,101			281		3.92	%
Total borrowings	305,104			4,018		1.76	%	275,076			2,892		1.41	%
Total interest-bearing liabilities	2,689,200			18,510		0.92	%	2,257,892			8,040		0.48	%
Non interest-bearing demand deposits	602,968					0.75	%	492,775					0.39	%
Other liabilities	42,790							8,294
Stockholders' equity	499,552							361,184
Total liabilities & equity	$	3,834,510						$	3,120,145
Net interest income				$	96,309						$	82,217
Net interest spread						3.49	%						3.69	%
Impact of non-interest bearing funds						0.17	%						0.11	%
TE Net yield on interest- earning assets						3.66	%						3.80	%

(1) The tax-exempt income is not recorded on a tax equivalent basis.

(2) Nonaccrual loans and loans held for sale are included in the average balances. Balances are net of unaccreted discount related to loans acquired.

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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 three and nine-months ended September 30, 2019, compared to the same periods in 2018 (in thousands):

	Three months ended September 30, 2019 compared to 2018 Increase / (Decrease)									Nine months ended September 30, 2019 compared to 2018 Increase / (Decrease)
	Total Change			Volume (1)			Rate (1)			Total Change			Volume (1)			Rate (1)
Earning Assets:
Interest-bearing deposits	$	156		$	73		$	83		$	1,272		$	1,084		$	188
Federal funds sold	2			1			1			6			2			4
Certificates of deposit investments	20			18			2			74			70			4
Investment securities:
Taxable	757			845			(88		)	2,368			2,252			116
Tax-exempt (2)	37			107			(70		)	385			388			(3		)
Loans (2) (3)	3,135			2,525			610			20,457			14,263			6,194
Total interest income	4,107			3,569			538			24,562			18,059			6,503
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits	899			46			853			3,034			300			2,734
Savings deposits	9			50			(41		)	34			74			(40		)
Time deposits	2,049			365			1,684			6,276			1,666			4,610
Securities sold under agreements to repurchase	124			21			103			475			23			452
FHLB advances	124			28			96			793			299			494
Federal Funds Purchased	(50		)	(42		)	(8		)	(84		)	(108		)	24
Junior subordinated debt	(13		)	24			(37		)	223			65			158
Other debt	(90		)	(45		)	(45		)	(281		)	(121		)	(160		)
Total interest expense	3,052			447			2,605			10,470			2,198			8,272
Net interest income	$	1,055		$	3,122		$	(2,067	)	$	14,092		$	15,861		$	(1,769	)

(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 have been included in the average balances.

The tax effected net interest income increased$14.1 million, or 17.1%, to $96.3 million for the nine months endedSeptember 30, 2019, from $82.2 million for the same period in 2018. Net interest income increased primarily due to the growth in average earning assets including loans and investments acquired from SCB and First Bank. The net interest margin decreased primarily due to a higher cost of deposits and borrowings offset by higher yields on loans and investments and additional accretion income from the acquisitions.

For the nine months endedSeptember 30, 2019, average earning assets increased by $587.5 million, or 20.3%, and average interest-bearing liabilities increased$431.3 million or 19.1%, compared with average balances for the same period in 2018.

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The changes in average balances for these periods are shown below:

• Average interest-bearing deposits with other financial institutions increased$56.9 million or 301.8%.

• Average federal funds sold increased$0.2 million or 27.7%.

• Average certificates of deposits investments increased$4.3 million or 189.6%

• Average loans increased by $394.5 million or 18.0%.

• Average securities increased by $131.6 million or 19.5%.

• Average interest-bearing customer deposits increased by $401.3 million or 20.2%.

• Average securities sold under agreements to repurchase increased by $18.3 million or 12.7%.

• Average borrowings and other debt increased by $11.7 million or 8.9%.

• Net interest margin decreased to 3.66% for the first nine months of 2019 from 3.80% for the first nine months of 2018.

Provision for Loan Losses

The provision for loan losses for the nine months ended September 30, 2019 and 2018 was $3,696,000 and $5,483,000, respectively.  The decrease in provision expense was primarily due to a decrease in loan volume. Net charge-offs were $3,144,000 for the nine months ended September 30, 2019, compared to net charge offs of $1,621,000 for September 30, 2018.  Nonperforming loans were $24.2 million and $27.9 million as of September 30, 2019 and 2018, respectively.   For information on loan loss experience and nonperforming loans, see discussion under the “Nonperforming Loans” and “Loan Quality and Allowance for Loan Losses” sections below.

Other Income

An important source of the Company’s revenue is other income.  The following table sets forth the major components of other income for the three and nine-months ended September 30, 2019 and 2018 (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2019		2018		$ Change		2019		2018		$ Change
Wealth management revenues	$	3,311	$	1,579	$	1,732	$	10,543	$	4,920	$	5,623
Insurance commissions	3,242		877		2,365		12,557		3,202		9,355
Service charges	2,091		2,009		82		5,852		5,447		405
Security gains, net	51		—		51		323		901		(578		)
Mortgage banking revenue, net	582		368		214		1,167		939		228
ATM / debit card revenue	2,173		1,979		194		6,391		5,443		948
Bank Owned Life Insurance	439		342		97		1,316		933		383
Other	1,028		765		263		2,995		1,982		1,013
Total other income	$	12,917	$	7,919	$	4,998	$	41,144	$	23,767	$	17,377

Following are explanations of the changes in these other income categories for the three months ended September 30, 2019 compared to the same period in 2018:

• Wealth management revenues increased$1,732,000 or 109.7% to $3,311,000 from $1,579,000 primarily due to increases in market value and revenue from defined contribution and other retirement accounts, an increase in revenue from brokerage accounts from new business development efforts, and farm management and brokerage services and additional trust accounts added with the acquisition of SCB.

• Insurance commissions increased$2,365,000 or 269.7% to $3,242,000 from $877,000 primarily due to an increase in insurance activities and revenues following the acquisition of SCB.

• Fees from service charges increased$82,000 or 4.1% to $2,091,000 from $2,009,000 primarily due to additional income from SCB transactions offset by a decrease in service charges based on the number of deposit transactions.

• The sale of securities during the three months ended September 30, 2019 resulted in net securities gains of $51,000 compared to $0 during the three months ended September 30, 2018.

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• Mortgage banking income increased$214,000 or 58.2% to $582,000 from $368,000. The increase includes $55,000 for recovery in the valuation of FIrst Mid Bank's mortgage servicing rights. Loans sold balances were as follows:

• $30.5 million (representing 230 loans) for the three months ended September 30, 2019

• $19.9 million (representing 151 loans) for the three months ended September 30, 2018

First Mid Bank generally releases the servicing rights on loans sold into the secondary market.

• Revenue from ATMs and debit cards increased$194,000 or 9.8% to $2,173,000 from $1,979,000 primarily due to an increase in electronic transactions from the SCB and First Bank acquisitions that occurred in the second and fourth quarters of 2018, respectively.

• Bank owned life insurance income increased$97,000 or 28.4%. The Company acquired $13.6 million in bank owned life insurance from SCB acquisition in the fourth quarter of 2018.

• Other income increased$263,000 or 34.4% to $1,028,000 from $765,000 primarily due to increases in miscellaneous fees and revenues from SCB and First Bank acquisitions.

Following are explanations of the changes in these other income categories for the nine months ended September 30, 2019 compared to the same period in 2018:

• Wealth management revenues increased$5,623,000 or 114.3% to $10,543,000 from $4,920,000 primarily from increases in market value and revenue from defined contribution and other retirement accounts, an increase in revenue from brokerage accounts from new business development efforts, and farm management and brokerage services and additional trust accounts added with the acquisition of SCB.

• Insurance commissions increased$9,355,000 or 292.2% to $12,557,000 from $3,202,000 primarily due to an increase in insurance activities and revenues following the acquisition of SCB.

• Fees from service charges increased$405,000 or 7.4% to $5,852,000 from $5,447,000 primarily due to additional income from SCB transactions offset by a decrease in service charges based on the number of deposit transactions.

• The sale of securities during the nine months ended September 30, 2019 resulted in net securities gains of $323,000 compared to $901,000 during the nine months ended September 30, 2018.

• Mortgage banking income increased$228,000 or 24.3% to $1,167,000 from $939,000. The increase includes $55,000 for recovery in the valuation of FIrst Mid Bank's mortgage servicing rights. Loans sold balances were as follows:

• $64.9 million (representing 500 loans) for the nine months ended September 30, 2019

• $48.3 million (representing 373 loans) for the nine months ended September 30, 2018

First Mid Bank generally releases the servicing rights on loans sold into the secondary market.

• Revenue from ATMs and debit cards increased$948,000 or 17.4% to $6,391,000 from $5,443,000 primarily due to an increase in electronic transactions from the First Bank and SCB acquisitions that occurred in the second and fourth quarters of 2018, respectively.

• Bank owned life insurance income increased$383,000 or 41.1%. The Company acquired $8.6 million in bank owned life insurance from First Bank acquisition in the second quarter of 2018, and acquired $13.6 million in bank owned life insurance from SCB acquisition in the fourth quarter of 2018.

• Other income increased$1,013,000 or 51.1% to $2,995,000 from $1,982,000 primarily due to increases in miscellaneous fees and revenues from SCB and First Bank acquisitions.

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Other Expense

The following table sets forth the major components of other expense for the three and nine-months ended September 30, 2019 and 2018 (in thousands):

	Three months ended September 30,									Nine months ended September 30,
	2019			2018			$ Change			2019		2018		$ Change
Salaries and employee benefits	$	14,497		$	11,600		$	2,897		$	46,636	$	32,851	$	13,785
Net occupancy and equipment expense	4,377			3,530			847			13,375		10,308		3,067
Net other real estate owned expense	172			(61		)	233			413		22		391
FDIC insurance	(87		)	174			(261		)	389		740		(351		)
Amortization of intangible assets	1,373			838			535			4,552		2,059		2,493
Stationery and supplies	284			328			(44		)	835		725		110
Legal and professional	1,215			1,071			144			3,713		3,925		(212		)
Marketing and donations	523			468			55			1,458		1,253		205
Other operating expenses	3,540			6,542			(3,002		)	13,020		11,777		1,243
Total other expense	$	25,894		$	24,490		$	1,404		$	84,391	$	63,660	$	20,731

Following are explanations for the changes in these other expense categories for the three months ended September 30, 2019 compared to the same period in 2018:

• Salaries and employee benefits, the largest component of other expense, increased$2,897,000 or 25.0% to $14,497,000 from $11,600,000.  The increase is primarily due to additional employees from SCB acquisition in the fourth quarter of 2018, and merit increases in 2019 for continuing employees during the first quarter of 2019. There were 830 and 686 full-time equivalent employees at September 30, 2019 and 2018, respectively.

• Occupancy and equipment expense increased$847,000 or 24.0% to $4,377,000 from $3,530,000. The increase was primarily due to increases maintenance and repair expense, rent expense, and building insurance related to the acquisitions of First Bank and SCB.

• Net other real estate owned expense increased$233,000 or 382.0% to $172,000 from $(61,000). The increase in 2019 was primarily due to more losses on properties sold during 2019 than properties sold during 2018.

• Expense for amortization of intangible assets increased$535,000 or 63.8% to $1,373,000 from $838,000 for the three months ended September 30, 2019 and 2018, respectively. The increase in 2019 was due to amortization of additional core deposit intangibles from the SCB acquisition, and customer list intangibles from the SCB acquisition.

• Other operating expenses decreased$3,002,000 or 45.9% to $3,540,000 in 2019 from $6,542,000 in 2018 primarily due costs associated with the acquisitions of First Bank and SCB during the third quarter of 2018.

• On a net basis, all other categories of operating expenses decreased$106,000 or 5.2% to $1,935,000 in 2019 from $2,041,000 in 2018.  The decrease is primarily due to decreases in FDIC insurance expense offset by an increase in legal and professional expenses. During the third quarter of 2019, the First Mid Bank received a $257,000 credit for it's June 30, 2019 assessment. The amount was reversed from the previously accrued expense.

Following are explanations for the changes in these other expense categories for the nine months ended September 30, 2019 compared to the same period in 2018:

• Salaries and employee benefits, the largest component of other expense, increased$13,785,000 or 42.0% to $46,636,000 from $32,851,000.  The increase is primarily due to additional employees from the First Bank acquisition in the second quarter of 2018, additional employees from SCB acquisition in the fourth quarter of 2018, and merit increases in 2019 for continuing employees during the first quarter of 2019. There were 830 and 686 full-time equivalent employees at September 30, 2019 and 2018, respectively.

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• Occupancy and equipment expense increased$3,067,000 or 29.8% to $13,375,000 from $10,308,000. The increase was primarily due to increases maintenance and repair expense, rent expense, and building insurance related to the acquisitions of First Bank and SCB.

• Net other real estate owned expense increased$391,000 or 1,777.3% to $413,000 from $22,000. The increase in 2019 was primarily due to more losses on properties sold during 2019 than properties sold during 2018.

• Expense for amortization of intangible assets increased$2,493,000 or 121.1% to $4,552,000 from $2,059,000 for the nine months endedSeptember 30, 2019 and 2018, respectively. The increase in 2019 was due to amortization of additional core deposit intangibles from the First Bank and SCB acquisitions, customer list intangibles from the SCB acquisition and a mortgage servicing rights impairment reserve recorded.

• Other operating expenses increased$1,243,000 or 10.6% to $13,020,000 in 2019 from $11,777,000 in 2018 primarily due to an increase in loan collection expenses and costs associated with the merger of SCB into First Mid Bank.

• On a net basis, all other categories of operating expenses decreased$248,000 or 3.7% to $6,395,000 in 2019 from $6,643,000 in 2018.  The decrease is primarily due to decreases in FDIC insurance expense offset by an increase in legal and professional expenses. During the third quarter of 2019, the First Mid Bank received a $257,000 credit for it's June 30, 2019 assessment. The amount was reversed from the previously accrued expense.

Income Taxes

Total income tax expense amounted to $11.8 million (24.7% effective tax rate) for the nine months endedSeptember 30, 2019, compared to $8.7 million (24.6% effective tax rate) for the same period in 2018.

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 2016.

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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 as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019				December 31, 2018
	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	235,280	2.30	%	$	270,816	2.38	%
Obligations of states and political subdivisions	181,038		2.95	%	193,195		2.94	%
Mortgage-backed securities: GSE residential	373,267		2.83	%	304,372		2.86	%
Other securities	3,278		3.45	%	2,278		3.58	%
Total securities	$	792,863	2.71	%	$	770,661	2.72	%

At September 30, 2019, the Company’s investment portfolio increased by $22.2 million from December 31, 2018. 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 September 30, 2019 for certain investment securities (in thousands):

	Amortized Cost		Estimated Fair Value		Average Credit Rating of Fair Value at September 30, 2019 (1)
					AAA		AA +/-		A +/-		BBB +/-		< BBB -		Not rated
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	165,765	$	167,102	$	—	$	167,102	$	—	$	—	$	—	$	—
Obligations of state and political subdivisions	181,038		187,330		17,139		119,576		48,506		504		—		1,605
Mortgage-backed securities (2)	373,267		378,844		1,056		—		—		—		—		377,788
Other securities	3,278		3,422		—		—		—		2,005		—		1,417
Total available-for-sale	$	723,348	$	736,698	$	18,195	$	286,678	$	48,506	$	2,509	$	—	$	380,810
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	69,515	$	69,492	$	—	$	69,492	$	—	$	—	$	—	$	—

(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.

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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 3 -- Investment Securities in the Notes to Condensed Consolidated Financial Statements (unaudited) for a discussion of the Company’s evaluation and subsequent charges for OTTI.

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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, as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019				December 31, 2018
	Principal balance		% Outstanding Loans		Principal balance		% Outstanding Loans
Construction and land development	$	68,821	2.6	%	$	50,619	1.9	%
Agricultural real estate	229,715		8.8	%	231,700		8.8	%
1-4 Family residential properties	347,370		13.2	%	373,518		14.1	%
Multifamily residential properties	154,859		5.9	%	184,051		7.0	%
Commercial real estate	954,992		36.5	%	906,850		34.2	%
Loans secured by real estate	1,755,757		67.0	%	1,746,738		66.0	%
Agricultural loans	121,650		4.6	%	135,877		5.1	%
Commercial and industrial loans	543,937		20.7	%	557,011		21.1	%
Consumer loans	83,174		3.2	%	91,516		3.5	%
All other loans	119,040		4.5	%	113,377		4.3	%
Total loans	$	2,623,558	100.0	%	$	2,644,519	100.0	%

Gross loan balances decreased$21.0 million, or 0.79% primarily due to seasonal declines in agricultural loans of approximately $14.2 million and declines in commercial and industrial loans of approximately $13.1 million, 1-4 Family residential properties of approximately $26.1 million, multifamily residential properties of approximately $29.2 million primarily due to acquired loans becoming paid off offset by increases in commercial real estate of approximately $48.1 and construction and land development of approximately $18.2.  The balance of real estate loans held for sale, included in the balances shown above, amounted to $4.6 million and $1.5 million as of September 30, 2019 and December 31, 2018, respectively.

Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. The Company does not have any sub-prime mortgages or credit card loans outstanding which are also generally considered to be higher credit risk. The following table summarizes the loan portfolio geographically by branch region as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019				December 31, 2018
	Principal balance		% Outstanding Loans		Principal balance		% Outstanding loans
Central region	$	571,541	21.8	%	$	571,909	21.7	%
Sullivan region	384,431		14.7	%	375,407		14.2	%
Decatur region	592,009		22.5	%	501,743		19.0	%
Peoria region	410,991		15.7	%	291,283		11.0	%
Highland region	540,667		20.6	%	518,881		19.6	%
Southern region	123,919		4.7	%	133,225		5.0	%
Soy Capital Bank	—		—	%	252,071		9.5	%
Total all regions	$	2,623,558	100.0	%	$	2,644,519	100.0	%

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Loans are geographically dispersed among these regions located in central and southwestern Illinois. While these regions have experienced some economic stress during 2019 and 2018, the Company does not consider these locations high risk areas since these regions have not experienced the significant declines in real estate values seen in some other areas in the United States.

The Company does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage of total risk-based capital for the periods shown above. At September 30, 2019 and December 31, 2018, the Company did have industry loan concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):

	September 30, 2019				December 31, 2018
	Principal balance		% Outstanding Loans		Principal balance		% Outstanding Loans
Other grain farming	$	270,544	10.31	%	$	276,142	10.44	%
Lessors of non-residential buildings	264,737		10.09	%	250,495		9.47	%
Lessors of residential buildings & dwellings	288,983		11.01	%	289,169		10.93	%
Hotels and motels	125,979		4.80	%	129,216		4.89	%
Other Gambling Industries	116,611		4.44	%	105,959		3.98	%

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 September 30, 2019, 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	$	24,989	$	12,610	$	31,222	$	68,821
Agricultural real estate	16,689		77,149		135,877		229,715
1-4 Family residential properties	24,522		69,262		253,586		347,370
Multifamily residential properties	12,106		98,427		44,326		154,859
Commercial real estate	76,380		414,873		463,739		954,992
Loans secured by real estate	154,686		672,321		928,750		1,755,757
Agricultural loans	99,461		18,738		3,451		121,650
Commercial and industrial loans	199,575		261,322		83,040		543,937
Consumer loans	5,852		67,429		9,893		83,174
All other loans	12,696		32,162		74,182		119,040
Total loans	$	472,270	$	1,051,972	$	1,099,316	$	2,623,558

(1) Based upon remaining contractual maturity.

(2) Includes demand loans, past due loans and overdrafts.

As of September 30, 2019, loans with maturities over one year consisted of approximately $1.6 billion in fixed rate loans and approximately $547 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.

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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 at September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019			December 31, 2018
Nonaccrual loans	$	21,429		$	27,298
Restructured loans which are performing in accordance with revised terms	2,774			2,451
Total nonperforming loans	24,203			29,749
Repossessed assets	4,442			2,595
Total nonperforming loans and repossessed assets	$	28,645		$	32,344
Nonperforming loans to loans, before allowance for loan losses	0.92		%	1.12		%
Nonperforming loans and repossessed assets to loans, before allowance for loan losses	1.09		%	1.22		%

The $5,869,000decrease in nonaccrual loans during 2019 resulted from the net of $10,727,000 of loans put on nonaccrual status offset by $12,481,000 of loans becoming current or paid-off, $2,499,000 of loans transferred to other real estate and $1,616,000 of loans charged off.

The following table summarizes the composition of nonaccrual loans (in thousands):

	September 30, 2019				December 31, 2018
	Balance		% of Total		Balance		% of Total
Construction and land development	$	180	0.8	%	$	377	1.4	%
Agricultural real estate	289		1.3	%	309		1.1	%
1-4 Family residential properties	7,631		35.7	%	5,762		21.1	%
Multifamily Residential properties	1,437		6.7	%	2,105		7.7	%
Commercial real estate	4,324		20.2	%	8,457		31.1	%
Loans secured by real estate	13,861		64.7	%	17,010		62.4	%
Agricultural loans	797		3.7	%	667		2.4	%
Commercial and industrial loans	6,117		28.5	%	8,990		32.9	%
Consumer loans	654		3.1	%	625		2.3	%
All Other Loans	—		—	%	6		—	%
Total loans	$	21,429	100.0	%	$	27,298	100.0	%

Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $915,000 and $1,096,000 for the nine months endedSeptember 30, 2019 and 2018, respectively.

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The $1,847,000increase in repossessed assets during the first nine months of 2019 resulted from $2,863,000 of additional assets repossessed, $43,000 of write downs on assets held, and $973,000 of repossessed assets sold. The following table summarizes the composition of repossessed assets (in thousands):

	September 30, 2019				December 31, 2018
	Balance		% of Total		Balance		% of Total
Construction and land development	$	1,922	43.3	%	$	1,513	58.2	%
1-4 family residential properties	211		4.8	%	583		22.5	%
Multi-family residential properties	85		1.9	%	—		—	%
Commercial real estate	2,130		47.9	%	438		16.9	%
Total real estate	4,348		97.9	%	2,534		97.6	%
Commercial & industrial loans	—		—	%	61		2.4	%
Consumer loans	94		2.1	%	—		—	%
Total repossessed collateral	$	4,442	100.0	%	$	2,595	100.0	%

Repossessed assets sold during the first nine months of 2019 resulted in net losses of $99,000, of which $77,000 of net losses was related to real estate asset sales, $9,000 of net gains was related to other repossessed assets, and write downs of $31,000. Repossessed assets sold during the same period in 2018 resulted in net losses of $11,000, of which $23,000 of net losses was related to real estate asset sales and $12,000 of net gains 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. Factors considered by management in evaluating the overall adequacy of the allowance include a migration analysis of the historical net loan losses by loan segment, the level and composition of nonaccrual, past due and renegotiated loans, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates.

Management reviews economic factors including 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, increased operating costs for farmers, and increased levels of unemployment and bankruptcy impacting consumer’s ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. Management considers the allowance for loan losses a critical accounting policy.

Management recognizes there are risk factors that are inherent in the Company’s loan portfolio.  All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business.  The Company’s operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry.  Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company’s success. At September 30, 2019, the Company’s loan portfolio included $351.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $270.5 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased$16.9 million from $368.5 million at December 31, 2018 while loans concentrated in other grain farming decreased$5.6 million from $276.1 million at December 31, 2018.  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 $126.0 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

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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 $264.7 million of loans to lessors of non-residential buildings, $289.0 million of loans to lessors of residential buildings and dwellings, and $116.6 million of loans 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.  The board of directors and management review the status of problem loans each month and formally determine a best estimate of the allowance for loan losses on a quarterly basis.  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 as of September 30, 2019 and 2018, and of changes in the allowance for the three and nine month periods ended September 30, 2019 and 2018, is as follows (dollars in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Average loans outstanding, net of unearned income	$	2,577,901		$	2,375,303		$	2,588,061		$	2,193,568
Allowance-beginning of period	26,359			22,045			26,189			19,977
Charge-offs:
Real estate-mortgage	1,337			450			1,617			1,230
Commercial, financial & agricultural	776			263			1,118			414
Installment	193			27			450			110
Other	154			106			385			287
Total charge-offs	2,460			846			3,570			2,041
Recoveries:
Real estate-mortgage	62			2			74			58
Commercial, financial & agricultural	49			5			94			126
Installment	22			31			77			66
Other	51			51			181			170
Total recoveries	184			89			426			420
Net charge-offs (recoveries)	2,276			757			3,144			1,621
Provision for loan losses	2,658			2,551			3,696			5,483
Allowance-end of period	$	26,741		$	23,839		$	26,741		$	23,839
Ratio of annualized net charge-offs to average loans	0.35		%	0.13		%	0.16		%	0.10		%
Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period)	1.02		%	0.99		%	1.02		%	0.99		%
Ratio of allowance for loan losses to nonperforming loans	110		%	85		%	110		%	85		%

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The ratio of allowance for loan losses to loans outstanding was 1.02% as of September 30, 2019 compared to 0.99% as of September 30, 2018. The ratio of the allowance for loan losses to nonperforming loans is 110% as of September 30, 2019 compared to 85% as of September 30, 2018.  The increase in this ratio is primarily due to a greater increase in the allowance for loan losses than the increase in non-performing loans at September 30, 2019 compared to September 30, 2018.

During the first nine months of 2019, the Company had net charge-offs of $3,144,000 compared to net charge-offs of $1,621,000 in 2018. During the first nine months of 2019, there were significant charge offs of six commercial real estate loans to four borrowers of $1,041,000 and one commercial operating loan to one borrower of $582,000 . During the first nine months of 2018 there were significant charge offs of one agricultural loan to one borrower of $93,000, one commercial real estate loan to one borrower of $169,000, three commercial loans to a single borrower of $257,000 and two residential real estate loans to two borrowers of $376,000.

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 nine months endedSeptember 30, 2019 and 2018 and for the year ended December 31, 2018 (dollars in thousands):

	Nine months ended September 30, 2019				Nine months ended September 30, 2018				Year ended December 31, 2018
	Average Balance		Weighted Average Rate		Average Balance		Weighted Average Rate		Average Balance		Weighted Average Rate
Demand deposits:
Non-interest-bearing	$	602,968	—	%	$	492,775	—	%	$	506,873	—	%
Interest-bearing	1,303,735		0.52	%	1,155,724		0.24	%	1,194,089		0.28	%
Savings	438,450		0.14	%	388,223		0.15	%	395,028		0.15	%
Time deposits	641,911		1.87	%	438,869		0.82	%	473,043		0.99	%
Total average deposits	$	2,987,064	0.65	%	$	2,475,591	0.28	%	$	2,569,033	0.33	%

The following table sets forth the high and low month-end balances for the nine months endedSeptember 30, 2019 and 2018 and for the year ended December 31, 2018 (in thousands):

	Nine months ended September 30, 2019		Nine months ended September 30, 2018		Year ended December 31, 2018
High month-end balances of total deposits	$	3,046,212	$	2,670,864	$	3,017,035
Low month-end balances of total deposits	2,945,040		2,208,941		2,208,941

During the first nine months of 2019, the average balance of deposits increased by $418.0 million from the average balance for the year ended December 31, 2018. Average non-interest bearing deposits increased by $96.1 million, average interest-bearing balances increased by $109.6 million, savings account balances increased$43.4 million and balances of time deposits increased$168.9 million. The increases were primarily due to the result of deposit balances acquired in the acquisitions of First Bank during the second quarter of 2018 and SCB during the fourth quarter of 2018 that were held for the full nine months of 2019.

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 at September 30, 2019 and December 31, 2018 (in thousands):

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	September 30, 2019		December 31, 2018
3 months or less	$	56,027	$	44,898
Over 3 through 6 months	78,675		49,476
Over 6 through 12 months	103,052		78,567
Over 12 months	130,983		155,071
Total	$	368,737	$	328,012

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Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase are short-term obligations of First Mid 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 offered as a cash management service to its corporate customers.  Other borrowings consist of Federal Home Loan Bank (“FHLB”) advances, federal funds purchased, loans (short-term or long-term debt) that the Company has outstanding and junior subordinated debentures.

Information relating to securities sold under agreements to repurchase and other borrowings as of September 30, 2019 and December 31, 2018 is presented below (dollars in thousands):

	September 30, 2019			December 31, 2018
Securities sold under agreements to repurchase	$	174,530		$	192,330
Federal Home Loan Bank advances:
Fixed term – due in one year or less	56,000			29,000
Fixed term – due after one year	24,862			90,745
Debt:
Debt due after one year	—			7,724
Junior subordinated debentures	29,126			29,000
Total	$	284,518		$	348,799
Average interest rate at end of period	1.64		%	1.30		%
Maximum outstanding at any month-end:
Securities sold under agreements to repurchase	$	191,557		$	192,330
Federal funds purchased	5,000			22,000
Federal Home Loan Bank advances:
FHLB-Overnight	25,000			30,000
Fixed term – due in one year or less	66,000			29,000
Fixed term – due after one year	54,932			101,745
Debt:
Debt due after one year	6,549			10,313
Junior subordinated debentures	29,126			30,221
Averages for the period (YTD):
Securities sold under agreements to repurchase	$	162,003		$	140,622
Federal funds purchased	459			3,794
Federal Home Loan Bank advances:
FHLB-overnight	4,597			9,434
Fixed term – due in one year or less	53,945			16,510
Fixed term – due after one year	52,603			71,757
Debt:
Loans due in one year or less	—			548
Loans due after one year	2,440			9,555
Junior subordinated debentures	29,057			27,391
Total	$	305,104		$	279,611
Average interest rate during the period	1.75		%	1.52		%

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Securities sold under agreements to repurchase decreased$17.8 million during the first nine months of 2019 primarily due to the seasonal declines in balances and cash flow needs of various customers. FHLB advances represent borrowings by First Mid Bank to economically fund loan demand.  

At September 30, 2019 the fixed term advances consisted of $81 million as follows:

• $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

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 September 30, 2019. This loan was renewed on April 12, 2019 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. The loan is secured by all of the stock of First Mid Bank. The Company and First Mid Bank were in compliance with the then existing covenants at September 30, 2019 and 2018 and December 31, 2018.

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.  On October 7, 2019, these trust preferred securities were redeemed, along with $310,000 in common securities issued by Trust I and held by the Company, as a result of the concurrent redemption of 100% of the Company's junior subordinated debentures due 2034 and held by Trust I, which supported the trust preferred securities. The redemption price for the junior subordinated debentures was equal to 100% of the principal amount plus accrued interest, if any, up to, but not including, the redemption date of October 7, 2019. The proceeds from the redemption of the junior subordinated debentures were simultaneously applied to redeem all of the outstanding common securities and the outstanding trust preferred securities at a price of 100% of the aggregate liquidation amount of the trust preferred securities plus accumulated but unpaid distributions up to but not including the redemption date. The redemption was made pursuant to the optional redemption provisions of the underlying indenture.

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, 3.72% and 4.39% at September 30, 2019 and December 31, 2018, respectively). The net proceeds to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield Bancorp, Inc. in 2006.

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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 (3.97% and 4.64% at September 30, 2019 and December 31, 2018, 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 (3.82% and 4.49% at September 30, 2019 and December 31, 2018, respectively) and resets quarterly.

The trust preferred securities issued by Trust I (prior to redemption), 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. 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.

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Interest Rate Sensitivity

The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk.  Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of interest-bearing assets differ significantly from the maturity or repricing characteristics of interest-bearing liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities.  This balance serves to limit the adverse effects of changes in interest rates.  The Company’s asset liability management committee (ALCO) oversees the interest rate sensitivity position and directs the overall allocation of funds.

In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as “static GAP” analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet. The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at September 30, 2019 (dollars in thousands):

	Rate Sensitive Within																				Fair Value
	1 year			1-2 years			2-3 years			3-4 years			4-5 years			Thereafter			Total
Interest-earning assets:
Federal funds sold and other interest-bearing deposits	$	9,645		$	—		$	—		$	—		$	—		$	—		$	9,645	$	9,645
Certificates of deposit investments	3,400			245			1,470			245			—			—			5,360		5,360
Taxable investment securities	204,203			115,507			94,539			85,320			35,165			85,360			620,094		620,071
Nontaxable investment securities	692			27,913			20,206			16,282			11,675			76,351			153,119		186,119
Loans	1,001,426			462,255			403,882			356,816			290,869			108,310			2,623,558		2,537,394
Total	$	1,219,366		$	605,920		$	520,097		$	458,663		$	337,709		$	270,021		$	3,411,776	$	3,358,589
Interest-bearing liabilities:
Savings and NOW accounts	$	333,296		$	114,370		$	114,370		$	114,370		$	114,370		$	540,484		$	1,331,260	$	1,331,260
Money market accounts	296,355			21,675			21,675			21,675			21,675			52,462			435,517		435,517
Other time deposits	416,124			134,143			44,285			18,658			12,295			125			625,630		633,885
Short-term borrowings/debt	174,530			—			—			—			—			—			174,530		174,572
Long-term borrowings/debt	84,988			10,000			10,000			5,000			—			—			109,988		105,418
Total	$	1,305,293		$	280,188		$	190,330		$	159,703		$	148,340		$	593,071		$	2,676,925	$	2,680,652
Rate sensitive assets – rate sensitive liabilities	$	(85,927	)	$	325,732		$	329,767		$	298,960		$	189,369		$	(323,050	)	$	734,851
Cumulative GAP	(85,927		)	239,805			569,572			868,532			1,057,901			734,851
Cumulative amounts as % of total Rate sensitive assets	(2.5		)%	9.5		%	9.7		%	8.8		%	5.6		%	(9.5		)%
Cumulative Ratio	(2.5		)%	7.0		%	16.7		%	25.5		%	31.0		%	21.5		%

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The static GAP analysis shows that at September 30, 2019, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis.  The Company’s ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank’s historical experience and with known industry trends.  ALCO meets at least monthly to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities.  The Company is currently experiencing downward pressure on asset yields resulting from the extended period of historically low interest rates and heightened competition for loans. A continuation of this environment could result in a decline in interest income and the net interest margin.

Capital Resources

At September 30, 2019, the Company’s stockholders' equity increased$46 million, or 9.7%, to $522 million from $476 million as of December 31, 2018. During the first nine months of 2019, net income contributed $36.0 million to equity before the payment of dividends to stockholders. The change in market value of available-for-sale investment securities increased stockholders' equity by $15.9 million, net of tax.

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 banks by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation.  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 regulatory capital standards to ensure capital adequacy require the the Company and its subsidiary banks to maintain a minimum capital amounts and ratios (set forth in the table below). Management believes that, as of September 30, 2019 and December 31, 2018, the Company and First Mid Bank met all capital adequacy requirements.

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To be categorized as well-capitalized, 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 following table (dollars in thousands):

	Actual				Required Minimum For Capital Adequacy Purposes			To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio	Amount		Ratio
September 30, 2019
Total Capital (to risk-weighted assets)
Company	$	447,296	15.30	%	$	306,952	> 10.50%	N/A		N/A
First Mid Bank	409,418		14.08		305,346		> 10.50	$	290,806	> 10.00%
Tier 1 Capital (to risk-weighted assets)
Company	420,555		14.39		248,485		> 8.50	N/A		N/A
First Mid Bank	382,677		13.16		247,185		> 8.50	232,645		> 8.00
Common Equity Tier 1 Capital (to risk-weighted assets)
Company	391,429		13.39		204,635		> 7.00	N/A		N/A
First Mid Bank	382,677		13.16		203,564		> 7.00	189,024		> 6.50
Tier 1 Capital (to average assets)
Company	420,555		11.38		147,868		> 4.00	N/A		N/A
First Mid Bank	382,677		10.40		147,125		> 4.00	183,906		> 5.00
December 31, 2018
Total Capital (to risk-weighted assets)
Company	$	412,879	13.63	%	$	299,148	> 9.875%	N/A		N/A
First Mid Bank	350,361		12.85		269,171		> 9.875	$	272,578	> 10.00%
Soy Capital Bank	45,387		14.33		31,283		> 9.875	31,679		> 10.00%
Tier 1 Capital (to risk-weighted assets)
Company	386,690		12.76		238,561		> 7.875	N/A		N/A
First Mid Bank	324,172		11.89		214,655		> 7.875	218,063		> 8.00
Soy Capital Bank	45,387		14.33		24,947		> 7.875	25,343		> 8.00
Common Equity Tier 1 Capital (to risk-weighted assets)
Company	357,690		11.81		193,121		> 6.375	N/A		N/A
First Mid Bank	324,172		11.89		173,769		> 6.375	177,176		> 6.50
Soy Capital Bank	45,387		14.33		20,195		> 6.375	20,591		> 6.50
Tier 1 Capital (to average assets)
Company	386,690		11.15		138,765		> 4.00	N/A		N/A
First Mid Bank	324,172		9.92		130,716		> 4.00	163,396		> 5.00
Soy Capital Bank	45,387		11.12		16,322		> 4.00	20,403		> 5.00

The Company's risk-weighted assets, capital and capital ratios for September 30, 2019 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 the Basel III rules. As of September 30, 2019, the Company and First Mid Bank had capital ratios above the required minimums for regulatory capital adequacy, and First Mid Bank had capital ratios that qualified it for treatment as well-capitalized under the regulatory framework for prompt corrective action with respect to banks.  

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Stock Plans

Participants may purchase Company stock under the following four plans of the Company: the Deferred Compensation Plan, the First Retirement and Savings Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan.  For more detailed information on these plans, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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 25,950 and 13,250 restricted stock awards during 2019 and 2018, respectively and 15,540 and 28,700 as stock unit awards during 2019 and 2018, respectively.

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.   As of September 30, 2019, 4,834 shares were issued pursuant to the ESPP.

Stock Repurchase Program

Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock.  The repurchase programs approved by the Board of Directors are as follows:

• On August 5, 1998, repurchases of up to 3%, or $2 million, of the Company’s common stock.

• In March 2000, repurchases up to an additional 5%, or $4.2 million of the Company’s common stock.

• In September 2001, repurchases of $3 million of additional shares of the Company’s common stock.

• In August 2002, repurchases of $5 million of additional shares of the Company’s common stock.

• In September 2003, repurchases of $10 million of additional shares of the Company’s common stock.

• On April 27, 2004, repurchases of $5 million of additional shares of the Company’s common stock.

• On August 23, 2005, repurchases of $5 million of additional shares of the Company’s common stock.

• On August 22, 2006, repurchases of $5 million of additional shares of the Company’s common stock.

• On February 27, 2007, repurchases of $5 million of additional shares of the Company’s common stock.

• On November 13, 2007, repurchases of $5 million of additional shares of the Company’s common stock.

• On December 16, 2008, repurchases of $2.5 million of additional shares of the Company’s common stock.

• On May 26, 2009, repurchases of $5 million of additional shares of the Company’s common stock.

• On February 22, 2011, repurchases of $5 million of additional shares of the Company’s common stock.

• On November 13, 2012, repurchases of $5 million of additional shares of the Company's common stock.

• On November 19, 2013, repurchases of $5 million additional shares of the Company's common stock.

• On October 28, 2014, repurchases of $5 million additional shares of the Company's common stock.

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On August 16, 2019, the Company adopted a repurchase plan under Rule 10b5-1 and Rule 10b-18 of the Exchange Act. The Company implemented the repurchase plan in connection with its previously announced stock repurchase program. Under the repurchase plan, up to approximately $6.2 million worth of shares of the Company’s common stock may be repurchased. During the quarter, the Company repurchased approximately $1.1 million in common stock, or 35,427 shares. Since 1998, the Company has repurchased a total of 2,103,054 shares at a total price of approximately $71.6 million. The Company has approximately $5.1 million in remaining capacity under the plan.

Although the Company adopted the repurchase plan, the Company may make discretionary repurchases in the open market or in privately negotiated transactions from time to time. The timing, manner, price and amount of any such repurchases will be determined by the Company at its discretion and will depend upon a variety of factors including economic and market conditions, price, applicable legal requirements and other factors.

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, deposits of the State of Illinois, 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 the sources include:

• First Mid Bank has $100 million available in overnight federal fund lines, including $30 million from First Tennessee Bank, N.A., $20 million from U.S. Bank, N.A., $10 million from Wells Fargo Bank, N.A., $15 million from The Northern Trust Company and $25 million from Zions Bank.  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 September 30, 2019, 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 September 30, 2019, the excess collateral at the FHLB would support approximately $536.5 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 September 30, 2019, the Company had a revolving credit agreement in the amount of $10 million with The Northern Trust Company with an outstanding balance of $0 and $10 million in available funds.  This loan was renewed on April 12, 2019 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, including requirements for operating and capital ratios. The Company and its subsidiary bank were in compliance with the then existing covenants at September 30, 2019 and 2018 and December 31, 2018.

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.

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The following table summarizes significant contractual obligations and other commitments at September 30, 2019 (in thousands):

	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Time deposits	$	625,630	$	416,124	$	178,428	$	30,953	$	125
Debt	30,930		—		—		—		30,930
Other borrowings	255,530		230,530		20,000		5,000		—
Operating leases	14,479		2,654		4,730		2,489		4,606
Supplemental retirement	482		62		100		100		220
	$	927,051	$	649,370	$	203,258	$	38,542	$	35,881

For the nine months endedSeptember 30, 2019, net cash of $42.2 million was provided by operating activities offset by $70.5 million and $4.9 million used in financing activities and investing activities, respectively. In total, cash and cash equivalents decreased by $33.2 million since year-end 2018.

Off-Balance Sheet Arrangements

First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include lines of credit, letters of credit and other commitments to extend credit.  Each of these instruments involves, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets.  The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments.

The off-balance sheet financial instruments whose contract amounts represent credit risk at September 30, 2019 and December 31, 2018 were as follows (in thousands):

	September 30, 2019		December 31, 2018
Unused commitments and lines of credit:
Commercial real estate	$	147,400	$	102,015
Commercial operating	299,545		298,657
Home equity	39,452		43,026
Other	94,285		110,226
Total	$	580,682	$	553,924
Standby letters of credit	$	9,844	$	10,183

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.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the market risk faced by the Company since December 31, 2018.  For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 4.  CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report.  Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.  Further, there have been no changes in the Company’s internal control over financial reporting during the last fiscal quarter that have materially affected or that are reasonably likely to affect materially the Company’s internal control over financial reporting.

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PART II

ITEM 1. LEGAL PROCEEDINGS

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 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.  See the risk factors and “Supervision and Regulation” described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES
Period	(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
July 1, 2019 - July 31, 2019	0	$0.00	0	$	6,238,000
August 1, 2019 - August 31, 2019	29,462	$31.87	29,462	$	5,299,000
September 1, 2019 - September 30, 2019	5,965	$31.88	5,965	$	5,108,000
Total	35,427	$31.88	35,427	$	5,108,000
See heading “Stock Repurchase Program” for more information regarding stock purchases.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that precedes the Signature Page and the exhibits filed.

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Exhibit Index to Quarterly Report on Form 10-Q
Exhibit Number	Description and Filing or Incorporation Reference
11.1	Statement re:  Computation of Earnings Per Share (Filed herewith on page 11)
31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2019 and December 31, 2018, (ii) the Consolidated Statements of Income for the three months ended September 30, 2019 and 2018, (iii) the Consolidated Statements of Cash Flows for the three months and nine months ended September 30, 2019 and 2018, and (iv) the Notes to Consolidated Financial Statements.

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SIGNATURES

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.

FIRST MID BANCSHARES, INC.

(Registrant)

Date:  November 5, 2019

Joseph R. Dively

President and Chief Executive Officer

Matthew K. Smith

Chief Financial Officer

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