

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 ~~June 30, 2018~~March 31, 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-ILLINOIS~~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 ~~and posted on its corporate website, if any,~~ every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X ] No [ ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, 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 ~~August 6, 2018~~May 7, 2019, ~~15,290,146~~16,677,128 common shares, $4.00 par value, were outstanding.

PART I


ITEM 1. FINANCIAL STATEMENTS
First Mid-Illinois Bancshares, Inc.
First Mid Bancshares, Inc.
Condensed Consolidated Balance Sheets	(Unaudited)						(Unaudited)
(In thousands, except share data)	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Assets
Cash and due from banks:
Non-interest bearing	$	46,917		$	75,398		$	62,767		$	63,593
Interest bearing	37,963			12,990			169,285			77,142
Federal funds sold	695			491			496			665
Cash and cash equivalents	85,575			88,879			232,548			141,400
Certificates of deposit investments	2,930			1,685			7,320			7,569
Investment securities:
Available-for-sale, at fair value	616,303			578,579			695,618			692,274
Held-to-maturity, at amortized cost (estimated fair value of $67,525 and $68,457 at June 30, 2018 and December 31, 2017, respectively)	69,383			69,332
Held-to-maturity, at amortized cost (estimated fair value of $68,743 and $67,909 at March 31, 2019 and December 31, 2018, respectively)							69,462			69,436
Loans held for sale	2,454			1,025			1,233			1,508
Loans	2,374,229			1,938,476			2,595,761			2,643,011
Less allowance for loan losses	(22,045		)	(19,977		)	(26,704		)	(26,189		)
Net loans	2,352,184			1,918,499			2,569,057			2,616,822
Interest receivable	12,612			10,832			16,073			16,881
Other real estate owned	2,440			2,754			3,796			2,534
Premises and equipment, net	47,003			38,266			59,237			59,117
Goodwill, net	87,504			60,150			104,997			105,277
Intangible assets, net	15,114			10,679			32,464			33,820
Bank owned life insurance	51,101			41,883			65,914			65,484
Right of use lease assets							13,531			—
Other assets	24,870			18,976			24,369			27,612
Total assets	$	3,369,473		$	2,841,539		$	3,895,619		$	3,839,734
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	526,117		$	480,283		$	628,944		$	575,784
Interest bearing	2,144,747			1,794,356			2,417,269			2,412,902
Total deposits	2,670,864			2,274,639			3,046,213			2,988,686
Securities sold under agreements to repurchase	141,662			155,388			157,760			192,330
Interest payable	1,145			602			2,166			1,758
FHLB borrowings	95,708			60,038			119,791			119,745
Other borrowings	9,375			10,313			6,257			7,724
Junior subordinated debentures	28,792			24,000			29,042			29,000
Lease liabilities							13,533			—
Other liabilities	10,601			8,595			23,705			24,627
Total liabilities	2,958,147			2,533,575			3,398,467			3,363,870
Stockholders’ Equity:
Common stock, $4 par value; authorized 30,000,000 shares; issued 15,858,211 and 13,231,225 shares in 2018 and 2017, respectively	65,433			54,925
Common stock, $4 par value; authorized 30,000,000 shares; issued 17,251,505 and 17,219,012 shares in 2019 and 2018, respectively							71,006			70,876
Additional paid-in capital	250,433			163,603			294,837			293,937
Retained earnings	118,721			104,683			144,708			131,392
Deferred compensation	2,403			3,540			2,074			2,761
Accumulated other comprehensive loss	(9,274		)	(2,304		)
Less treasury stock at cost, 573,065 shares in 2018 and 570,477 shares in 2017	(16,390		)	(16,483		)
Accumulated other comprehensive income (loss)							1,155			(6,473		)
Less treasury stock at cost, 574,377 shares in 2019 and 2018							(16,628		)	(16,629		)
Total stockholders’ equity	411,326			307,964			497,152			475,864
Total liabilities and stockholders’ equity	$	3,369,473		$	2,841,539		$	3,895,619		$	3,839,734

See accompanying notes to unaudited condensed consolidated financial statements.


First Mid-Illinois Bancshares, Inc.
First Mid Bancshares, Inc.
Condensed Consolidated Statements of Income (unaudited)	Condensed Consolidated Statements of Income (unaudited)								Condensed Consolidated Statements of Income (unaudited)
(In thousands, except per share data)	Three months ended June 30,				Six months ended June 30,					Three months ended March 31,
	2018		2017		2018		2017			2019		2018
Interest income:
Interest and fees on loans	$	25,362	$	21,025	$	46,369	$	40,952		$	32,104	$	21,007
Interest on investment securities	4,679		4,366		8,760		8,406			5,209		4,081
Interest on certificates of deposit investments	12		7		21		32			38		9
Interest on federal funds sold	1		—		2		61			3		1
Interest on deposits with other financial institutions	77		48		137		177			697		60
Total interest income	30,131		25,446		55,289		49,628			38,051		25,158
Interest expense:
Interest on deposits	1,670		933		2,932		1,812			4,378		1,262
Interest on securities sold under agreements to repurchase	65		46		124		86			260		59
Interest on FHLB borrowings	475		168		750		319			723		275
Interest on other borrowings	118		119		226		242			—		108
Interest on subordinated debentures	349		227		608		444			438		259
Total interest expense	2,677		1,493		4,640		2,903			5,799		1,963
Net interest income	27,454		23,953		50,649		46,725			32,252		23,195
Provision for loan losses	1,877		1,840		2,932		3,562			947		1,055
Net interest income after provision for loan losses	25,577		22,113		47,717		43,163			31,305		22,140
Other income:
Trust revenues	938		841		2,015		1,771
Brokerage commissions	661		509		1,326		1,014
Wealth management revenues										3,645		1,742
Insurance commissions	838		853		2,325		2,478			5,555		1,487
Service charges	1,803		1,690		3,438		3,402			1,802		1,635
Securities gains, net	881		335		901		335			54		20
Mortgage banking revenue, net	410		335		571		528			239		161
ATM / debit card revenue	1,860		1,665		3,464		3,233			2,016		1,604
Bank owned life insurance	315		282		591		563			430		276
Other	655		1,459		1,217		2,141			898		562
Total other income	8,361		7,969		15,848		15,465			14,639		7,487
Other expense:
Salaries and employee benefits	11,057		10,102		21,251		20,037			16,574		10,194
Net occupancy and equipment expense	3,505		3,116		6,778		6,249			4,455		3,273
Net other real estate owned expense	7		127		83		145			53		76
FDIC insurance	285		290		566		469			279		281
Amortization of intangible assets	716		559		1,221		1,106			1,356		505
Stationery and supplies	186		186		397		371			287		211
Legal and professional	1,717		894		2,854		1,725			1,194		1,137
Marketing and donations	431		277		785		571			454		354
Other	2,892		2,404		5,235		6,484			3,658		2,343
Total other expense	20,796		17,955		39,170		37,157			28,310		18,374
Income before income taxes	13,142		12,127		24,395		21,471			17,634		11,253
Income taxes	3,105		3,927		5,968		7,007			4,318		2,863
Net income	10,037		8,200		18,427		14,464			$	13,316	$	8,390
Per share data:
Basic net income per common share available to common stockholders	$	0.72	$	0.66	$	1.38	$	1.16		$	0.80	$	0.66
Diluted net income per common share available to common stockholders	$	0.72	$	0.66	$	1.38	$	1.16		0.80		0.66
Cash dividends declared per common share	$	0.34	$	0.32	$	0.34	$	0.32

See accompanying notes to unaudited condensed consolidated financial statements.


First Mid-Illinois Bancshares, Inc.
First Mid Bancshares, Inc.
Condensed Consolidated Statements of Comprehensive Income (unaudited)	Condensed Consolidated Statements of Comprehensive Income (unaudited)												Condensed Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)	Three months ended June 30,						Six months ended June 30,							Three months ended March 31,
	2018			2017			2018			2017				2019			2018
Net income	$	10,037		$	8,200		$	18,427		$	14,464			$	13,316		$	8,390
Other Comprehensive Income
Unrealized gains (losses) on available-for-sale securities, net of taxes of $64 and $(3,444) for three months ended June 30, 2018 and 2017, respectively and $2,605 and $(5,481) for six months ended June 30, 2018 and 2017, respectively.	(150		)	5,391			(6,370		)	8,580
Amortized holding losses on held-to-maturity securities transferred from available-for-sale, net of taxes of $(8) and $(11) for three months ended June 30, 2018 and 2017, respectively and $(17) and $(22) for six months ended June 30, 2018 and 2017, respectively.	21			17			40			34
Less: reclassification adjustment for realized gains included in net income, net of taxes of $255 and $131 for three months ended June 30, 2018 and 2017, respectively and $261 and $131 for six months ended June 30, 2018 and 2017, respectively.	(626		)	(204		)	(640		)	(204		)
Other Comprehensive Income (Loss)
Unrealized gains (losses) on available-for-sale securities, net of taxes of $(3,123) and $2,540 for three months ended March 31, 2019 and 2018, respectively.														7,645			(6,221		)
Amortized holding losses on held-to-maturity securities transferred from available-for-sale, net of taxes of $(8) for three months ended March 31, 2019 and 2018.														21			20
Less: reclassification adjustment for realized gains included in net income, net of taxes of $16 and $6 for three months ended March 31, 2019 and 2018, respectively.														(38		)	(14		)
Other comprehensive income (loss), net of taxes	(755		)	5,204			(6,970		)	8,410				7,628			(6,215		)
Comprehensive income	$	9,282		$	13,404		$	11,457		$	22,874			$	20,944		$	2,175

See accompanying notes to unaudited condensed consolidated financial statements.

First Mid-Illinois Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited) Six months ended June 30,
(In thousands) 2018 2017
Cash flows from operating activities:
Net income $ 18,427
$ 14,464
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses 2,932
3,562
Depreciation, amortization and accretion, net 3,478
4,124
Change in cash surrender value of bank owned life insurance (591 ) (563 )
Stock-based compensation expense 160
129
Gains on investment securities, net (901 ) (335 )
Loss on sales of repossessed assets, net 11
30
Loss on write down of premises and equipment 1
1
Gains on sale of loans held for sale, net (462 ) (507 )
Increase in accrued interest receivable 549
933
Increase (decrease) in accrued interest payable 216
(19 )
Origination of loans held for sale (27,596 ) (32,256 )
Proceeds from sale of loans held for sale 26,629
32,006
Decrease (increase) in other assets 1,435
(2,353 )
(Decrease) increase in other liabilities (6,242 ) 5,269
Net cash provided by operating activities 18,046
24,485
Cash flows from investing activities:

Proceeds from maturities of certificates of deposit investments —
12,958
Proceeds from sales of securities available-for-sale 13,152
28,140
Proceeds from maturities of securities available-for-sale 25,950
31,105
Purchases of securities available-for-sale (28,260 ) (109,166 )
Net increase in loans (73,973 ) (6,162 )
Purchases of premises and equipment (753 ) (741 )
Proceeds from sales of other real property owned 1,040
5,068
Net cash provided by acquisition 10,323
—
Net cash used in investing activities (52,521 ) (38,798 )
Cash flows from financing activities:
Net increase (decrease) in deposits 10,601
(40,481 )
Decrease in repurchase agreements (13,726 ) (43,352 )
Proceeds from FHLB advances 15,000
10,000
Repayment of FHLB advances (10,000 ) (5,000 )
Repayment from short-term debt —
(5,875 )
Repayment of long-term debt (938 ) —
Proceeds from issuance of common stock 36,263
475
Direct expenses related to capital transactions (2,078 ) —
Purchase of treasury stock (95 ) —
Dividends paid on common stock (3,856 ) (3,467 )
Net cash provided by (used in) financing activities 31,171
(87,700 )
Decrease in cash and cash equivalents (3,304 ) (102,013 )
Cash and cash equivalents at beginning of period 88,879
175,902
Cash and cash equivalents at end of period $ 85,575
$ 73,889



First Mid Bancshares, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the three months ended March 31, 2019 and 2018
(In thousands, except share and per share data)
	Common Stock		Additional Paid-In-Capital					Deferred Compensation			Accumulated Other Comprehensive Income (Loss)
						Retained Earnings								Treasury Stock
																	Total
December 31, 2018	$	70,876	$	293,937		$	131,392	$	2,761		$	(6,473	)	$	(16,629	)	$	475,864
Net income	—		—			13,316		—			—			—			13,316
Other comprehensive income, net of tax	—		—			—		—			7,628			—			7,628
Issuance of 5,761 common shares pursuant to Deferred Compensation Plan	23		171			—		—			—			—			194
Issuance of 25,950 restricted shares pursuant to the 2017 Stock Incentive Plan	104		760			—		—			—			—			864
Issuance of 782 common shares pursuant to the Employee Stock Purchase Plan	3		21			—		—			—			—			24
Deferred Compensation	—		—			—		(1		)	—			1			—
Grant of restricted units pursuant to 2017 SIP	—		(52		)	—		(814		)	—			—			(866		)
Vested restricted shares/units compensation expense	—		—			—		128			—			—			128
March 31, 2019	$	71,006	$	294,837		$	144,708	$	2,074		$	1,155		$	(16,628	)	$	497,152

December 31, 2017	$	54,925	$	163,603		$	104,683	$	3,540		$	(2,304	)	$	(16,483	)	$	307,964
Net income	—		—			8,390		—			—			—			8,390
Other comprehensive loss, net of tax	—		—			—		—			(6,215		)	—			(6,215		)
Issuance of 3,848 common shares pursuant to Deferred Compensation Plan	15		135			—		—			—			—			150
Issuance of 25,950 restricted shares pursuant to the 2017 Stock Incentive Plan	53		463			—		—			—			—			516
Deferred Compensation	—		—			—		(316		)	—			316			—
Tax benefit related to deferred compensation distributions	—		217			—		—			—			—			217
Grant of restricted units pursuant to 2017 SIP	—		594			—		(1,109		)	—			—			(515		)
Vested restricted shares/units compensation expense	—		—			—		80			—			—			80
March 31, 2018	$	54,993	$	165,012		$	113,073	$	2,195		$	(8,519	)	$	(16,167	)	$	310,587



First Mid Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)	Three months ended March 31,
(In thousands)	2019			2018
Cash flows from operating activities:
Net income	$	13,316		$	8,390
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	947			1,055
Depreciation, amortization and accretion, net	2,430			1,731
Change in cash surrender value of bank owned life insurance	(430		)	(276		)
Stock-based compensation expense	128			80
Operating lease payments	(664		)	—
Gains on investment securities, net	(54		)	(20		)
(Gain) loss on sales of repossessed assets, net	(5		)	50
Loss on write down of premises and equipment	—			1
Gains on sale of loans held for sale, net	(180		)	(174		)
Decrease in accrued interest receivable	808			650
Increase in accrued interest payable	493			114
Origination of loans held for sale	(12,098		)	(11,762		)
Proceeds from sale of loans held for sale	12,553			11,652
Decrease (increase) in other assets	507			(488		)
Decrease in other liabilities	(333		)	(291		)
Net cash provided by operating activities	17,418			10,712
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments	249			—
Proceeds from sales of securities available-for-sale	12,631			6,527
Proceeds from maturities of securities available-for-sale	23,020			12,754
Purchases of securities available-for-sale	(28,431		)	(19,883		)
Net decrease (increase) in loans	45,188			(38,223		)
Purchases of premises and equipment	(987		)	(234		)
Proceeds from sales of other real property owned	354			792
Net cash provided by (used in) investing activities	52,024			(38,267		)
Cash flows from financing activities:
Net increase in deposits	57,527			17,252
Decrease in repurchase agreements	(34,570		)	(22,953		)
Repayment of long-term debt	(1,467		)	(938		)
Proceeds from issuance of common stock	216			150
Net cash provided by (used in) financing activities	21,706			(6,489		)
Increase (decrease) in cash and cash equivalents	91,148			(34,044		)
Cash and cash equivalents at beginning of period	141,400			88,879
Cash and cash equivalents at end of period	$	232,548		$	54,835

First Mid-Illinois Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited) Six months ended June 30,
(In thousands) 2018 2017

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 4,097
$ 2,936
Income taxes 5,020
4,198
Supplemental disclosures of noncash investing and financing activities

Loans transferred to other real estate owned 214
5,171
Dividends reinvested in common stock 533
527
Net tax benefit related to option and deferred compensation plans 161
216
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
$ —



First Mid Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)	Three months ended March 31,
(In thousands)	2019		2018
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	5,391	$	1,856
Income taxes	2,035		2,320
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned	1,630		50
Initial recognition of right-of-use assets	14,116		—
Initial recognition of lease liabilities	14,116		—

See accompanying notes to unaudited condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 -- Basis of Accounting and Consolidation

The unaudited condensed consolidated financial statements include the accounts of First ~~Mid-Illinois~~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”), ~~formerly known as~~Soy Capital Bank and Trust Company ("Soy Capital Bank") (which merged with and into First ~~Mid-Illinois~~Mid Bank ~~& Trust, N.A., First Bank & Trust, IL ("First Bank & Trust")~~on April 6, 2019), First Mid Wealth Management, Mid-Illinois Data Services, Inc. (“MIDS”) and ~~The Checkley Agency, Inc. doing business as~~ First Mid Insurance Group, Inc. (“First Mid Insurance”). The Company changed its name to First Mid Bancshares, Inc. on April 25, 2019. 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 ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~, and all such adjustments are of a normal recurring nature. Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the ~~June 30, 2018~~March 31, 2019 presentation and there was no impact on net income or stockholders’ equity. The results of the interim period ended ~~June 30, 2018~~March 31, 2019 are not necessarily indicative of the results expected for the year ending December 31, ~~2018~~2019. The Company operates as a one-segment entity for financial reporting purposes.

The ~~2017~~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 financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s ~~2017~~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”).

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, ~~will merge~~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 ~~will become~~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 ~~(other than shares held in treasury by SCB and shares held by stockholders who have properly made and not withdrawn a demand for appraisal rights under Illinois law) will be~~were converted into and ~~become~~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 and subject to certain potential adjustments. Overall elections are subject to proration such that, depending on the number of shares of SCB common stock electing shares of the Company’s common stock, between 19 and 32.5 percent of the SCB shares will be exchanged for cash, and between 67.5 and 81 percent will be exchanged for the Company’s common stock. Additionally, SCB’s outstanding stock options will be fully vested upon consummation of the SCB Merger, and all outstanding SCB options that are unexercised prior to the effective time of the SCB Merger will be cashed out.withheld. In addition, immediately prior to the closing of the proposed merger, SCB ~~will pay a~~paid special dividend to its shareholders in the aggregate amount of approximately $25 million. The SCB Merger iswas subject to customary closing conditions, including the approval of the appropriate regulatory authorities and of the stockholders of SCB. The SCB Merger ~~is anticipated~~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 ~~be completed~~the stockholders of SCB, including cash in ~~late 2018.~~

~~It is anticipated that SCB’s wholly-owned bank subsidiary,~~lieu of fractional shares. Soy Capital Bank and Trust Company (“Soy Capital Bank”), ~~will be~~ merged with and into First Mid Bank ~~at a date following completion of the Merger.~~on April 6, 2019. At the time of the bank merger, Soy Capital Bank’s banking offices ~~will become~~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 ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, the company sold no shares of common stock under the program. As of ~~June 30, 2018,~~March 31, 2019, approximately $16.53 million of common stock remained available for issuance under the At The Market program.

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 13,250 shares of restricted stock during 2018 and ~~15,450~~15,540 and ~~18,391~~28,700 restricted stock units during ~~2018~~2019 and ~~2017,~~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 March 31, 2019, 782 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 trust department. Fees are billed in arrears based upon the preceding period account balance. Revenue from the farm management department is recorded when service is complete, for example when crops are sold.

Brokerage commissions. The primary brokerage revenue is recorded at the beginning of each quarter through billing to customers based on the account asset size on the last day of the previous quarter. If a withdrawal of funds takes place, a prorated refund may occur; this is reflected within the same quarter as the original billing occurred. All performance obligations are met within the same quarter that the revenue is recorded.

Insurance commissions. The Company’s insurance agency subsidiary, First Mid Insurance, ~~Group (“FMIG”),~~ receives commissions on premiums of new and renewed business policies. ~~FMIG~~First Mid Insurance records commission revenue on direct bill policies as the cash is received. For agency bill policies, ~~FMIG~~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 March 31, 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are as follows (in thousands):

Unrealized Gain (Loss) on
Securities
Securities with Other-Than-Temporary Impairment Losses Total
June 30, 2018
Net unrealized losses on securities available-for-sale $ (12,840 ) $ —
$ (12,840 )
Unamortized losses on held-to-maturity securities transferred from available-for-sale (224 ) —
(224 )
Securities with other-than-temporary impairment losses —
—
—
Tax benefit 3,790
—
3,790
Balance at June 30, 2018 $ (9,274 ) $ —
$ (9,274 )



	Unrealized Gain (Loss) on Securities			Securities with Other-Than-Temporary Impairment Losses		Total
March 31, 2019
Net unrealized gains on securities available-for-sale	$	1,764		$	—	$	1,764
Unamortized losses on held-to-maturity securities transferred from available-for-sale	(138		)	—		(138		)
Securities with other-than-temporary impairment losses	—			—		—
Tax expense	(471		)	—		(471		)
Balance at March 31, 2019	$	1,155		$	—	$	1,155


December 31, 2017
December 31, 2018
Net unrealized losses on securities available-for-sale	$	(2,619	)	$	—		$	(2,619	)	$	(8,951	)	$	—	$	(8,951	)
Unamortized losses on held-to-maturity securities transferred from available-for-sale	(281		)	—			(281		)	(166		)	—		(166		)
Securities with other-than-temporary impairment losses	—			(345		)	(345		)	—			—		—
Tax benefit	841			100			941			2,644			—		2,644
Balance at December 31, 2017	$	(2,059	)	$	(245	)	$	(2,304	)
Balance at December 31, 2018										$	(6,473	)	$	—	$	(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 ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~, were as follows (in thousands):


	Amounts Reclassified from Other Comprehensive Income												Affected Line Item in the Statements of Income	Amounts Reclassified from Other Comprehensive Income						Affected Line Item in the Statements of Income
	Amounts Reclassified from Other Comprehensive Income													Amounts Reclassified from Other Comprehensive Income
	Three months ended June 30,						Six months ended June 30,							Three months ended March 31,
	2018			2017			2018			2017				2019			2018
Realized gains on available-for-sale securities	$	881		$	335		$	901		$	335		Securities gains, net	$	54		$	20		Securities gains, net
													(Total reclassified amount before tax)							(Total reclassified amount before tax)
	(255		)	(131		)	(261		)	(131		)	Income taxes	(16		)	(6		)	Income taxes
Total reclassifications out of accumulated other comprehensive income	$	626		$	204		$	640		$	204		Net reclassified amount	$	38		$	14		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 iswas 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.

~~Accounting Standards Update 2016-08, Revenue from Contracts with Customers (Topic 606) (“ASU 2016-08").~~ In March 2016, the FASB issued ASU 2016-08 which amended the accounting guidance issued by the FASB in May 2014 that revised the criteria for determining when to recognize revenue from contracts with customers and expanded disclosure requirements. The amendment defers the effective date by one year. This accounting guidance can be implemented using either a retrospective method or a cumulative-effect approach. This new guidance is effective for interim and annual reporting

1112

periods beginning after December 15, 2017. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams.

~~Accounting Standards Update 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01").~~ In January 2016, FASB issued ASU 2016-01 which amends prior guidance to require an entity to measure its equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of same issuer. The new guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The new guidance is effective for reporting periods after January 1, 2018 and did not have a significant impact on the Company's consolidated financial statements other than adoption of the standard resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis. See Note 7 - Fair Value of Assets and Liabilities for further information regarding the valuation of these loans.

Pending New Accounting Guidance

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

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 has also engaged an outside consultant to assist with the methodology review and data validation, as well as other key aspects of implementing the standard. The committee meets periodically to discuss the latest developments and ensure progress is being made. The team also keeps current on evolving interpretations and industry practices related to ASU 2016-13. The committee ~~continues~~is currently focusing on data and model validation and expects to ~~evaluate~~begin parallel processing with the existing allowance for loan losses model during the second quarter of 2019. Once the parallel processing is in place, the committee will focus on evaluating the analysis output and ~~validate data resources and different loss methodologies. The~~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 six~~-month period ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ were as follows:


	Three months ended June 30,				Six months ended June 30,				Three months ended March 31,
	2018		2017		2018		2017		2019		2018
Basic Net Income per Common Share
Available to Common Stockholders:
Net income	$	10,037,000	$	8,200,000	$	18,427,000	$	14,464,000	$	13,316,000	$	8,390,000
Weighted average common shares outstanding	13,956,674		12,491,757		13,317,395		12,483,788		16,665,999		12,671,017
Basic earnings per common share	$	0.72	$	0.66	$	1.38	$	1.16	$	0.80	$	0.66
Diluted Net Income per Common Share
Available to Common Stockholders:
Net income applicable to diluted earnings per share	10,037,000		8,200,000		$	18,427,000	$	14,464,000	$	13,316,000	$	8,390,000
Weighted average common shares outstanding	13,956,674		12,491,757		13,317,395		12,483,788		16,665,999		12,671,017
Dilutive potential common shares:
Assumed conversion of stock options	4,124		836		4,053		836		—		3,980
Restricted stock awarded	13,250		7,338		13,250		7,338		38,780		13,250
Assumed conversion of preferred stock	—		—		—		—
Dilutive potential common shares	17,374		8,174		17,303		8,174		38,780		17,230
Diluted weighted average common shares outstanding	13,974,048		12,499,931		13,334,698		12,491,962		16,704,779		12,688,247
Diluted earnings per common share	$	0.72	$	0.66	$	1.38	$	1.16	$	0.80	$	0.66

There were no shares not considered in computing diluted earnings per share for the ~~three and six-month~~three-month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were as follows (in thousands):

Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value
June 30, 2018
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies $ 127,342
$ —
$ (4,304 ) $ 123,038
Obligations of states and political subdivisions 176,376
1,064
(2,200 ) 175,240
Mortgage-backed securities: GSE residential 323,238
359
(7,926 ) 315,671
Trust preferred securities —
—
—
—
Other securities 2,187
167
—
2,354
Total available-for-sale $ 629,143
$ 1,590
$ (14,430 ) $ 616,303
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies $ 69,383
$ —
$ (1,858 ) $ 67,525

December 31, 2017
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies $ 115,796
$ 8
$ (2,034 ) $ 113,770
Obligations of states and political subdivisions 165,037
2,254
(1,025 ) 166,266
Mortgage-backed securities: GSE residential 295,778
493
(2,460 ) 293,811
Trust preferred securities 2,893
—
(345 ) 2,548
Other securities 2,039
145
—
2,184
Total available-for-sale $ 581,543
$ 2,900
$ (5,864 ) $ 578,579
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies $ 69,332
$ 103
$ (978 ) $ 68,457

~~Trust preferred securities represents one trust preferred pooled security issued by First Tennessee Financial (“FTN”). This security was sold during the second quarter of 2018.~~



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
March 31, 2019
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	190,845	$	926	$	(1,044	)	$	190,727
Obligations of states and political subdivisions	188,572		2,996		(465		)	191,103
Mortgage-backed securities: GSE residential	312,159		1,399		(2,074		)	311,484
Other securities	2,278		26		—			2,304
Total available-for-sale	$	693,854	$	5,347	$	(3,583	)	$	695,618
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	69,462	$	11	$	(730	)	$	68,743

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 ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2018			2017			2018			2017			2019			2018
Gross gains	$	921		$	352		$	941		$	352		$	84		$	20
Gross losses	(40		)	(17		)	(40		)	(17		)	(30		)	—

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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 ~~June 30, 2018~~March 31, 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			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	$	85,405		$	37,633		$	—		$	—		$	123,038		$	148,125		$	42,602		$	—		$	—		$	190,727
Obligations of state and political subdivisions	16,785			77,266			80,129			1,060			175,240			26,862			85,494			77,798			949			191,103
Mortgage-backed securities: GSE residential	—			104,930			176,494			34,247			315,671			657			214,585			96,242			—			311,484
Trust preferred securities	—			—			—			—			—
Other securities	—			2,013			—			341			2,354			—			2,014			—			290			2,304
Total available-for-sale investments	$	102,190		$	221,842		$	256,623		$	35,648		$	616,303		$	175,644		$	344,695		$	174,040		$	1,239		$	695,618
Weighted average yield	2.35		%	2.68		%	2.92		%	3.40		%	2.77		%	2.64		%	2.85		%	2.92		%	3.06		%	2.82		%
Full tax-equivalent yield	2.52		%	3.05		%	3.28		%	3.43		%	3.08		%	2.79		%	3.12		%	3.43		%	4.07		%	3.12		%
Held to Maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	39,994		$	29,389		$	—		$	—		$	69,383		$	49,940		$	19,522		$	—		$	—		$	69,462
Weighted average yield	1.76		%	2.08		%	—		%	—		%	2.68		%	1.83		%	2.06		%	—		%	—		%	1.90		%
Full tax-equivalent yield	1.76		%	2.08		%	—		%	—		%	2.68		%	1.83		%	2.06		%	—		%	—		%	1.90		%

The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent yields have been calculated using a 21% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at ~~June 30, 2018~~.March 31, 2019.

Investment securities carried at approximately $~~492~~574 million and $~~479~~628 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

1516

The following table presents the aging of gross unrealized losses and fair value by investment category as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2018
March 31, 2019
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	74,660	$	(1,917	)	$	48,378	$	(2,387	)	$	123,038	$	(4,304	)	$	998	$	—		$	82,772	$	(1,044	)	$	83,770	$	(1,044	)
Obligations of states and political subdivisions	72,991		(1,357		)	14,936		(843		)	87,927		(2,200		)	1,382		(3		)	30,225		(462		)	31,607		(465		)
Mortgage-backed securities: GSE residential	211,083		(4,680		)	68,005		(3,246		)	279,088		(7,926		)	1,952		(5		)	199,536		(2,069		)	201,488		(2,074		)
Total	$	358,734	$	(7,954	)	$	131,319	$	(6,476	)	$	490,053	$	(14,430	)	$	4,332	$	(8	)	$	312,533	$	(3,575	)	$	316,865	$	(3,583	)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	29,438	$	(387	)	$	38,087	$	(1,471	)	$	67,525	$	(1,858	)	$	—	$	—		$	63,775	$	(730	)	$	63,775	$	(730	)
December 31, 2017
December 31, 2018
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	58,584	$	(540	)	$	47,972	$	(1,494	)	$	106,556	$	(2,034	)	$	16,095	$	(148	)	$	105,549	$	(3,087	)	$	121,644	$	(3,235	)
Obligations of states and political subdivisions	42,618		(769		)	9,267		(256		)	51,885		(1,025		)	38,782		(450		)	42,741		(1,390		)	81,523		(1,840		)
Mortgage-backed securities: GSE residential	187,949		(1,942		)	22,609		(518		)	210,558		(2,460		)	81,435		(1,150		)	171,321		(5,036		)	252,756		(6,186		)
Trust preferred securities	—		—			2,548		(345		)	2,548		(345		)
Total	$	289,151	$	(3,251	)	$	82,396	$	(2,613	)	$	371,547	$	(5,864	)	$	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	$	34,101	$	(525	)	$	14,540	$	(453	)	$	48,641	$	(978	)	$	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 ~~June 30, 2018~~March 31, 2019 there were ~~twelve~~nineteen available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of ~~$48,378,000~~$82,772,000 and unrealized losses of ~~$2,387,000~~$1,044,000 in a continuous unrealized loss position for twelve months or more. At December 31, ~~2017~~2018 , there were ~~eleven~~twenty-three available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of ~~$47,972,000~~$105,549,000 and unrealized losses of ~~$1,494,000~~$3,087,000 in a continuous unrealized loss position for twelve months or more. At ~~June 30, 2018~~March 31, 2019 there were ~~seven~~thirteen held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of ~~$38,087,000~~$63,775,000 and unrealized losses of ~~$1,471,000~~$730,000 in a continuous unrealized loss position for twelve months or more. At December 31, ~~2017~~2018 there were ~~seven~~nine held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of ~~$14,540,000~~$48,226,000 and unrealized losses of ~~$453,000~~$1,380,000 in a continuous unrealized loss position for twelve months or more.

Obligations of states and political subdivisions. At ~~June 30, 2018~~March 31, 2019 there were ~~thirty-three~~sixty-one obligations of states and political subdivisions with a fair value of ~~$14,936,000~~$30,225,000 and unrealized losses of ~~$843,000~~$462,000 in a continuous loss position for twelve months or more. At December 31, ~~2017,~~2018, there were ~~thirty-nine~~eighty-four obligations of states and political subdivisions with a fair value of ~~$9,267,000~~$42,741,000 and unrealized losses of ~~$256,000~~$1,390,000 in a continuous unrealized loss position for twelve months or more.

Mortgage-backed Securities: GSE Residential. At ~~June 30, 2018~~March 31, 2019 there were ~~twenty-eight~~seventy-seven mortgage-backed securities with a fair value of ~~$68,005,000~~$199,536,000 and unrealized losses of ~~$3,246,000~~$2,069,000 in a continuous unrealized loss position for twelve months or more. At December 31, ~~2017~~2018, there were ~~twenty-six~~sixty-nine mortgage-backed securities with a fair value of ~~$22,609,000~~$171,321,000 and unrealized losses of ~~$518,000~~$5,036,000 in a continuous unrealized loss position for twelve months or more.

~~Trust Preferred Securities.~~ At ~~December 31, 2017, there was~~ ~~one~~ ~~trust preferred security with a fair value of~~ ~~$2,548,000~~ ~~and unrealized loss of~~ ~~$345,000~~ in a continuous unrealized loss position for twelve months or more. The unrealized loss was primarily due to the long-term nature of the trust preferred security, a lack of demand or inactive market for the security, the impending change to the regulatory treatment of these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities. The company sold this security during the second quarter of 2018.

Other securities. At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, there were no other securities in a continuous unrealized loss position for twelve months or more.

The Company does not believe any other individual unrealized loss as of ~~June 30, 2018~~March 31, 2019 represents ~~OTTI.~~other than temporary impairment ("OTTI"). However, given the continued disruption in the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the other-than-temporary impairment is identified.

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

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

Credit Losses Recognized on Investments. 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 ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017~~2018 (in thousands).


	Accumulated Credit Losses					Accumulated Credit Losses
	June 30, 2018			June 30, 2017		March 31, 2019		March 31, 2018
Credit losses on trust preferred securities held
Beginning of period	$	1,111		$	1,111	$	—	$	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	$	—		$	1,111	$	—	$	1,111

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.

1718

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 follows (in thousands):


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Construction and land development	$	88,945	$	107,721	$	50,234	$	51,013
Agricultural real estate	185,217		127,232		237,437		232,409
1-4 Family residential properties	380,302		294,483		363,569		374,751
Multifamily residential properties	106,728		61,966		177,949		186,393
Commercial real estate	807,630		684,639		909,176		911,656
Loans secured by real estate	1,568,822		1,276,041		1,738,365		1,756,222
Agricultural loans	113,823		86,602		118,125		136,125
Commercial and industrial loans	503,423		445,378		551,837		559,120
Consumer loans	59,932		30,070		87,503		92,744
All other loans	141,345		108,023		111,794		113,925
Total Gross loans	2,387,345		1,946,114		2,607,624		2,658,136
Less: Loans held for sale	2,454		1,025		1,233		1,508
	2,384,891		1,945,089		2,606,391		2,656,628
Less:
Net deferred loan fees, premiums and discounts	10,662		6,613		10,630		13,617
Allowance for loan losses	22,045		19,977		26,704		26,189
Net loans	$	2,352,184	$	1,918,499	$	2,569,057	$	2,616,822

Net loans ~~increased $433.7~~decreased $47.8 million as of ~~June 30, 2018~~March 31, 2019 compared to December 31, ~~2017. Of this increase, approximately $364.9 million is a result~~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 ~~the acquisition of First Bank & Trust.~~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 market 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 ~~June 30, 2018~~,March 31, 2019, the Company’s loan portfolio included $~~299.0~~355.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $~~172.3~~267.1 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture ~~increased$85.2~~decreased $12.9 million from ~~$213.8~~$368.5 million at December 31, ~~2017~~2018 due to ~~$81.8 million acquired from First Bank & Trust and~~ seasonal paydowns based upon timing of cash flow requirements. Loans concentrated in other grain farming ~~increased~~decreased ~~$1.5~~$9.0 million from $~~170.8~~276.1 million at December 31, ~~2017~~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 $~~121.1~~128.0 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 ~~$189.7~~$228.3 million of loans to lessors of non-residential buildings, ~~$130.0~~$289.2 million of loans to lessors of residential buildings and dwellings, and ~~$95.4~~$103.0 million of loans to other gambling industries.

1819

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.

1920

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.

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 prior 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~~three-months ended March 31, 2019 and ~~six-months ended June 30,~~ 2018 ~~and 2017~~ and for the year ended December 31, ~~2017~~2018 (in thousands):


	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate		Residential Real Estate			Consumer			Unallocated		Total			Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated		Total
Three months ended June 30, 2018
Three months ended March 31, 2019																	Three months ended March 31, 2019
Allowance for loan losses:
Balance, beginning of period	$	17,368		$	1,581	$	961		$	861		$	—	$	20,771
Balance, beginning of year																	$	21,556		$	2,197		$	1,504		$	932		$	—	$	26,189
Provision charged to expense	1,334			319		92			132			—		1,877			584			236			(116		)	243			—		947
Losses charged off	(536		)	—		(55		)	(128		)	—		(719		)	(215		)	(30		)	(52		)	(271		)	—		(568		)
Recoveries	—			—		53			63			—		116			22			9			5			100			—		136
Balance, end of period	$	18,166		$	1,900	$	1,051		$	928		$	—	$	22,045		$	21,947		$	2,412		$	1,341		$	1,004		$	—	$	26,704
Ending balance:
Individually evaluated for impairment	$	493		$	30	$	19		$	—		$	—	$	542		$	2,257		$	24		$	231		$	3		$	—	$	2,515
Collectively evaluated for impairment	$	17,673		$	1,870	$	1,032		$	928		$	—	$	21,503		$	18,994		$	2,388		$	1,101		$	1,001		$	—	$	23,484
Acquired with deteriorated credit quality	$	—		$	—	$	—		$	—		$	—	$	—		$	696		$	—		$	9		$	—		$	—	$	705
Loans:
Individually evaluated for impairment																	$	10,303		$	45		$	3,763		$	171		$	—	$	14,282
Collectively evaluated for impairment																	1,747,455			354,432			372,261			93,948			$	—	2,568,096
Acquired with deteriorated credit quality																	12,799			—			1,817			—			$	—	14,616
Ending balance																	$	1,770,557		$	354,477		$	377,841		$	94,119		$	—	$	2,596,994

Commercial/ Commercial Real Estate Agricultural/ Agricultural Real Estate Residential Real Estate Consumer Unallocated Total
Three months ended June 30, 2017

Allowance for loan losses:

Balance, beginning of period $ 13,771
$ 2,319
$ 978
$ 751
$ 27
$ 17,846
Provision charged to expense 1,667
86
23
57
7
1,840
Losses charged off (871 ) (662 ) (50 ) (135 ) —
(1,718 )
Recoveries 180
—
18
43
—
241
Balance, end of period $ 14,747
$ 1,743
$ 969
$ 716
$ 34
$ 18,209
Ending balance:

Individually evaluated for impairment $ 194
$ —
$ 47
$ 1
$ —
$ 242
Collectively evaluated for impairment $ 14,553
$ 1,743
$ 922
$ 715
$ 34
$ 17,967
Acquired with deteriorated credit quality $ —
$ —
$ —
$ —
$ —
$ —
Commercial/ Commercial Real Estate Agricultural/ Agricultural Real Estate Residential Real Estate Consumer Unallocated Total
Six months ended June 30, 2018
Allowance for loan losses:
Balance, beginning of year $ 16,546
$ 1,742
$ 886
$ 803
$ —
$ 19,977
Provision charged to expense 2,270
158
269
235
—
2,932
Losses charged off (773 ) —
(158 ) (264 ) —
(1,195 )
Recoveries 123
—
54
154
—
331
Balance, end of period $ 18,166
$ 1,900
$ 1,051
$ 928
$ —
$ 22,045
Ending balance:

Individually evaluated for impairment $ 493
$ 30
$ 19
$ —
$ —
$ 542
Collectively evaluated for impairment $ 17,673
$ 1,870
$ 1,032
$ 928
$ —
$ 21,503
Acquired with deteriorated credit quality $ —
$ —
$ —
$ —
$ —
$ —
Loans:

Individually evaluated for impairment $ 12,163
$ 150
$ 2,743
$ 153
$ —
$ 15,209
Collectively evaluated for impairment 1,593,116
294,768
383,791
73,773
$ —
2,345,448
Acquired with deteriorated credit quality 12,300
238
3,482
6
$ —
16,026
Ending balance $ 1,617,579
$ 295,156
$ 390,016
$ 73,932
$ —
$ 2,376,683

2223


	Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated			Total			Commercial/ Commercial Real Estate			Agricultural/ Agricultural Real Estate			Residential Real Estate			Consumer			Unallocated		Total
Six months ended June 30, 2017
Three months ended March 31, 2018																			Three months ended March 31, 2018
Allowance for loan losses:
Balance, beginning of year	$	12,901		$	2,249		$	874		$	693		$	36		$	16,753		$	16,546		$	1,742		$	886		$	803		$	—	$	19,977
Provision charged to expense	3,133			155			169			107			(2		)	3,562			936			(161		)	177			103			—		1,055
Losses charged off	(1,483		)	(662		)	(99		)	(237		)	—			(2,481		)	(237		)	—			(103		)	(136		)	—		(476		)
Recoveries	196			1			25			153			—			375			123			—			1			91			—		215
Balance, end of period	$	14,747		$	1,743		$	969		$	716		$	34		$	18,209		$	17,368		$	1,581		$	961		$	861		$	—	$	20,771
Ending balance:
Individually evaluated for impairment	$	194		$	—		$	47		$	1		$	—		$	242		$	486		$	5		$	20		$	—		$	—	$	511
Collectively evaluated for impairment	$	14,553		$	1,743		$	922		$	715		$	34		$	17,967		$	16,877		$	1,576		$	941		$	861		$	—	$	20,255
Acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	5		$	—		$	—		$	—		$	—	$	5
Loans:
Individually evaluated for impairment	$	5,653		$	261		$	1,494		$	248		$	—		$	7,656		$	11,592		$	202		$	1,115		$	170		$	—	$	13,079
Collectively evaluated for impairment	1,241,763			202,620			331,874			35,611			—			1,811,868			1,417,379			196,173			311,163			39,650			—		1,964,365
Acquired with deteriorated credit quality	6,110			—			—			—			—			6,110			253			—			—			—			—		253
Ending balance	$	1,253,526		$	202,881		$	333,368		$	35,859		$	—		$	1,825,634		$	1,429,224		$	196,375		$	312,278		$	39,820		$	—	$	1,977,697
Year ended December 31, 2017
Year ended December 31, 2018
Allowance for loan losses:
Balance, beginning of year	$	12,901		$	2,249		$	874		$	693		$	36		$	16,753		$	16,546		$	1,742		$	886		$	803		$	—	$	19,977
Provision charged to expense	6,884			153			100			361			(36		)	7,462			6,070			548			1,447			602			—		8,667
Losses charged off	(3,795		)	(662		)	(217		)	(521		)	—			(5,195		)	(1,227		)	(93		)	(886		)	(787		)	—		(2,993		)
Recoveries	556			2			129			270			—			957			167			—			57			314			—		538
Balance, end of year	$	16,546		$	1,742		$	886		$	803		$	—		$	19,977		$	21,556		$	2,197		$	1,504		$	932		$	—	$	26,189
Ending balance:
Individually evaluated for impairment	$	586		$	2		$	25		$	1		$	—		$	614		$	1,816		$	—		$	225		$	3		$	—	$	2,044
Collectively evaluated for impairment	$	15,951		$	1,740		$	861		$	802		$	—		$	19,354		$	18,514		$	2,197		$	1,270		$	929		$	—	$	22,910
Acquired with deteriorated credit quality	$	9		$	—		$	—		$	—		$	—		$	9		$	1,226		$	—		$	9		$	—		$	—	$	1,235
Loans:
Individually evaluated for impairment	$	11,372		$	488		$	1,026		$	200		$	—		$	13,086		$	14,422		$	32		$	2,360		$	166		$	—	$	16,980
Collectively evaluated for impairment	1,360,156			213,033			314,097			38,870			—			1,926,156			1,756,908			367,175			387,961			99,872			—		2,611,916
Acquired with deteriorated credit quality	259			—			—			—			—			259			13,411			4			2,205			3			—		15,623
Ending balance	$	1,371,787		$	213,521		$	315,123		$	39,070		$	—		$	1,939,501		$	1,784,741		$	367,211		$	392,526		$	100,041		$	—	$	2,644,519

2324

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.

2425

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	Construction & Land Development				Agricultural Real Estate				1-4 Family Residential Properties				Multifamily Residential Properties				Construction & Land Development				Agricultural Real Estate				1-4 Family Residential Properties				Multifamily Residential Properties
	2018		2017		2018		2017		2018		2017		2018		2017		2019		2018		2019		2018		2019		2018		2019		2018
Pass	$	87,955	$	107,140	$	175,635	$	120,767	$	360,561	$	282,441	$	103,653	$	60,954	$	48,192	$	49,794	$	227,602	$	221,047	$	341,528	$	352,583	$	156,561	$	163,845
Special Mention	444		454		6,628		4,829		3,342		2,654		464		476		465		471		7,349		7,805		5,550		5,526		7,825		8,144
Substandard	82		—		2,624		1,587		14,670		8,572		1,831		368		522		354		1,913		2,848		15,539		15,409		11,517		12,062
Doubtful	—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	88,481	$	107,594	$	184,887	$	127,183	$	378,573	$	293,667	$	105,948	$	61,798	$	49,179	$	50,619	$	236,864	$	231,700	$	362,617	$	373,518	$	175,903	$	184,051


	Commercial Real Estate (Nonfarm/Nonresidential)				Agricultural Loans				Commercial & Industrial Loans				Consumer Loans				Commercial Real Estate (Nonfarm/Nonresidential)				Agricultural Loans				Commercial & Industrial Loans				Consumer Loans
	2018		2017		2018		2017		2018		2017		2018		2017		2019		2018		2019		2018		2019		2018		2019		2018
Pass	$	766,400	$	647,208	$	109,985	$	83,469	$	489,913	$	425,846	$	58,377	$	29,375	$	863,328	$	861,086	$	108,301	$	127,863	$	536,110	$	535,186	$	85,017	$	90,133
Special Mention	14,079		16,941		2,622		2,304		4,112		11,492		9		5		11,974		16,035		6,017		7,581		5,120		9,967		171		177
Substandard	22,702		17,608		926		858		8,186		6,925		704		369		30,377		29,729		3,708		433		9,623		11,858		1,352		1,206
Doubtful	181		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	803,362	$	681,757	$	113,533	$	86,631	$	502,211	$	444,263	$	59,090	$	29,749	$	905,679	$	906,850	$	118,026	$	135,877	$	550,853	$	557,011	$	86,540	$	91,516


	All Other Loans				Total Loans				All Other Loans				Total Loans
	2018		2017		2018		2017		2019		2018		2019		2018
Pass	$	137,824	$	103,339	$	2,290,303	$	1,860,539	$	108,715	$	110,352	$	2,475,354	$	2,511,889
Special Mention	2,743		3,520		34,443		42,675		2,618		3,010		47,089		58,716
Substandard	31		—		51,756		36,287		—		15		74,551		73,914
Doubtful	—		—		181		—		—		—		—		—
Total	$	140,598	$	106,859	$	2,376,683	$	1,939,501	$	111,333	$	113,377	$	2,596,994	$	2,644,519

2526

The following table presents the Company’s loan portfolio aging analysis at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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		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
June 30, 2018
March 31, 2019
Construction and land development	$	—	$	—	$	44	$	44	$	88,437	$	88,481	$	—	$	2,115	$	50	$	176	$	2,341	$	46,838	$	49,179	$	—
Agricultural real estate	640		—		—		640		184,247		184,887		—		671		51		—		722		236,142		236,864		—
1-4 Family residential properties	2,396		977		882		4,255		374,318		378,573		—		6,128		809		4,038		10,975		351,642		362,617		—
Multifamily residential properties	281		—		—		281		105,667		105,948		—		638		—		1,421		2,059		173,844		175,903		—
Commercial real estate	3,445		1,495		2,532		7,472		795,890		803,362		—		1,214		—		3,061		4,275		901,404		905,679		—
Loans secured by real estate	6,762		2,472		3,458		12,692		1,548,559		1,561,251		—		10,766		910		8,696		20,372		1,709,870		1,730,242		—
Agricultural loans	365		11		110		486		113,047		113,533		—		124		—		70		194		117,832		118,026		—
Commercial and industrial loans	1,891		1,140		2,105		5,136		497,075		502,211		—		1,013		151		6,284		7,448		543,405		550,853		—
Consumer loans	784		313		2		1,099		57,991		59,090		—		672		317		249		1,238		85,302		86,540		—
All other loans	—		—		—		—		140,598		140,598		—		—		—		—		—		111,333		111,333		—
Total loans	$	9,802	$	3,936	$	5,675	$	19,413	$	2,357,270	$	2,376,683	$	—	$	12,575	$	1,378	$	15,299	$	29,252	$	2,567,742	$	2,596,994	$	—
December 31, 2017
December 31, 2018
Construction and land development	$	26	$	48	$	—	$	74	$	107,520	$	107,594	$	—	$	460	$	43	$	—	$	503	$	50,116	$	50,619	$	—
Agricultural real estate	—		—		396		396		126,787		127,183		—		—		804		—		804		230,896		231,700		—
1-4 Family residential properties	3,023		538		1,767		5,328		288,339		293,667		—		3,347		3,051		4,080		10,478		363,040		373,518		—
Multifamily residential properties	—		—		—		—		61,798		61,798		—		1,149		—		1,955		3,104		180,947		184,051		—
Commercial real estate	90		38		3,566		3,694		678,063		681,757		—		1,349		89		4,058		5,496		901,354		906,850		—
Loans secured by real estate	3,139		624		5,729		9,492		1,262,507		1,271,999		—		6,305		3,987		10,093		20,385		1,726,353		1,746,738		—
Agricultural loans	—		32		158		190		86,441		86,631		—		63		—		20		83		135,794		135,877		—
Commercial and industrial loans	192		3		770		965		443,298		444,263		—		1,417		10		3,902		5,329		551,682		557,011		—
Consumer loans	178		67		27		272		29,477		29,749		—		888		356		299		1,543		89,973		91,516		—
All other loans	—		—		—		—		106,859		106,859		—		697		—		—		697		112,680		113,377		—
Total loans	$	3,509	$	726	$	6,684	$	10,919	$	1,928,582	$	1,939,501	$	—	$	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

2627

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans with a specific allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	278	$	278	$	7	$	2,559	$	2,559	$	14
Agricultural real estate	—		—		—		276		276		—		—		—		—		—		—		—
1-4 Family residential properties	3,540		3,912		19		1,026		1,347		25		5,580		5,605		240		4,565		4,952		234
Multifamily residential properties	301		301		—		313		313		—		4,145		4,145		—		4,465		4,465		—
Commercial real estate	8,160		8,160		429		5,544		5,565		531		12,731		13,114		969		12,517		12,804		1,553
Loans secured by real estate	12,001		12,373		448		7,159		7,501		556		22,734		23,142		1,216		24,106		24,780		1,801
Agricultural loans	154		1,002		30		212		1,009		2		45		629		24		36		504		—
Commercial and industrial loans	6,414		6,921		64		5,774		6,037		64		5,948		6,297		1,977		8,292		8,723		1,475
Consumer loans	159		159		—		200		200		1		171		171		3		169		171		3
Total loans	$	18,728	$	20,455	$	542	$	13,345	$	14,747	$	623	$	28,898	$	30,239	$	3,220	$	32,603	$	34,178	$	3,279
Loans without a specific allowance:
Construction and land development	$	58	$	58	$	—	$	—	$	—	$	—	$	224	$	224	$	—	$	48	$	48	$	—
Agricultural real estate	235		235		—		15		15		—		310		310		—		309		309		—
1-4 Family residential properties	3,178		3,270		—		2,239		2,664		—		3,478		3,676		—		3,680		4,769		—
Multifamily residential properties	—		—		—		55		55		—		131		131		—		7,597		7,597		—
Commercial real estate	432		493		—		303		368		—		1,328		1,052		—		983		1,201		—
Loans secured by real estate	3,903		4,056		—		2,612		3,102		—		5,471		5,393		—		12,617		13,924		—
Agricultural loans	955		359		—		545		—		—		701		117		—		631		163		—
Commercial and industrial loans	953		968		—		909		1,249		—		488		892		—		1,660		2,027		—
Consumer loans	170		195		—		102		119		—		545		729		—		471		1,006		—
All other loans	21		21		—		—		—		—		—		—		—		6		6		—
Total loans	$	6,002	$	5,599	$	—	$	4,168	$	4,470	$	—	$	7,205	$	7,131	$	—	$	15,385	$	17,126	$	—
Total loans:
Construction and land development	$	58	$	58	$	—	$	—	$	—	$	—	$	502	$	502	$	7	$	2,607	$	2,607	$	14
Agricultural real estate	235		235		—		291		291		—		310		310		—		309		309		—
1-4 Family residential properties	6,718		7,182		19		3,265		4,011		25		9,058		9,281		240		8,245		9,721		234
Multifamily residential properties	301		301		—		368		368		—		4,276		4,276		—		12,062		12,062		—
Commercial real estate	8,592		8,653		429		5,847		5,933		531		14,059		14,166		969		13,500		14,005		1,553
Loans secured by real estate	15,904		16,429		448		9,771		10,603		556		28,205		28,535		1,216		36,723		38,704		1,801
Agricultural loans	1,109		1,361		30		757		1,009		2		746		746		24		667		667		—
Commercial and industrial loans	7,367		7,889		64		6,683		7,286		64		6,436		7,189		1,977		9,952		10,750		1,475
Consumer loans	329		354		—		302		319		1		716		900		3		640		1,177		3
All other loans	21		21		—		—		—		—		—		—		—		6		6		—
Total loans	$	24,730	$	26,054	$	542	$	17,513	$	19,217	$	623	$	36,103	$	37,370	$	3,220	$	47,988	$	51,304	$	3,279

2728

The following tables present average recorded investment and interest income recognized on impaired loans for the three ~~and six~~-month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):

For the three months ended
June 30, 2018 June 30, 2017

Average Investment
in Impaired Loans
Interest Income Recognized
Average Investment
in Impaired Loans
Interest Income Recognized
Construction and land development $ 44
$ —
$ 594
$ —
Agricultural real estate 235
—
16
—
1-4 Family residential properties 6,719
22
2,929
106
Multifamily residential properties 301
—
4,129
51
Commercial real estate 8,675
3
7,068
31
Loans secured by real estate 15,974
25
14,736
188
Agricultural loans 1,109
—
826
—
Commercial and industrial loans 7,672
—
1,781
2
Consumer loans 329
—
625
—
All other loans 21
—
—
—
Total loans $ 25,105
$ 25
$ 17,968
$ 190


	For the six months ended								For the three months ended
	June 30, 2018				June 30, 2017				March 31, 2019				March 31, 2018
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Construction and land development	$	44	$	—	$	347	$	—	$	813	$	—	$	46	$	—
Agricultural real estate	235		—		17		—		1,239		—		—		—
1-4 Family residential properties	6,777		28		3,121		117		8,690		23		3,891		8
Multifamily residential properties	302		—		4,133		94		1,718		—		308		—
Commercial real estate	8,680		6		5,316		62		10,359		6		5,993		3
Loans secured by real estate	16,038		34		12,934		273		22,819		29		10,238		11
Agricultural loans	1,061		—		930		—		664		—		885		—
Commercial and industrial loans	7,892		2		1,841		4		6,698		1		7,056		2
Consumer loans	349		—		628		—		744		—		294		—
All other loans	21		—		—		—		—		—		—		—
Total loans	$	25,361	$	36	$	16,333	$	277	$	30,925	$	30	$	18,473	$	13

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 ~~June 30, 2018~~March 31, 2019 stated above that were still accruing was ~~$2,396,000~~$1,612,000 of 1-4 Family residential properties, ~~and $683,000~~$425,000 of commercial real ~~estate.~~estate, $72,000 of commercial and industrial and $6,000 of consumer. The balance of loans modified in a troubled debt restructurings at ~~June 30, 2017~~March 31, 2018 included in the impaired loans stated above that were still accruing was ~~$594,000~~$730,000 of 1-4 family residential properties, ~~$3,395,000 of multifamily residential properties, $2,087,000 commercial real estate, $33,000~~$249,000 commercial and industrial loans, and ~~$2,000 of~~$20,000 consumer loans. For the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017~~, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

Non Accrual Loans

The following table presents the Company’s recorded balance of nonaccrual loans as ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands). This table excludes purchased impaired loans and performing troubled debt restructurings.


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Construction and land development	$	58	$	—	$	224	$	377
Agricultural real estate	235		291		310		309
1-4 Family residential properties	4,323		2,687		6,377		5,762
Multifamily residential properties	301		368		1,582		2,105
Commercial real estate	7,909		5,596		7,561		8,457
Loans secured by real estate	12,826		8,942		16,054		17,010
Agricultural loans	1,109		757		746		667
Commercial and industrial loans	7,365		6,658		6,363		8,990
Consumer loans	329		302		710		625
All other loans	21		—		—		6
Total loans	$	21,650	$	16,659	$	23,873	$	27,298

Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $~~758,000~~1,097,000 and $~~140,000~~608,000 for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~, 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, ~~and~~ First Bank & Trust during the second quarter of 2018, and Soy Capital Bank 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are as follows (in thousands):

June 30,
2018 December 31,
2017
Construction and land development $ 299
$ —
Agricultural real estate 121
—
1-4 Family residential properties $ 3,183
$ —
Multifamily residential properties 3,951
—
Commercial real estate 7,780
251
Loans secured by real estate 15,334
251
Agricultural loans 117
—
Commercial and industrial loans 569
8
Consumer loans 6
—
Carrying amount 16,026
259
Allowance for loan losses —
9
Carrying amount, net of allowance $ 16,026
$ 250

As of September 8, 2016, the First Clover Leaf acquisition date, the principal outstanding of PCI loans totaled $10,650,000 and the fair value of PCI loans totaled $8,688,000. The balance of these loans at June 30, 2018 was $385,000 and the fair value was $247,000. As of May 1, 2018, the First Bank acquisition date, the principal outstanding of PCI loans totaled $20,357,000 and the fair value of PCI loans totaled $16,126,000. The balance of these loans at June 30, 2018 was $20,011,000 and the fair value totaled $15,780,000.



	March 31, 2019			December 31, 2018
Construction and land development	$	278		$	2,558
Agricultural real estate	—			—
1-4 Family residential properties	1,817			2,206
Multifamily residential properties	3,864			3,891
Commercial real estate	8,657			6,946
Loans secured by real estate	14,616			15,601
Agricultural loans	—			4
Commercial and industrial loans	—			15
Consumer loans	—			3
Carrying amount	14,616			15,623
Allowance for loan losses	(705		)	(1,235		)
Carrying amount, net of allowance	$	13,911		$	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. ~~As of June 30, 2018 there is no accretable yield on the PCI loans acquired.~~ 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 ~~June 30, 2018,~~March 31, 2019, there ~~was one loan with a change in expected cash flows and as a result, the previously recorded provision was reversed. As of December 31, 2017, there was one loan~~were five loans with a change in expected cash flows and as a result, approximately ~~$9,000~~$705,000 of provision was ~~recorded.~~

~~The PCI loans acquired from First Bank & Trust during the second quarter~~recorded net of approximately $593,000 of provision reversed. As of December 31, 2018, ~~for which it was probable that all contractually required payments would not be collected were as follows:~~

Contractually required payments $ 20,357
Non-accretable difference (4,231 )
Cash flows expected to be collected at acquisition 16,126
Accretable yield —
Fair value of acquired loans at acquisition $ 16,126

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 was $~~10.6~~10.2 million and $~~8.9~~10.0 million, respectively. There was ~~$56,000~~$2,229,000 and ~~$37,000~~$1,418,000 in specific reserves established with respect to these loans as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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~~ ~~June 30, 2018~~ ~~and December 31, 2017 (in thousands).~~

Troubled debt restructurings: June 30, 2018 December 31, 2017
1-4 Family residential properties 2,883
874
Commercial real estate 1,897
1,376
Loans secured by real estate 4,780
2,250
Agricultural loans 745
757
Commercial and industrial loans 4,933
5,690
Consumer loans 153
201
Total $ 10,611
$ 8,898
Performing troubled debt restructurings:

1-4 Family residential properties 2,396
$ 578
Commercial real estate 683
251
Loans secured by real estate 3,079
829
Commercial and industrial loans —
25
Total $ 3,079
$ 854

The increase in TDRs during the period was was primarily due to loans acquired in the acquisition of First Bank net of loans that paid off during the period. The following table presents loans modified as TDRs during the ~~six months endedJune 30, 2018 and 2017, as a result of various modified loan factors (in thousands):~~

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


	June 30, 2018				June 30, 2017
	Number of Modifications	Recorded Investment		Type of Modifications	Number of Modifications	Recorded Investment		Type of Modifications
Troubled debt restructurings:									March 31, 2019		December 31, 2018
1-4 Family residential properties	1	161		(b)	—	—			2,404		2,472
Commercial real estate									1,887		1,706
Loans secured by real estate									4,291		4,178
Agricultural loans	—	—			1	819		(b)(c)	629		499
Commercial and industrial loans									5,114		5,112
Consumer loans									171		167
Total	1	$	161		1	$	819		$	10,205	$	9,956
Performing troubled debt restructurings:
1-4 Family residential properties									$	1,612	$	1,769
Commercial real estate									425		676
Loans secured by real estate									2,037		2,445
Commercial and industrial loans									72		—
Consumer loans									6		6
Total									$	2,115	$	2,451

The decrease in TDRs during the period was was primarily due to loans.

The following table presents loans modified as TDRs during the three months endedMarch 31, 2019 and 2018, as a result of various modified loan factors (in thousands):



	March 31, 2019				March 31, 2018
	Number of Modifications	Recorded Investment		Type of Modifications	Number of Modifications	Recorded Investment		Type of Modifications
1-4 Family residential properties	1	$	46	(b)(c)	1	$	161	(b)
Commercial real estate	1	483		(b)(c)	—	—
Loans secured by real estate	2	529			1	161
Commercial and industrial loans	2	72		(b)(c)
Consumer Loans	1	14		(b)(c)	—	—
Total	5	$	615		1	$	161

Type of modifications:

(a) Reduction of stated interest rate of loan

(b) Change in payment terms

(d) Permanent reduction of the recorded investment

A loan is considered to be in payment default once it is 90 days past due under the modified terms. There were no loans modified as troubled debt restructurings during the prior twelve months that experienced defaults for ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. There was one loan modified as troubled debt restructuring during the prior twelve months that experienced defaults as of December 31, ~~2017.~~2018.

The balance of real estate owned includes ~~$2,440,000~~$3,796,000 and ~~$2,754,000~~$2,534,000 of foreclosed real estate properties recorded as a result of obtaining physical possession of the property at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure procedures are in process was ~~$738,000~~$2,163,000 and ~~$404,000~~$425,000 at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Goodwill not subject to amortization (effective 1/1/02)	$	91,264	$	3,760	$	63,910	$	3,760	$	108,757	$	3,760	$	109,037	$	3,760
Intangibles from branch acquisition	3,015		3,015		3,015		3,015		3,015		3,015		3,015		3,015
Core deposit intangibles	25,086		12,484		19,862		11,473		32,355		14,997		32,355		14,017
Other intangibles	3,731		2,376		3,731		2,285		16,029		2,966		16,029		2,648
	$	123,096	$	21,635	$	90,518	$	20,533	$	160,156	$	24,738	$	160,436	$	23,440

Goodwill of ~~$27.4~~$26.5 million was recorded for the acquisition and merger of First Bank during ~~the second quarter of~~ 2018. All of the goodwill was assigned to the banking segment of the Company. The Company expects this goodwill will not be deductible for tax purposes.

The following table provides a reconciliation of the purchase price paid for the acquisition of 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

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)			$	26,946				$	21,677
Purchase accounting adjustments:
Fair value of securities	320				$	41
Fair value of loans, net	3,886				3,377
Fair value of OREO	12				345
Fair value of premises and equipment	689				(953		)
Fair value of time deposits	1,301				(343		)
Fair value of FHLB advances	(328	)			(29		)
Fair value of subordinated debentures	(1,451	)
Core deposit intangible	(5,224	)			(7,269		)
Customer list intangible					(12,298		)
Other assets and other liabilities, net	1,203				13,808
			408					(3,321		)
Resulting goodwill from acquisition			$	27,354				18,356

As part of the First Bank ~~acquisition,~~and SCB acquisitions, the Company acquired mortgage servicing rights valued at ~~$425,000.~~$1,558,000. The following table summarizes the activity pertaining to mortgage servicing rights included in intangible assets as of ~~June 30,~~March 31, 2019, March 31, 2018 ~~June 30, 2017~~ and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018			June 30, 2017			December 31, 2017			March 31, 2019			March 31, 2018			December 31, 2018
Beginning Balance	$	844			$985		$	985		$	2,101			$844		$	844
Mortgage servicing rights acquired during period	425			—			—			—			—			1,558
Mortgage servicing rights capitalized	7			—			—			—			—			7
Mortgage servicing rights amortized	(119		)	(72		)	(141		)	(58		)	(39		)	(308		)
Ending Balance	$	1,157			$913		$	844		$	2,043			$805		$	2,101

Total amortization expense for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ was as follows (in thousands):


	Three months ended June 30,				Six months ended June 30,				Three months ended March 31,
	2018		2017		2018		2017		2019		2018
Core deposit intangibles	591		472		$	1,011	$	943	$	980	$	420
Other intangibles	45		45		91		91
Customer list intangibles									318		46
Mortgage servicing rights	80		42		119		72		58		39
	$	716	$	559	$	1,221	$	1,106	$	1,356	$	505

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 01/01/18-06/30/18 $ 1,221
Estimated amortization expense:
     For period 07/01/18-12/31/18 1,556
     For year ended 12/31/19 2,903
     For year ended 12/31/20 2,409
     For year ended 12/31/21 1,943
     For year ended 12/31/22 1,730
     For year ended 12/31/23 1,547



Aggregate amortization expense:
For period 01/01/19-03/31/19	$	1,356
Estimated amortization expense:
For period 04/01/19-12/31/19	3,783
For year ended 12/31/20	4,573
For year ended 12/31/21	3,996
For year ended 12/31/22	3,630
For year ended 12/31/23	3,318
For year ended 12/31/24	3,050

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, ~~2017~~2018 and determined that, as of that date, goodwill was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets.

Note 6 -- Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase were ~~$141.7~~$157.8 million at ~~June 30, 2018,~~March 31, 2019, a decrease of ~~$13.7~~$34.6 million from ~~$155.4~~$192.3 million at December 31, ~~2017.~~2018. The decrease during the first ~~six~~three months of ~~2018~~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 ~~0.14%~~0.63%.

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):


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
US Treasury securities and obligations of U.S. government corporations & agencies	$	94,460	$	100,895	$	121,926	$	130,893
Mortgage-backed securities: GSE: residential	47,202		54,493		35,834		61,437
Total	$	141,662	$	155,388	$	157,760	$	192,330

FHLB borrowings ~~increased to $96~~were $120 million at ~~June 30, 2018 from $60 million at~~March 31, 2019 and December 31, ~~2017.~~2018. At ~~June 30, 2018~~March 31, 2019 the advances were as follows:

~~$5 million advance with a 3-month maturity, at 2.11%, due August 23, 2018~~

~~$5 million advance with a 6-month maturity, at 2.10%, due October 16, 2018~~

~~$10 million advance with a 3-year maturity, at 1.42%, due November 5, 2018~~

~~$5 million advance with a 1.5-year maturity, at 1.49%, due December 28, 2018~~

$4 million advance with a 3-year maturity, at 1.72%, due April 12, 2019

$15 million advance with a 6-month maturity at 2.68%, due May 13, 2019

$5 million advance with a 2-year maturity, at 1.56%, due June 28, 2019

$10 million advance with a 11-month maturity at 2.81%, due August 30, 2019

$5 million advance with a 15-month maturity, at 2.63%%, due September 27, 2019

$2 million advance with a 5-year maturity, at 1.89%%, due October 17, 2019

$10 million advance with a 14-month maturity at 2.88%, due November 29, 2019

$5 million advance with a 1.5-year maturity, at 2.67%%, due December 27, 2019

$4 million advance with a 3-year maturity at 2.40%, due January 9, 2020

$5 million advance with a 2.5-year maturity, at 1.67%, due January 31, 2020

$5 million advance with a 4-year maturity, at 1.79%, due April ~~30,~~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.

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 and include subordinated tranches of collateralized mortgage obligations and investments in trust preferred securities.~~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.

The trust preferred securities are collateralized debt obligation securities that are backed by trust preferred securities issued by banks, thrifts, and insurance companies. The market for these securities at ~~June 30, 2018~~ is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred securities trade and then by a significant decrease in the volume of trades relative

3435

to historical levels. The new issue market is also inactive and will continue to be, as a result of the Dodd-Frank Act’s elimination of trust preferred securities from Tier 1 capital for certain holding companies. There are currently very few market participants who are willing and or able to transact for these securities. The market values for these securities are very depressed relative to historical levels. Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, we determined:

~~The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at June 30, 2018,~~

An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates, and

The trust preferred securities held by the Company were classified within Level 3 of the fair value hierarchy because we determined that significant adjustments are required to determine fair value at the measurement date.

The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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)
June 30, 2018
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 123,038
$ —
$ 123,038
$ —
Obligations of states and political subdivisions 175,240
—
175,240
—
Mortgage-backed securities 315,671
—
315,671
—
Trust preferred securities —
—
—
—
Other securities 2,354
341
2,013
—
Total available-for-sale securities $ 616,303
$ 341
$ 615,962
$ —
December 31, 2017
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 113,770
$ —
$ 113,770
$ —
Obligations of states and political subdivisions 166,266
—
166,266
—
Mortgage-backed securities 293,811
—
293,811
—
Trust preferred securities 2,548
—
—
2,548
Other securities 2,184
172
2,012
—
Total available-for-sale securities $ 578,579
$ 172
$ 575,859
$ 2,548



			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)
March 31, 2019
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	190,727	$	—	$	190,727	$	—
Obligations of states and political subdivisions	191,103		—		190,135		968
Mortgage-backed securities	311,484		—		311,484		—
Other securities	2,304		96		2,208		—
Total available-for-sale securities	$	695,618	$	96	$	694,554	$	968
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

The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the ~~three and~~ ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ is summarized as follows (in thousands):


	Trust Preferred Securities												Obligations of State and Political Subdivisions				Trust Preferred Securities
	Three months ended						Six months ended						Three months ended				Three months ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017			March 31, 2019		March 31, 2018		March 31, 2019		March 31, 2018
Beginning balance	$	2,522		$	1,638		$	2,548		$	1,652		$	967	$	—	$	—	$	2,548
Transfers into Level 3	—			—			—			—			—		—		—		—
Transfers out of Level 3	—			—			—			—			—		—		—		—
Total gains or losses:
Included in net income	—			—			—			—			1		—		—		—
Included in other comprehensive income (loss)	—			825			18			848			—		—		—		18
Purchases, issuances, sales and settlements:																	—
Purchases	—			—			—			—			—		—		—		—
Issuances	—			—			—			—			—		—		—		—
Sales	(2,522		)	—			(2,522		)	—			—		—		—		—
Settlements				(39		)	(44		)	(76		)	—		—		—		(44		)
Ending balance	$	—		$	2,424		$	—		$	2,424		$	968	$	—	$	—	$	2,522
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	$	—		$	—		$	—		$	—		$	—	$	—	$	—	$	—

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 ~~June 30, 2018~~March 31, 2019 was $~~25,578,000~~11,438,000 and a fair value of $~~20,756,000~~8,478,000 resulting in specific loss exposures of $~~4,822,000~~2,960,000.

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 ~~June 30, 2018~~March 31, 2019 was $~~2,440,000~~3,796,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $~~163,000~~1,574,000.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	Fair Value Measurements Using								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)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2018
March 31, 2019
Impaired loans (collateral dependent)	$	20,756	$	—	$	—	$	20,756	$	8,478	$	—	$	—	$	8,478
Foreclosed assets held for sale	163		—		—		163		1,574		—		—		1,574
December 31, 2017
December 31, 2018
Impaired loans (collateral dependent)	$	3,053	$	—	$	—	$	3,053	$	16,437	$	—	$	—	$	16,437
Foreclosed assets held for sale	91		—		—		91		836		—		—		836

Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

~~Trust Preferred Securities.~~ The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities was offered quotes and comparability adjustments. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, changes in either of those inputs will not affect the other input.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill at ~~June 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands).


June 30, 2018	Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
March 31, 2019												Fair Value		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans (collateral dependent)	$	20,756	Third party valuations	Discount to reflect realizable value	0	%	-	40%	(	20%	)	$	8,478	Third party valuations	Discount to reflect realizable value	0	%	-	40%	(	20%	)
Foreclosed assets held for sale	$	163	Third party valuations	Discount to reflect realizable value less estimated selling costs	0	%	-	40%	(	35%	)	1,574		Third party valuations	Discount to reflect realizable value less estimated selling costs	0	%	-	40%	(	35%	)

December 31, 2017 Fair Value Valuation Technique Unobservable Inputs Range (Weighted Average)
Trust Preferred Securities $ 2,548
Discounted cash flow Discount rate 12.7%
Constant prepayment rate (1) 1.3%
Cumulative projected prepayments 21.6%
Probability of default 0.5%
Projected cures given deferral 0.0%
Loss severity 97.7%
Impaired loans (collateral dependent) $ 3,053
Third party valuations Discount to reflect realizable value 0 % - 40% ( 20% )
Foreclosed assets held for sale

$ 91
Third party valuations Discount to reflect realizable value less estimated selling costs 0 % - 40% ( 35% )



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%	)

(1) Every five years

~~Other.~~ ~~The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.~~

~~Cash and Cash Equivalents, Federal Funds Sold, Interest Receivable and Federal Reserve and Federal Home Loan Bank Stock.~~ ~~The carrying amount approximates fair value.~~

~~Certificates of Deposit Investments.~~ ~~The fair value of certificates of deposit investments is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.~~

~~Held-to-Maturity Securities.~~ ~~Fair Value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.~~

~~Loans Held for Sale.~~ ~~Loans expected to be sold are classified as held for sale and are recorded at the lower of aggregate cost or market value.~~

~~Loans.~~ For June 30, 2018, fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. This is not comparable with the fair values disclosed for December 31, 2017, which were based on an entrance price basis. For that date, fair values of variable rate loans that reprice frequently and with no significant change in credit risk were based on carrying values. The fair values of other loans as of that date were estimated using discounted cash flow analyses which used interest rates then being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value.

~~Deposits.~~ Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount of these deposits approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

~~Securities Sold Under Agreements to Repurchase.~~ The fair value of securities sold under agreements to repurchased is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

~~Interest Payable.~~ ~~The carrying amount approximates fair value.~~

~~Junior Subordinated Debentures, Federal Home Loan Bank Borrowings and Other Borrowings.~~ ~~Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.~~

The following tables present estimated fair values of the Company’s financial instruments at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 in accordance with ~~FAS 107-1 and APB 28-1, codified with~~ ASC ~~805~~825 (in thousands):


	Carrying Amount		Fair Value		Level 1		Level 2		Level 3		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
June 30, 2018
March 31, 2019
Financial Assets
Cash and due from banks	$	84,880	$	84,880	$	84,880	$	—	$	—	$	232,052	$	232,052	$	232,052	$	—	$	—
Federal funds sold	695		695		695		—		—		496		496		496		—		—
Certificates of deposit investments	2,930		2,930		—		2,930		—		7,320		7,320		—		7,320		—
Available-for-sale securities	616,303		616,303		341		615,962		—		695,618		695,618		96		694,554		968
Held-to-maturity securities	69,383		67,525		—		67,525		—		69,462		68,743		—		68,743		—
Loans held for sale	2,454		2,454		—		2,454		—		1,233		1,233		—		1,233		—
Loans net of allowance for loan losses	2,352,184		2,301,723		—		—		2,301,723		2,569,057		2,520,206		—		—		2,520,206
Interest receivable	12,612		12,612		—		12,612		—		16,073		16,073		—		16,073		—
Right-of-use lease assets											13,531		13,531		—		13,531		—
Federal Reserve Bank stock	5,160		5,160		—		5,160		—		7,389		7,389		—		7,389		—
Federal Home Loan Bank stock	2,050		2,050		—		2,050		—		2,995		2,995		—		2,995		—
Financial Liabilities
Deposits	$	2,670,864	$	2,668,442	$	—	$	2,147,323	$	521,119	$	3,046,213	$	3,051,083	$	—	$	2,385,575	$	665,508
Securities sold under agreements to repurchase	141,662		141,645		—		141,645		—		157,760		157,647		—		157,647		—
Interest payable	1,145		1,145		—		1,145		—		2,166		2,166		—		2,166		—
Federal Home Loan Bank borrowings	95,708		95,372		—		95,372		—		119,791		120,079		—		120,079		—
Other borrowings	9,375		9,375		—		9,375		—		6,257		6,257		—		6,257		—
Junior subordinated debentures	28,792		23,532		—		23,532		—		29,042		24,302		—		24,302		—
Lease liabilities											13,533		13,533		—		13,533		—


	Carrying Amount		Fair Value		Level 1		Level 2		Level 3		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
December 31, 2017
December 31, 2018
Financial Assets
Cash and due from banks	$	88,388	$	88,388	$	88,388	$	—	$	—	$	140,735	$	140,735	$	140,735	$	—	$	—
Federal funds sold	491		491		491		—		—		665		665		665		—		—
Certificates of deposit investments	1,685		1,692		—		1,692		—		7,569		7,569		—		7,569		—
Available-for-sale securities	578,579		578,579		172		575,859		2,548		692,274		692,274		364		690,943		967
Held-to-maturity securities	69,332		68,457		—		68,457		—		69,436		67,909		—		67,909		—
Loans held for sale	1,025		1,025		—		1,025		—		1,508		1,508		—		1,508		—
Loans net of allowance for loan losses	1,918,499		1,899,678		—		—		1,899,678		2,616,822		2,541,037		—		—		2,541,037
Interest receivable	10,832		10,832		—		10,832		—		16,881		16,881		—		16,881		—
Federal Reserve Bank stock	5,160		5,160		—		5,160		—		7,390		7,390		—		7,390		—
Federal Home Loan Bank stock	2,407		2,407		—		2,407		—		3,095		3,095		—		3,095		—
Financial Liabilities
Deposits	$	2,274,639	$	2,272,868	$	—	$	1,930,604	$	342,264	$	2,988,686	$	2,991,177	$	—	$	2,396,917	$	594,260
Securities sold under agreements to repurchase	155,388		155,394		—		155,394		—		192,330		192,179		—		192,179		—
Interest payable	602		602		—		602		—		1,758		1,758		—		1,758		—
Federal Home Loan Bank borrowings	60,038		59,968		—		59,968		—		119,745		119,704		—		119,704		—
Other borrowings	10,313		10,313		—		10,313		—		7,724		7,724		—		7,724		—
Junior subordinated debentures	24,000		18,050		—		18,050		—		29,000		24,418		—		24,418		—

Note 8 -- Business Combinations

SCB Bancorp, Inc.

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.

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.



	Acquired Book Value			Fair Value Adjustments		As Recorded by SCB
Assets
Cash and due from banks	$	65,112		—		$	65,112
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			11,611		18,356
Core deposit intangible	—			7,269		7,269
Other Intangibles	1,228			11,070		12,298
Other assets	24,858			(5,835	)	19,023
Total assets acquired	$	457,324		21,305		$	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	$	45,629		21,677		$	67,306

Consideration Paid
Cash						$	19,046
Common Stock						48,260
Total consideration paid						$	67,306

The Company has recognized approximately $1.2 million, pre-tax, of acquisition costs for the SCB acquisition. Of this amount, $283,000 was recognized during the first quarter of 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.

~~Note 8 -- Business Combinations~~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
	March 31,
	2018
Net interest income	$	26,552
Provision for loan losses	1,055
Non-interest income	12,704
Non-interest expense	24,218
Income before income taxes	13,983
Income tax expense	3,584
Net income	$	10,399

Earnings per share
Basic	$	0.74
Diluted	0.74

Basic weighted average shares outstanding	14,001,588
Diluted weighted average shares outstanding	14,018,818

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

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”), ~~will be~~ merged with and into First Mid Bank on August 10, 2018. At the time of the bank merger, First Bank & Trust’s banking offices ~~will become~~became branches of First Mid Bank. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations ("ASC 805"),” and accordingly the assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Fair values are subject to refinement for up to one year after the closing date of May 1, 2018 as additional information regarding the closing date fair values become available. The total consideration paid was used to determine the amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets acquired, goodwill of ~~$27.4~~$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 & Trust		Acquired Book Value			Fair Value Adjustments			As Recorded by First Bank
Assets
Cash & due from banks	$	20,598					$	20,598	$	20,598		$	—		$	20,598
Investment Securities	59,906			(320		)	59,586		59,906			(320		)	59,586
Loans	371,156			(8,298		)	362,858		371,156			(7,875		)	363,281
Allowance for loan losses	(4,412		)	4,412			—		(4,412		)	4,412			—
Other real estate owned	547			(12		)	535		547			(12		)	535
Premises and equipment	10,126			(689		)	9,437		10,126			(689		)	9,437
Goodwill	543			26,811			27,354		543			25,948			26,491
Core deposit intangible	—			5,224			5,224		—			5,224			5,224
Other assets	16,389			(696		)	15,693		16,389			(256		)	16,133
Total assets acquired	$	474,853		$	26,432		$	501,285	$	474,853		$	26,432		$	501,285
Liabilities and Stockholders' Equity
Deposits	$	384,323		$	1,301		$	385,624	$	384,323		$	1,301		$	385,624
FHLB advances	31,000			(328		)	30,672		31,000			(328		)	30,672
Subordinated debentures	6,186			(1,451		)	4,735		6,186			(1,451		)	4,735
Other liabilities	8,665			(36		)	8,629		8,665			(36		)	8,629
Total liabilities assumed	430,174			(514		)	429,660		430,174			(514		)	429,660
Net assets acquired	$	44,679		$	26,946		$	71,625	$	44,679		$	26,946		$	71,625

Consideration Paid
Cash							$	10,275							$	10,275
Common stock							61,350								61,350
Total consideration paid							$	71,625							$	71,625

The Company has recognized approximately ~~$3.1~~$5.1 million, pre-tax, of acquisition costs for the First Bank acquisition. Of this amount, $153,000 was recognized during the first quarter of 2019. These costs are included in legal and professional and other expense. Of the ~~$8.3~~$7.9 million fair value adjustment to loans, approximately ~~$4.1~~$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 ~~ten~~10 years.

4142

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 a the beginning of the period (dollars in thousands):


	Three months ended				Six months ended				Three months ended
	June 30,								March 31,
	2018		2017		2018		2017		2018
Net interest income	$	29,062	$	29,305	$	57,035	$	55,917	$	28,049
Provision for loan losses	1,927		1,910		3,132		3,867		1,205
Non-interest income	8,640		8,675		16,960		17,214		8,320
Non-interest expense	21,870		24,885		43,654		46,945		21,783
Income before income taxes	13,905		11,185		27,209		22,319		13,381
Income tax expense	3,307		3,505		6,715		7,323		3,429
Net income	10,598		$	7,680	20,494		$	14,996	$	9,952

Earnings per share
Basic	$	0.76	$	0.51	$	1.42	$	1.06	$	0.70
Diluted	$	0.76	$	0.51	$	1.42	$	1.06	0.69

Basic weighted average shares outstanding	13,956,674		15,092,373		14,407,273		14,127,688		14,314,917
Diluted weighted average shares outstanding	13,974,048		15,100,547		14,424,576		14,135,862		14,332,147

The unaudited pro forma condensed combined financial statements do not reflect any anticipated cost savings and revenue enhancements. Accordingly, the pro forma results of operations of the Company as of and after the First Bank business combination may not be indicative of the results that actually would have occurred if the combination had been in effect during the periods presented or of the results that may be attained in the future.

~~Actual revenue~~

Note 9 -- Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of March 31, 2019, substantially all of the Company's leases are operating leases for real estate property for bank branches, ATM locations, and ~~earnings~~office space. These leases are generally for periods of ~~First Bank & Trust~~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. The following table contains supplemental balance sheet information related to leases (dollars in thousands):



	March 31, 2019
Operating lease right-of-use assets	$	13,531
Operating lease liabilities	13,533

Weighted-average remaining lease term	5.8 years

Weighted-average discount rate	3.20		%

Certain of the Company's leases contain options to renew the lease; however, not all renewal options are included in the ~~consolidated statement~~calculation of ~~income 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 ~~from~~to incur additional financial obligations.

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



Year ending December 31,
2019 (excluding the three months ended March 31, 2019)	$	2,001
2020	2,587
2021	2,345
2022	2,056
2023	1,275
Thereafter	5,356
Total lease payments	15,620
Less imputed interest	(2,087		)
Total lease liability	$	13,533

The components of lease expense for the ~~acquisition date~~three months ended March 31, 2019 and 2018 were as follows (in thousands):



	Three months ended March 31,
	2019
Operating lease cost	$	671
Short-term lease cost	23
Variable lease cost	224
Total lease cost	918
Income from subleases	(248		)
Net lease cost	$	670

As the Company elected not to ~~June 30, 2018~~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 ~~$4,298,000 and $919,000, respectively.~~(in thousands):



	March 31, 2019
Operating cash flows from operating leases	$	664

4245

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 six~~-month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~. 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 ~~2017~~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 the second quarter of~~ 2018 include the income and expenses of First Bank & Trust for the period May 1 through ~~June 30,~~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 ~~$447,000~~$3,018,000 due to First ~~Bank & Trust's~~Bank's purchase accounting net accretion and amortization expense of intangibles during 2018. For the ~~second quarter of 2018.~~three months ended March 31, 2019, net income before taxes was positively impacted by $561,000 due to purchase accounting net accretion and amortization related to First Bank. During ~~the second quarter of~~ 2018, the Company also incurred ~~$2,897,000~~$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 ~~six~~three months ended ~~June 30,~~March 31, 2019, pre-tax expenses related to this acquisition totaled $153,000.

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 three months ended March 31, 2019, net income before taxes was positively impacted by $988,000 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 ~~totaled $3,229,000.~~

On June 12, 2018, the Company and Almond Merger Sub, entered into an Agreement and Plan of Merger with SCB pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of SCB, ~~pursuant~~comprised primarily of legal, consulting and change-in-control costs. During the three months ended March 31, 2019, pre-tax expenses related to a business combination whereby SCB will merge with and into Almond Merger Sub, whereupon the separate corporate existence of SCB will cease and Almond Merger Sub will continue as the surviving company and a wholly-owned subsidiary of the Company.this acquisition totaled $283,000.

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 $~~18,427,000~~13,316,000 and ~~$14,464,000~~$8,390,000 for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~, respectively. Diluted net income per common share available to common stockholders was $~~1.38~~0.80 and $~~1.16~~0.66 for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~.

The following table shows the Company’s annualized performance ratios for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~, compared to the performance ratios for the year ended December 31, ~~2017~~2018:


	Six months ended				Year ended		Three months ended				Year ended
	June 30, 2018		June 30, 2017		December 31, 2017		March 31, 2019		March 31, 2018		December 31, 2018
Return on average assets	1.23	%	1.02	%	0.94	%	1.38	%	1.18	%	1.13	%
Return on average common equity	11.06	%	9.96	%	8.92	%	11.02	%	10.86	%	9.59	%
Average equity to average assets	11.09	%	10.22	%	10.59	%	12.51	%	10.91	%	11.77	%

Total assets were ~~$3.4~~$3.9 billion at ~~June 30, 2018,~~March 31, 2019, compared to ~~$2.8~~$3.8 billion as of December 31, ~~2017~~2018. From December 31, ~~2017~~2018 to ~~June 30, 2018~~,March 31, 2019, cash and interest bearing deposits ~~decreased $3.3~~increased $91.2 million, net loan balances ~~increased $433.7~~decreased $47.8 million and investment securities increased ~~$37.8~~$3.4 million. Net loan balances were $~~2.35~~2.57 billion at ~~June 30, 2018~~March 31, 2019 compared to $~~1.92~~2.62 billion at December 31, ~~2017~~2018.

Net interest margin, on a tax effected basis, defined as net interest income divided by average interest-earning assets, was ~~3.66%~~3.74% for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, up from ~~3.58%~~3.65% for the same period in ~~2017.~~2018. This increase was primarily due to ~~an increase in loan balances,~~ higher yields on loans and investments, and accretion income from ~~the acquisitions of First Bank and First Clover Leaf Bank.~~previous acquisitions. Net interest income before the provision for loan losses was ~~$50.6~~$32.3 million compared to net interest income of ~~$46.7~~$23.2 million for the same period in ~~2017.~~2018. The increase in net interest income was primarily due to the growth in average earnings assets ~~primarily due to~~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 ~~$15,848,000~~$14,639,000 increased ~~$383,000~~$7,152,000 or ~~2.5%~~95.5% from ~~$15,465,000~~$7,487,000 for the same period last year. ~~Trust~~Wealth management revenues increased ~~$244,000,~~$1,903,000, primarily due the addition of farm management and brokerage revenues from the SCB acquisition, insurance commissions increase $4,068,000, primarily due to revenues from the acquisition of SCB, and revenue from ATM and debit cards increased $412,000 primarily due to an increase in ~~revenue~~electronic transactions from ~~defined contribution and other retirement accounts, and an increase in brokerage revenue~~the acquisitions of $312,000, primarily due to an increase in the number of brokerage accounts, and an increase in net securities gains of $566,000 offset by a decrease in other income of $924,000 primarily due to a income tax refund received in 2017 resulting from overpayment of taxes in 2016 by First ~~Clover Leaf Financial Corp.~~Bank & SCB.

Total non-interest expense of ~~$39.2~~$28.3 million increased ~~$2,013,000~~$9,936,000 or ~~5.4%~~54.1% from ~~$37.2~~$18.4 million for the same period last year. This increase was primarily due to legal and professional costs and intangibles amortization associated with the acquisition of First Bank and SCB, and an increase in salaries and benefits expense.

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


	Change in Net Income 2018 versus 2017						Change in Net Income 2019 versus 2018
	Three months ended June 30,			Six months ended June 30,			Three months ended March 31,
Net interest income	$	3,501		$	3,924		$	9,057
Provision for loan losses	(37		)	630			108
Other income, including securities transactions	392			383			7,152
Other expenses	(2,841		)	(2,013		)	(9,936		)
Income taxes	822			1,039			(1,455		)
Increase in net income	$	1,837		$	3,963		$	4,926

Credit quality is an area of importance to the Company. Total nonperforming loans were ~~$24.7~~$26.0 million at ~~June 30, 2018,~~March 31, 2019, compared to ~~$17.1~~$17.9 million at ~~June 30, 2017~~March 31, 2018 and ~~$17.5~~$29.8 million at December 31, ~~2017.~~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 ~~$2.5~~$3.9 million at ~~June 30, 2018~~March 31, 2019 compared to ~~$4.4~~$2.0 million at ~~June 30, 2017~~March 31, 2018 and ~~$2.8~~$2.6 million at December 31, ~~2017.~~2018. The Company’s provision for loan losses for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 was $947,000 and ~~2017 was $2,932,000 and $3,562,000,~~$1,055,000, respectively. Total loans past due 30 days or more were ~~0.82%~~1.13% of loans at ~~June 30, 2018~~March 31, 2019 compared to ~~0.48%~~0.75% at ~~June 30, 2017,~~March 31, 2018, and ~~0.56%~~1.06% of loans at December 31, ~~2017.~~2018. At ~~June 30, 2018,~~March 31, 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 ~~65.7%~~66.7% of the loan portfolio as of ~~June 30, 2018~~March 31, 2019 and ~~65.6%~~66.0% as of December 31, ~~2017.~~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 ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ and December 31, ~~2017~~2018 was ~~13.16%~~13.55%, ~~11.98%~~12.17% and ~~11.83%~~12.76%, respectively. The Company’s total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ and December 31, ~~2017~~2018 was ~~13.97%~~14.45%, ~~12.81%~~13.07% and ~~12.70%~~13.63%, respectively. The increase in these ratios from December 31, ~~2017~~2018 was primarily due to net income added to retained earnings. ~~The increase in these ratios was primarily due to the Company's capital raise that occurred during the second quarter of 2018.~~

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 ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ were ~~$512~~$601 million and ~~$457~~$564 million, respectively.

Federal Deposit Insurance Corporation Insurance Coverage. As FDIC-insured institutions, First Mid Bank is, and ~~First~~Soy Capital Bank ~~are~~was, required to pay deposit insurance premium assessments to the FDIC. A number of requirements with respect to the FDIC insurance system have ~~affect~~affected results, including insurance assessment rates. The Company expensed ~~$514,000~~$268,000 and ~~$407,000~~$253,000 for this assessment during the first ~~six~~three months of ~~2018~~2019 and ~~2017~~2018, respectively.

In addition to its insurance assessment, each insured bank is 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 ~~$52,000~~$11,000 and ~~$62,000~~$28,000 during the first ~~six~~three months of ~~2018~~2019 and ~~2017~~2018 for this assessment, respectively.

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 and Soy Capital Bank (prior to its merger with and into First ~~Bank~~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, First Mid ~~Bank's,~~Bank, and ~~First~~Soy Capital 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 ~~2017~~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.

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.

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

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

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

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, 2017 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.

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 were 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 $548,000 and $465,000 for 2019 and 2018, respectively were 3.68% at March 31, 2019 and 3.57% at March 31, 2018.

4852

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 six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ in the following table (dollars in thousands):


	Three months ended June 30, 2018							Three months ended June 30, 2017							Three months ended March 31, 2019							Three months ended March 31, 2018
	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Assets
Interest-bearing deposits with other financial institutions	$	19,904		$	76	1.53	%	$	20,573		$	48	0.95	%	$	112,220		$	697	2.52	%	$	14,160		$	60	1.72	%
Federal funds sold	632			2		1.27	%	490			—		—	%	663			3		1.84	%	491			1		0.79	%
Certificates of deposit investments	2,520			12		1.91	%	1,685			7		1.68	%	7,348			38		2.10	%	1,685			9		2.12	%
Investment securities
Investment securities:
Taxable	511,833			3,414		2.67	%	601,906			3,147		2.09	%	582,290			3,811		2.62	%	487,504			2,882		2.36	%
Tax-exempt (1)	169,616			1,265		2.98	%	175,721			1,219		2.77	%	190,695			1,770		3.71	%	165,688			1,518		3.67	%
Loans (2)	2,244,639			25,362		4.53	%	1,815,417			21,025		4.70	%
Loans net of unearned income (TE) (2)															2,622,816			32,280		4.99	%	1,956,156			21,154		4.39	%
Total earning assets	2,949,144			30,131		4.10	%	2,615,792			25,446		3.95	%	3,516,032			38,599		4.44	%	2,625,684			25,624		3.95	%
Cash and due from banks	43,930							54,117							64,329							50,529
Premises and equipment	44,493							39,254							59,192							38,062
Other assets	160,076							142,049							250,265							138,715
Allowance for loan losses	(24,159		)					(18,169		)					(26,815		)					(20,406		)
Total assets	$	3,173,484						$	2,833,043						$	3,863,003						$	2,832,584
Liabilities and Stockholders' Equity															Liabilities and Stockholders' Equity
Interest-bearing deposits
Demand deposits	$	1,158,531		$	602	0.21	%	$	1,149,578		$	420	0.15	%	$	1,335,626		$	1,622	0.49	%	$	1,074,627		$	532	0.20	%
Savings deposits	398,371			145		0.15	%	372,732			120		0.13	%	436,581			152		0.14	%	364,152			137		0.15	%
Time deposits	462,988			923		0.80	%	338,705			393		0.47	%	620,377			2,604		1.70	%	337,679			594		0.71	%
Total Interest Bearing Deposits															2,392,584			4,378		0.74	%	1,776,458			1,263		0.29	%
Securities sold under agreements to repurchase	147,633			65		0.18	%	154,192			46		0.12	%	182,466			260		0.58	%	162,495			59		0.15	%
FHLB advances	99,533			475		1.91	%	45,724			168		1.49	%	119,760			723		2.45	%	67,789			275		1.65	%
Fed Funds Purchased	4,140			22		2.13	%	3,291			12		1.36	%	—			—		—	%	2,874			13		1.77	%
Junior subordinated debt	27,697			349		5.05	%	23,945			227		3.86	%	29,014			438		6.12	%	24,008			259		4.38	%
Other debt	9,375			96		4.11	%	13,115			107		3.30	%	6,845			—		—	%	10,302			95		3.75	%
Total borrowings															338,085			1,421		1.70	%	267,468			701		1.06	%
Total interest-bearing liabilities	2,308,268			2,677		0.47	%	2,101,282			1,493		0.29	%	2,730,669			5,799		0.86	%	2,043,926			1,964		0.39	%
Non interest-bearing demand deposits	502,694							428,279							605,296					0.70	%	470,989					0.32	%
Other liabilities	5,174							8,289							43,723							8,705
Stockholders' equity	357,348							295,193							483,315							308,964
Total liabilities & equity	$	3,173,484						$	2,833,043						$	3,863,003						$	2,832,584
Net interest income				$	27,454						$	23,953						$	32,800						$	23,660
Net interest spread						3.63	%						3.66	%						3.58	%						3.56	%
Impact of non-interest bearing funds						0.10	%						0.05	%						0.16	%						0.09	%
Net yield on interest- earning assets						3.73	%						3.71	%

(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.
TE Net yield on interest- earning assets																				3.74	%						3.65	%

Six months ended June 30, 2018 Six months ended June 30, 2017

Average
Balance
Interest
Average
Rate

Average
Balance
Interest
Average
Rate
Assets
Interest-bearing deposits with other financial institutions $ 17,048
$ 136
1.61 % $ 39,824
$ 177
0.90 %
Federal funds sold 562
3
1.02 % 17,701
61
0.70 %
Certificates of deposit investments 2,105
21
2.04 % 4,976
32
1.30 %
Investment securities:

Taxable 500,309
6,295
2.52 % 579,657
6,015
2.07 %
Tax-exempt (1) 167,090
2,465
2.95 % 172,360
2,391
2.81 %
Loans (2) 2,101,194
46,369
4.45 % 1,809,942
40,952
4.56 %
Total earning assets 2,788,308
55,289
3.99 % 2,624,460
49,628
3.81 %
Cash and due from banks 47,212

54,801

Premises and equipment 41,295

39,739

Other assets 149,453

141,389

Allowance for loan losses (22,293 )

(17,686 )

Total assets $ 3,003,975

$ 2,842,703

Liabilities and Stockholders' Equity
Interest-bearing deposits

Demand deposits $ 1,116,810
$ 1,133
0.20 % $ 1,128,273
$ 789
0.14 %
Savings deposits 381,356
282
0.15 % 369,180
234
0.13 %
Time deposits 400,679
1,517
0.76 % 367,484
789
0.43 %
Securities sold under agreements to repurchase 155,023
124
0.16 % 157,413
86
0.11 %
FHLB advances 83,748
750
1.81 % 42,922
319
1.50 %
Fed Funds Purchased 3,510
35
1.94 % 1,725
12
1.33 %
Junior subordinated debt 25,862
608
4.74 % 23,935
444
3.75 %
Other debt 9,836
191
3.91 % 14,907
230
3.12 %
Total interest-bearing liabilities 2,176,824
4,640
0.43 % 2,105,839
2,903
0.28 %
Non interest-bearing demand deposits 486,930

438,839

Other liabilities 6,931

7,610

Stockholders' equity 333,290

290,415

Total liabilities & equity $ 3,003,975

$ 2,842,703

Net interest income
$ 50,649

$ 46,725

Net interest spread

3.56 %

3.53 %
Impact of non-interest bearing funds

0.10 %

0.05 %
Net yield on interest- earning assets

3.66 %

3.58 %

(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.

5053

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 six~~-months ended ~~June 30, 2018~~,March 31, 2019, compared to the same periods in ~~2017~~2018 (in thousands):


	Three months ended June 30, 2018 compared to 2017 Increase / (Decrease)									Six months ended June 30, 2018 compared to 2017 Increase / (Decrease)									Three months ended March 31, 2019 compared to 2018 Increase / (Decrease)
	Total Change			Volume (1)			Rate (1)			Total Change			Volume (1)			Rate (1)			Total Change			Volume (1)			Rate (1)
Earning Assets:
Interest-bearing deposits	$	28		$	(10	)	$	38		$	(41	)	$	(255	)	$	214		$	637		$	597		$	40
Federal funds sold	2			—			2			(58		)	(117		)	59			2			—			2
Certificates of deposit investments	5			4			1			(11		)	(43		)	32			29			29			—
Investment securities:
Taxable	267			(2,353		)	2,620			280			(1,943		)	2,223			929			593			336
Tax-exempt (2)	46			(43		)	89			74			(44		)	118			252			232			20
Loans (3)	4,337			9,115			(4,778		)	5,417			8,174			(2,757		)
Loans (2) (3)																			11,126			7,941			3,185
Total interest income	4,685			6,713			(2,028		)	5,661			5,772			(111		)	12,975			9,392			3,583
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits	182			3			179			344			(23		)	367			1,090			156			934
Savings deposits	25			8			17			48			9			39			15			65			(50		)
Time deposits	530			182			348			728			77			651			2,010			754			1,256
Securities sold under agreements to repurchase	19			(13		)	32			38			(4		)	42			201			8			193
FHLB advances	307			248			59			431			354			77			448			275			173
Federal Funds Purchased	10			4			6			23			16			7			(13		)	(7		)	(6		)
Junior subordinated debt	122			40			82			164			38			126			179			62			117
Other debt	(11		)	(120		)	109			(39		)	(157		)	118			(95		)	(24		)	(71		)
Total interest expense	1,184			352			832			1,737			310			1,427			3,835			1,289			2,546
Net interest income	$	3,501		$	6,361		$	(2,860	)	$	3,924		$	5,462		$	(1,538	)	$	9,140		$	8,103		$	1,037

(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.

~~Net~~The tax effected net interest income increased ~~$3.9~~$9.1 million, or ~~8.4%~~38.6%, to ~~$50.6~~$32.8 million for the ~~six~~three months ended~~June 30, 2018~~, March 31, 2019, from ~~$46.7~~$23.7 million for the same period in ~~2017.~~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 increased primarily due to higher yields on ~~investments.~~loans and investments and additional accretion income from the acquisitions.

For the ~~six~~three months ended~~June 30, 2018~~, March 31, 2019, average earning assets increased by ~~$163.8~~$890.3 million, or ~~6.2%~~33.9%, and average interest-bearing liabilities increased ~~$71.0~~$686.7 million or ~~3.4%~~33.6%, compared with average balances for the same period in ~~2017~~2018.

5154

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

Average interest-bearing deposits held by the Company ~~decreased $22.8~~increased $98.1 million or ~~57.2%~~692.5%.

Average federal funds sold ~~decreased $17.1~~increased $0.2 million or ~~96.8%~~35.0%.

Average certificates of deposits investments ~~decreased~~increased $~~2.9~~5.7 million or ~~57.7%~~336.1%

Average loans increased by ~~$291.3~~$666.7 million or ~~16.1%~~34.1%.

Average securities ~~decreased~~increased by ~~$84.6~~$119.8 million or ~~11.3%~~18.3%.

Average interest-bearing customer deposits increased by ~~$33.9~~$616.1 million or ~~1.8%~~34.7%.

Average securities sold under agreements to repurchase ~~decreased~~increased by ~~$2.4~~$20.0 million or ~~1.5%~~12.3%.

Average borrowings and other debt increased by ~~$39.5~~$50.6 million or ~~47.3%~~48.2%.

Net interest margin increased to ~~3.66%~~3.74% for the first ~~six~~three months of ~~2018~~2019 from ~~3.58%~~3.65% for the first ~~six~~three months of ~~2017~~2018.

To compare the tax-exempt yields on interest-earning assets to taxable yields, the Company also computes non-GAAP net interest income on a tax equivalent basis (TE) where the interest earned on tax-exempt loans and securities is adjusted to an amount comparable to interest subject to normal income taxes assuming a federal tax rate of 21% (referred to as the tax equivalent adjustment). The year-to-date net yield on interest-earning assets (TE) was 3.73% and 3.72% for the first ~~six months~~ ~~of 2018 and~~ ~~2017, respectively. The TE adjustments to net interest income for the~~ ~~six months~~ ~~ended~~ ~~June 30, 2018 and 2017~~ ~~were $963,000 and $1,739,000, respectively.~~

Provision for Loan Losses

The provision for loan losses for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ was ~~$2,932,000~~$947,000 and ~~$3,562,000,~~$1,055,000, respectively. The decrease in provision expense was primarily due to a decrease in ~~net charge-offs.~~loan volume. Net charge-offs were ~~$864,000~~$432,000 for the ~~six~~three months ended ~~June 30, 2018~~,March 31, 2019, compared to net charge offs of ~~$2,106,000~~$261,000 for ~~June 30, 2017.~~March 31, 2018. Nonperforming loans were ~~$24.7~~$26.0 million and ~~$17.1~~$17.9 million as of ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ 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 six~~-months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):


	Three months ended June 30,							Six months ended June 30,							Three months ended March 31,
	2018		2017		$ Change			2018		2017		$ Change			2019		2018		$ Change
Trust revenues	$	938	$	841	$	97		$	2,015	$	1,771	$	244
Brokerage commissions	661		509		152			1,326		1,014		312
Wealth management revenues															$	3,645	$	1,742	$	1,903
Insurance commissions	838		853		(15		)	2,325		2,478		(153		)	5,555		1,487		4,068
Service charges	1,803		1,690		113			3,438		3,402		36			1,802		1,635		167
Security gains, net	881		335		546			901		335		566			54		20		34
Mortgage banking revenue, net	410		335		75			571		528		43			239		161		78
ATM / debit card revenue	1,860		1,665		195			3,464		3,233		231			2,016		1,604		412
Bank Owned Life Insurance	315		282		33			591		563		28			430		276		154
Other	655		1,459		(804		)	1,217		2,141		(924		)	898		562		336
Total other income	$	8,361	$	7,969	$	392		$	15,848	$	15,465	$	383		$	14,639	$	7,487	$	7,152

Following are explanations of the changes in these other income categories for the three months ended ~~June 30, 2018~~March 31, 2019 compared to the same period in ~~2017:~~2018:

~~Trust~~Wealth management revenues increased ~~$97,000~~$1,903,000 or ~~11.5%~~109.2% to ~~$938,000~~$3,645,000 from ~~$841,000~~$1,742,000 primarily ~~due to an increase~~from increases in market value and revenue from defined contribution and other retirement accounts, ~~based on increases~~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 ~~market value~~acquisition of ~~the assets.~~SCB. Trust assets, at market value, were ~~$998.0~~$1,420.8 million at ~~June 30, 2018~~March 31, 2019 compared to ~~$881.5~~$984.0 million at ~~June 30, 2017.~~March 31, 2018.

~~Revenues~~Insurance commissions increased $4,068,000 or 273.6% to $5,555,000 from ~~brokerage increased $152,000 or 29.9% to $661,000 from $509,000~~$1,487,000 primarily due to an increase in insurance activities and revenues following the ~~number~~acquisition of ~~brokerage accounts from new business development efforts.~~

Insurance commissions decreased $15,000 or 1.8% to $838,000 from $853,000 primarily due to a decrease in commissions and contingency income received from carriers based on claims experience during 2018 compared to 2017.SCB.

Fees from service charges increased ~~$113,000~~$167,000 or ~~6.7%~~10.2% to ~~$1,803,000~~$1,802,000 from ~~$1,690,000~~$1,635,000 primarily due to ~~a increase in~~additional income from ~~the First Bank acquisition offset by a decrease in service charges based on the number of deposit transactions.~~

~~The sale of securities during the three months ended June 30, 2018 resulted in net securities gains of $881,000 compared to $335,000 during the three months ended June 30, 2017.~~

~~Mortgage banking income increased $75,000 or 22.4% to $410,000 from $335,000. Loans sold balances were as follows:~~

~~$16.9 million (representing 136 loans) for the three months ended June 30, 2018~~

~~$17.7 million (representing 138 loans) for the three months ended June 30, 2017~~

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

~~Revenue from ATMs and debit cards increased $195,000 or 11.7% to $1,860,000 from $1,665,000 due to an increase in electronic transactions.~~

~~Bank owned life insurance income increased $33,000 or 11.7%.~~

Other income decreased $804,000 or 55.1% to $655,000 from $1,459,000 primarily due to income tax refunds received in 2017 resulting from overpayment of taxes in 2016 by First Clover Leaf Financial and a decline in loan late charges and closing fees resulting from less loan transaction activity.

~~Following are explanations of the changes in these other income categories for the six months ended~~ ~~June 30, 2018~~ ~~compared to the same period in~~ ~~2017~~:

Trust revenues increased $244,000 or 13.8% to $2,015,000 from $1,771,000 primarily from an increase in revenue from defined contribution and other retirement accounts due to increases in the market value of the assets. Trust assets, at market value, were $998.0 million at June 30, 2018 compared to $881.5 million at June 30, 2017.

~~Revenues from brokerage increased $312,000 or 30.8% to $1,326,000 from $1,014,000 primarily due to an increase in the number of brokerage accounts from new business development efforts.~~

Insurance commissions decreased $153,000 or 6.2% to $2,325,000 from $2,478,000 primarily due to a decrease in commissions and contingency income received from carriers based on claims experience during 2018 compared to 2017.

~~Fees from service charges increased $36,000 or 1.1% to $3,438,000 from $3,402,000 primarily due to a increase in income from the First Bank acquisition~~SCB transactions offset by a decrease in service charges based on the number of deposit transactions.

The sale of securities during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 resulted in net securities gains of ~~$901,000~~$54,000 compared to ~~$335,000~~$20,000 during the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018.

Mortgage banking income increased ~~$43,000~~$78,000 or ~~8.1%~~48.4% to ~~$571,000~~$239,000 from ~~$528,000.~~$161,000. Loans sold balances were as follows:

$~~28.4~~12.4 million (representing ~~222~~102 loans) for the ~~six~~three months ended March 31, 2019

$11.5 million (representing 86 loans) for the three months ended ~~June 30,~~March 31, 2018

~~$31.5 million (representing 241 loans) for the six months ended~~ ~~June 30, 2017~~

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

Revenue from ATMs and debit cards increased ~~$231,000~~$412,000 or ~~7.1%~~25.7% to ~~$3,464,000~~$2,016,000 from ~~$3,233,000~~$1,604,000 primarily due to an increase in electronic ~~transactions.~~transactions from the SCB and First Bank acquisitions that occured in the second and fourth quarters of 2018, respectively.

Bank owned life insurance income increased ~~$28,000~~$154,000 or ~~5.0%~~55.8%. The Company acquired $8.6 million in bank owned life insurance from First Bank acquisition in 2018, and acquired $13.6 million in bank owned life insurance from SCB acquisition in 2018.

Other income ~~decreased $924,000~~increased $336,000 or ~~43.2%~~59.8% to ~~$1,217,000~~$898,000 from ~~$2,141,000~~$562,000 primarily due to ~~income tax refunds received~~increases in ~~2017 resulting~~miscellaneous fees and revenues from ~~overpayment of taxes in 2016 by~~SCB and First ~~Clover Leaf Financial and a decline in loan late charges and closing fees resulting from less loan transaction activity.~~Bank acquisitions.

Other Expense

~~The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations.~~ The following table sets forth the major components of other expense for the three ~~and six~~-months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):


	Three months ended June 30,							Six months ended June 30,							Three months ended March 31,
	2018		2017		$ Change			2018		2017		$ Change			2019		2018		$ Change
Salaries and employee benefits	$	11,057	$	10,102	$	955		$	21,251	$	20,037	$	1,214		$	16,574	$	10,194	$	6,380
Net occupancy and equipment expense	3,505		3,116		389			6,778		6,249		529			4,455		3,273		1,182
Net other real estate owned expense	7		127		(120		)	83		145		(62		)
Net other real estate owned expense (income)															53		76		(23		)
FDIC insurance	285		290		(5		)	566		469		97			279		281		(2		)
Amortization of intangible assets	716		559		157			1,221		1,106		115			1,356		505		851
Stationery and supplies	186		186		—			397		371		26			287		211		76
Legal and professional	1,717		894		823			2,854		1,725		1,129			1,194		1,137		57
Marketing and donations	431		277		154			785		571		214			454		354		100
Other operating expenses	2,892		2,404		488			5,235		6,484		(1,249		)	3,658		2,343		1,315
Total other expense	$	20,796	$	17,955	$	2,841		$	39,170	$	37,157	$	2,013		$	28,310	$	18,374	$	9,936

Following are explanations for the changes in these other expense categories for the three months ended ~~June 30, 2018~~March 31, 2019 compared to the same period in ~~2017:~~2018:

Salaries and employee benefits, the largest component of other expense, increased ~~$955,000~~$6,380,000 or ~~9.5%~~62.6% to ~~$11,057,000~~$16,574,000 from ~~$10,102,000.~~$10,194,000. The increase is primarily due to the addition of 112 employees ~~with~~from the First Bank acquisition ~~on May 1,~~in the second quarter of 2018, the addition of 149 employees from SCB acquisition in the fourth quarter of 2018, and merit increases in ~~2018~~2019 for continuing employees during the first quarter of ~~2018.~~2019. There were ~~711~~832 and ~~590~~591 full-time equivalent employees at ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

Occupancy and equipment expense increased ~~$389,000~~$1,182,000 or ~~12.5%~~36.1% to ~~$3,505,000~~$4,455,000 from ~~$3,116,000.~~$3,273,000. The increase was primarily due to increases maintenance and repair expense, rent expense, and building insurance related to the ~~acquisition~~acquisitions of First Bank ~~during the second quarter of 2018.~~and SCB.

Net other real estate owned expense decreased ~~$120,000~~$23,000 or ~~94.5%~~30.3% to ~~$7,000~~$53,000 from ~~$127,000.~~$76,000. The decrease in ~~2018~~2019 was primarily due to more losses on properties sold during ~~2017~~2018 than properties sold ~~in 2018.~~

Expense for amortization of intangible assets increased $157,000 or 28.1% to $716,000 from $559,000 for the three months ended June 30, 2018 and 2017, respectively. The increase in 2018 was due to additional core deposit intangibles amortization from the acquisition of First Bank.

~~Other operating expenses increased $488,000 or 20.3% to $2,892,000 in 2018 from $2,404,000 in 2017 primarily due costs associated with the acquisition of First Bank.~~

On a net basis, all other categories of operating expenses increased $972,000 or 59.0% to $2,619,000 in 2018 from $1,647,000 in 2017. The increase is primarily due to an increase in legal and professional fees primarily associated with the acquisition of First Bank.during 2019.

5456

~~Following are explanations for the changes in these other expense categories for the~~ ~~six months~~ ~~ended~~ ~~June 30, 2018~~ ~~compared to the same period in~~ ~~2017~~:

Salaries and employee benefits, the largest component of other expense, increased $1,214,000 or 6.1% to $21,251,000 from $20,037,000. The increase is primarily due to the addition of 112 employees with the First Bank acquisition and merit increases in 2018 for continuing employees during the first quarter of 2018. There were 711 and 590 full-time equivalent employees at June 30, 2018 and 2017, respectively.

Occupancy and equipment expense increased $529,000 or 8.5% to $6,778,000 from $6,249,000. The increase was primarily due to increases maintenance and repair expense, rent expense, and building insurance related to the acquisition of First Bank.

~~Net other real estate owned expense decreased $62,000 or 42.8% to $83,000 from $145,000. The increase in 2018 was primarily due to losses on properties sold during 2017.~~

Expense for amortization of intangible assets increased ~~$115,000~~$851,000 or ~~10.4%~~168.5% to ~~$1,221,000~~$1,356,000 from ~~$1,106,000~~$505,000 for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~, respectively. The increase in ~~2018~~2019 was due to amortization of core deposit intangibles from the First Bank and SCB acquisition.

Other operating expenses ~~decreased $1,249,000~~increased $1,315,000 or ~~19.3%~~56.1% to ~~$5,235,000~~$3,658,000 in ~~2018~~2019 from ~~$6,484,000~~$2,343,000 in ~~2017~~2018 primarily due to an increase in loan collection expenses and costs associated with the merger of ~~First Clover Leaf Bank~~SCB into First Mid ~~Bank during the first quarter of 2017.~~Bank.

On a net basis, all other categories of operating expenses increased ~~$1,466,000~~$231,000 or ~~46.7%~~11.6% to ~~$4,602,000~~$2,214,000 in ~~2018~~2019 from ~~$3,136,000~~$1,983,000 in ~~2017~~2018. The ~~increase~~decrease is primarily due to ~~an increase~~a decrease in ~~legal~~stationary and ~~professional fees primarily associated with~~supplies due the ~~acquisition~~First Mid Bank name change during the first quarter of ~~First Bank.~~2018.

Income Taxes

Total income tax expense amounted to ~~$6.0~~$4.3 million ~~(24.4%~~(24.5% effective tax rate) for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, compared to ~~$7.0~~$2.9 million ~~(32.6%~~(25.4% effective tax rate) for the same period in ~~2017.~~2018. The decline in effective tax rate for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 compared to the same period in ~~2017~~2018 is primarily due ~~to a change in the federal statutory corporate tax rate from 35% to 21% effective January 1, 2018 following the enactment of certain tax reforms through the~~ ~~Tax Cuts and Jobs Act, offset by~~ an increase in ~~State~~tax exempt income and tax credits on certain municipal loans during the first quarter of ~~Illinois tax rate from 7.75%~~2019 compared to ~~9.50% beginning July 1, 2017.~~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 ~~2015.~~2016.

5557

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (dollars in thousands):


	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	196,725	2.14	%	$	185,128	1.98	%	$	260,307	2.39	%	$	270,816	2.38	%
Obligations of states and political subdivisions	176,376		2.99	%	165,037		2.86	%	188,572		2.97	%	193,195		2.94	%
Mortgage-backed securities: GSE residential	323,238		2.84	%	295,778		2.59	%	312,159		2.87	%	304,372		2.86	%
Trust preferred securities	—		—	%	2,893		2.15	%
Other securities	2,187		3.25	%	2,039		2.50	%	2,278		3.42	%	2,278		3.58	%
Total securities	$	698,526	2.68	%	$	650,875	2.55	%	$	763,316	2.73	%	$	770,661	2.72	%

At ~~June 30, 2018~~,March 31, 2019, the Company’s investment portfolio ~~increased~~decreased by ~~$47.7~~$7.3 million from December 31, ~~2017~~2018 primarily due ~~to securities added in the acquisition of First Bank, net of declines due to~~ securities that were sold to provide cash flow to fund loans. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed. The table below presents the credit ratings as of ~~June 30, 2018~~March 31, 2019 for certain investment securities (in thousands):


	Amortized Cost		Estimated Fair Value			Average Credit Rating of Fair Value at June 30, 2018 (1)																	Amortized Cost				Estimated Fair Value			Average Credit Rating of Fair Value at March 31, 2019 (1)
	Amortized Cost				AAA			AA +/-			A +/-			BBB +/-			< BBB -			Not rated						AAA				AA +/-			A +/-			BBB +/-			< BBB -			Not rated
Available-for-sale:			Estimated Fair Value																								Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	127,342	$	123,038		$	—		$	123,038		$	—		$	—		$	—		$	—	Amortized Cost	$	190,845			$	190,727		$	—		$	190,727		$	—		$	—		$	—		$	—
Obligations of state and political subdivisions	176,376		175,240			13,041			108,364			51,733			494			—			1,608		188,572				191,103			18,059			121,385			49,564			499			—			1,596
Mortgage-backed securities (2)	323,238		315,671			1,018			—			—			—			—			314,653		312,159				311,484			1,036			—			—			—			—			310,448
Other securities	2,187		2,354			—			—			—			2,013			—			341		2,278				2,304			—			—			—			2,014			—			290
Total available-for-sale	$	629,143	$	616,303		$	14,059		$	231,402		$	51,733		$	2,507		$	—		$	316,602	$	693,854			$	695,618		$	19,095		$	312,112		$	49,564		$	2,513		$	—		$	312,334
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	69,383	$	67,525		$	—		$	67,525		$	—		$	—		$	—		$	—	$	69,462			$	68,743		$	—		$	68,743		$	—		$	—		$	—		$	—

(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.

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.

5759

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018		% Outstanding Loans		December 31, 2017		% Outstanding Loans		March 31, 2019		% Outstanding Loans		December 31, 2018		% Outstanding Loans
Construction and land development	$	88,481	3.7	%	$	107,594	5.5	%	$	49,179	1.9	%	$	50,619	1.9	%
Agricultural real estate	184,887		7.8	%	127,183		6.6	%	236,864		9.1	%	231,700		8.8	%
1-4 Family residential properties	378,573		15.9	%	293,667		15.1	%	362,617		14.0	%	373,518		14.1	%
Multifamily residential properties	105,948		4.5	%	61,798		3.2	%	175,903		6.8	%	184,051		7.0	%
Commercial real estate	803,362		33.8	%	681,757		35.2	%	905,679		34.9	%	906,850		34.2	%
Loans secured by real estate	1,561,251		65.7	%	1,271,999		65.6	%	1,730,242		66.7	%	1,746,738		66.0	%
Agricultural loans	113,533		4.8	%	86,631		4.5	%	118,026		4.5	%	135,877		5.1	%
Commercial and industrial loans	502,211		21.1	%	444,263		22.9	%	550,853		21.2	%	557,011		21.1	%
Consumer loans	59,090		2.5	%	29,749		1.5	%	86,540		3.3	%	91,516		3.5	%
All other loans	140,598		5.9	%	106,859		5.5	%	111,333		4.3	%	113,377		4.3	%
Total loans	$	2,376,683	100.0	%	$	1,939,501	100.0	%	$	2,596,994	100.0	%	$	2,644,519	100.0	%

~~Overall~~Gross loan balances ~~increased $437.2~~decreased $47.5 million, or ~~22.54%~~1.80% primarily due to ~~the~~seasonal declines in agricultural loans of about $17.8 million and declines in 1-4 Family residential properties of approximately $10.9 million, Multifamily residential properties of approximately $8.1 million, and commercial and industrial loans of approximately $6.2 million primarily due to acquired ~~from First Bank.~~loans becoming paid off. The balance of real estate loans held for sale, included in the balances shown above, amounted to ~~$2,454,000~~$1,233,000 and ~~$1,025,000~~$1,508,000 as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (dollars in thousands):


	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Principal balance		% Outstanding Loans		Principal balance		% Outstanding loans		Principal balance		% Outstanding Loans		Principal balance		% Outstanding loans
Central region	568,215		23.9	%	543,938		28.0	%	$	544,392	21.0	%	$	571,909	21.7	%
Sullivan region	176,612		7.4	%	167,977		8.7	%	370,281		14.3	%	375,407		14.2	%
Decatur region	750,960		31.6	%	378,867		19.5	%	516,123		19.9	%	501,743		19.0	%
Peoria region	213,988		9.0	%	189,639		9.8	%	299,487		11.5	%	291,283		11.0	%
Highland region	529,760		22.3	%	525,983		27.1	%	514,272		19.8	%	518,881		19.6	%
Southern region	137,148		5.8	%	133,097		6.9	%	120,317		4.6	%	133,225		5.0	%
Soy Capital Bank									232,122		8.9	%	252,071		9.5	%
Total all regions	$	2,376,683	100.0	%	$	1,939,501	100.0	%	$	2,596,994	100.0	%	$	2,644,519	100.0	%

Loans are geographically dispersed among these regions located in central and southwestern Illinois. While these regions have experienced some economic stress during ~~2018~~2019 and ~~2017,~~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.

5860

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018, the Company did have industry loan concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):


	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Principal balance		% Outstanding Loans		Principal balance		% Outstanding Loans		Principal balance		% Outstanding Loans		Principal balance		% Outstanding Loans
Other grain farming	$	172,331	7.25	%	$	170,758	8.80	%	$	267,128	10.29	%	$	276,142	10.44	%
Lessors of non-residential buildings	189,740		7.98	%	185,967		9.59	%	228,260		8.79	%	250,495		9.47	%
Lessors of residential buildings & dwellings	130,016		5.47	%	131,756		6.79	%	289,241		11.14	%	289,169		10.93	%
Hotels and motels	121,052		5.09	%	131,702		6.79	%	127,952		4.93	%	129,216		4.89	%
Other Gambling Industries	95,407		4.01	%	95,713		4.93	%	102,974		3.97	%	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 ~~June 30, 2018~~,March 31, 2019, by contractual maturities (in thousands):


	Maturity (1)								Maturity (1)
	One year or less(2)		Over 1 through 5 years		Over 5 years		Total		One year or less(2)		Over 1 through 5 years		Over 5 years		Total
Construction and land development	$	71,002	$	5,645	$	11,834	$	88,481	$	20,086	$	11,456	$	17,637	$	49,179
Agricultural real estate	11,012		48,883		124,992		184,887		11,673		81,368		143,823		236,864
1-4 Family residential properties	32,190		84,066		262,317		378,573		27,704		76,039		258,874		362,617
Multifamily residential properties	16,463		51,782		37,703		105,948		10,005		119,529		46,369		175,903
Commercial real estate	75,866		322,140		405,356		803,362		68,089		390,277		447,313		905,679
Loans secured by real estate	206,533		512,516		842,202		1,561,251		137,557		678,669		914,016		1,730,242
Agricultural loans	86,478		24,409		2,646		113,533		79,251		33,675		5,100		118,026
Commercial and industrial loans	179,346		272,382		50,483		502,211		196,811		275,417		78,625		550,853
Consumer loans	5,588		46,324		7,178		59,090		4,548		72,327		9,665		86,540
All other loans	29,278		37,530		73,790		140,598		13,095		31,887		66,351		111,333
Total loans	$	507,223	$	893,161	$	976,299	$	2,376,683	$	431,262	$	1,091,975	$	1,073,757	$	2,596,994

(1) Based upon remaining contractual maturity.

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

As of ~~June 30, 2018,~~March 31, 2019, loans with maturities over one year consisted of approximately ~~$1.5~~$1.6 billion in fixed rate loans and approximately ~~$383~~$559 million in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding renewals and borrower requests, which are handled on a case-by-case basis.

Nonperforming Loans and Nonperforming Other Assets

Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and (c) loans not included in (a) and (b) above which are defined as “troubled debt restructurings”. Repossessed assets include primarily repossessed real estate and automobiles.

The Company’s policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due. The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual

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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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Nonaccrual loans	$	21,650		$	16,659		$	23,873		$	27,298
Restructured loans which are performing in accordance with revised terms	3,079			854			2,115			2,451
Total nonperforming loans	24,729			17,513			25,988			29,749
Repossessed assets	2,508			2,834			3,869			2,595
Total nonperforming loans and repossessed assets	$	27,237		$	20,347		$	29,857		$	32,344
Nonperforming loans to loans, before allowance for loan losses	1.04		%	0.90		%	1.00		%	1.12		%
Nonperforming loans and repossessed assets to loans, before allowance for loan losses	1.15		%	1.05		%	1.15		%	1.22		%

The ~~$4,991,000 increase~~$3,425,000 decrease in nonaccrual loans during ~~2018~~2019 resulted from the net of ~~$6,754,000~~$3,421,000 of loans put on nonaccrual status ~~including $2,242,000 acquired from First Bank~~ offset by ~~$2,338,000~~$4,865,000 of loans becoming current or paid-off, ~~$133,000~~$1,630,000 of loans transferred to other real estate and ~~$533,000~~$352,000 of loans charged off.

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


	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Balance		% of Total		Balance		% of Total		Balance		% of Total		Balance		% of Total
Construction and land development	$	58	0.3	%	$	—	—	%	$	224	0.9	%	$	377	1.4	%
Agricultural real estate	235		1.1	%	291		1.7	%	310		1.3	%	309		1.1	%
1-4 Family residential properties	4,323		20.0	%	2,687		16.1	%	6,377		26.7	%	5,762		21.1	%
Multifamily Residential properties	301		1.4	%	368		2.2	%	1,582		6.6	%	2,105		7.7	%
Commercial real estate	7,909		36.5	%	5,596		33.6	%	7,561		31.7	%	8,457		31.1	%
Loans secured by real estate	12,826		59.3	%	8,942		53.6	%	16,054		67.2	%	17,010		62.4	%
Agricultural loans	1,109		5.1	%	757		4.5	%	746		3.1	%	667		2.4	%
Commercial and industrial loans	7,365		34.0	%	6,658		40.1	%	6,363		26.7	%	8,990		32.9	%
Consumer loans	329		1.5	%	302		1.8	%	710		3.0	%	625		2.3	%
All Other Loans	21		0.1	%	—		—	%	—		—	%	6		—	%
Total loans	$	21,650	100.0	%	$	16,659	100.0	%	$	23,873	100.0	%	$	27,298	100.0	%

Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled ~~$758,000~~$1,097,000 and ~~$140,000~~$608,000 for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~, respectively.

The ~~$326,000 decrease~~$1,274,000 increase in repossessed assets during the first ~~six~~three months of ~~2018~~2019 resulted from ~~the net of $625,000 of assets acuired from First Bank, $217,000~~$1,706,000 of additional assets repossessed ~~$12,000 of write downs~~ and ~~$1,156,000~~$432,000 of repossessed assets sold.

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The following table summarizes the composition of repossessed assets (in thousands):


	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Balance		% of Total		Balance		% of Total		Balance		% of Total		Balance		% of Total
Construction and land development	$	1,920	76.6	%	$	1,781	62.7	%	$	1,513	39.1	%	$	1,513	58.2	%
1-4 family residential properties	520		20.7	%	413		14.6	%	277		7.2	%	583		22.5	%
Commercial real estate	—		—	%	560		19.8	%	2,006		51.8	%	438		16.9	%
Total real estate	2,440		97.3	%	2,754		97.1	%	3,796		98.1	%	2,534		97.6	%
Commercial & industrial loans	—		—	%	44		1.6	%	—		—	%	61		2.4	%
Consumer loans	68		2.7	%	36		1.3	%	73		1.9	%	—		—	%
Total repossessed collateral	$	2,508	100.0	%	$	2,834	100.0	%	$	3,869	100.0	%	$	2,595	100.0	%

Repossessed assets sold during the first ~~six~~three months of ~~2018~~2019 resulted in net losses of ~~$11,000,~~$4,976, of which ~~$23,000~~$6,024 of net losses was related to real estate asset sales and ~~$12,000~~$11,000 of net gains was related to other repossessed assets. Repossessed assets sold during the same period in ~~2017~~2018 resulted in net ~~gains~~losses of ~~$4,000, all~~$50,000, of ~~$9,000~~which $61,000 of net losses was related to real estate asset sales and ~~$13,000~~$11,000 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 ~~June 30, 2018,~~March 31, 2019, the Company’s loan portfolio included ~~$299.0~~$355.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, ~~$172.3~~$267.1 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture ~~increased $85.24~~decreased $12.9 million from ~~$213.8~~$368.5 million at December 31, ~~2017~~2018 while loans concentrated in other grain farming ~~increased $1.5~~decreased $9.0 million from ~~$170.8~~$276.1 million at December 31, ~~2017.~~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 ~~$121.1~~$128.0 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 ~~$189.7~~$228.3 million of loans to lessors of non-residential buildings, ~~$130.0~~$289.2 million of loans to lessors of residential buildings and dwellings, and ~~$95.4~~$103.0 million of loans to other gambling industries.

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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 ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ and of changes in the allowance for the three ~~and six~~ month periods ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ is as follows (dollars in thousands):


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2018			2017			2018			2017			2019			2018
Average loans outstanding, net of unearned income	$	2,244,639		$	1,805,619		$	2,101,194		$	1,815,417		$	2,622,816		$	1,956,156
Allowance-beginning of period	20,771			17,846			19,977			16,753			26,189			19,977
Charge-offs:
Real estate-mortgage	588			162			780			351			108			192
Commercial, financial & agricultural	3			1,421			151			1,893			189			148
Installment	43			50			83			72			157			40
Other	85			85			181			165			114			96
Total charge-offs	719			1,718			1,195			2,481			568			476
Recoveries:
Real estate-mortgage	55			161			56			171			6			1
Commercial, financial & agricultural	(2		)	37			121			51			30			123
Installment	11			6			35			10			28			24
Other	52			37			119			143			72			67
Total recoveries	116			241			331			375			136			215
Net charge-offs (recoveries)	603			1,477			864			2,106			432			261
Provision for loan losses	1,877			1,840			2,932			3,562			947			1,055
Allowance-end of period	$	22,045		$	18,209		$	22,045		$	18,209		$	26,704		$	20,771
Ratio of annualized net charge-offs to average loans	0.11		%	0.33		%	0.08		%	0.46		%	0.07		%	0.05		%
Ratio of allowance for loan losses to loans outstanding (less unearned interest at end of period)	0.93		%	1.00		%	0.93		%	1.00		%	1.03		%	1.05		%
Ratio of allowance for loan losses to nonperforming loans	89		%	106		%	89		%	106		%	103		%	116		%

The ratio of allowance for loan losses to loans outstanding was ~~0.93%~~1.03% as of ~~June 30, 2018~~March 31, 2019 compared to ~~1.00%~~1.05% as of ~~June 30, 2017.~~March 31, 2018. The ratio of the allowance for loan losses to nonperforming loans is ~~89%~~103% as of ~~June 30, 2018~~March 31, 2019 compared to ~~106%~~116% as of ~~June 30, 2017.~~March 31, 2018. The decrease in this ratio is primarily due to ~~an increase in loan balances and~~ the increase in nonperforming loans at March 31, 2019 compared to ~~$24.7 million at June 30, 2018 from $17.1 million at June 30, 2017 including $6.6 million in non-performing loans acquired from First Bank.~~March 31, 2018.

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During the first ~~six~~three months of ~~2018,~~2019, the Company had net charge-offs of ~~$864,000~~$432,000 compared to net charge-offs of ~~$2,106,000~~$261,000 in ~~2017.~~2018. During the first ~~six~~three months of 2019, there were no significant charge offs. During the first three months of 2018 there ~~were~~was a significant charge ~~offs~~off of two commercial loans to a single borrower of $126,000 and charge offs of two residential real estate loans to two borrowers of $376,000. During the first six months of 2017, there were charge offs of commercial real estate loans to two borrowers of $215,000, charge offs of two agricultural loans to one borrower of $662,000, and charge offs of five commercial operating loans to two borrowers of $1,052,000.

$126,000.

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 ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ and for the year ended December 31, ~~2017~~2018 (dollars in thousands):


	Six months ended June 30, 2018				Six months ended June 30, 2017				Year ended December 31, 2017				Three months ended March 31, 2019				Three months ended March 31, 2018				Year ended December 31, 2018
	Average Balance		Weighted Average Rate		Average Balance		Weighted Average Rate		Average Balance		Weighted Average Rate		Average Balance		Weighted Average Rate		Average Balance		Weighted Average Rate		Average Balance		Weighted Average Rate
Demand deposits:
Non-interest-bearing	$	486,930	—	%	$	438,839	—	%	$	438,575	—	%	$	605,296	—	%	$	470,989	—	%	$	506,873	—	%
Interest-bearing	1,116,810		0.20	%	1,128,273		0.14	%	1,119,835		0.16	%	1,335,626		0.49	%	1,074,627		0.20	%	1,194,089		0.28	%
Savings	381,356		0.15	%	369,180		0.13	%	367,261		0.13	%	436,581		0.14	%	364,152		0.15	%	395,028		0.15	%
Time deposits	400,679		0.76	%	367,484		0.43	%	348,278		0.49	%	620,377		1.70	%	337,679		0.71	%	473,043		0.99	%
Total average deposits	$	2,385,775	0.25	%	$	2,303,776	0.16	%	$	2,273,949	0.18	%	$	2,997,880	0.59	%	$	2,247,447	0.23	%	$	2,569,033	0.33	%

The following table sets forth the high and low month-end balances for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ and for the year ended December 31, ~~2017~~2018 (in thousands):


	Six months ended June 30, 2018		Six months ended June 30, 2017		Year ended December 31, 2017		Three months ended March 31, 2019		Three months ended March 31, 2018		Year ended December 31, 2018
High month-end balances of total deposits	$	2,670,864	$	2,331,084	$	2,331,084	$	3,046,213	$	2,291,891	$	3,017,035
Low month-end balances of total deposits	2,208,941		2,282,214		2,217,477		2,961,660		2,208,941		2,208,941

During the first ~~six~~three months of ~~2018,~~2019, the average balance of deposits increased by ~~$111.8~~$428.8 million from the average balance for the year ended December 31, ~~2017~~2018. Average non-interest bearing deposits increased by ~~$48.4~~$98.4 million, average interest-bearing balances ~~decreased~~increased by ~~$3.0~~$141.5 million, savings account balances increased ~~$14.1~~$41.6 million and balances of time deposits increased ~~$52.4~~$147.3 million. The increases were primarily due to the result of deposit balances acquired in the ~~acquisition~~acquisitions of First Bank during the second quarter of 2018 and SCB during the fourth quarter of 2018.

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
3 months or less	$	51,229	$	31,467	$	98,130	$	44,898
Over 3 through 6 months	76,406		34,194		26,990		49,476
Over 6 through 12 months	69,585		54,607		97,570		78,567
Over 12 months	66,357		46,805		176,921		155,071
Total	$	263,577	$	167,073	$	399,611	$	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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 is presented below (dollars in thousands):


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Securities sold under agreements to repurchase	$	141,662		$	155,388		$	157,760		$	192,330
Fed funds							—			—
Federal Home Loan Bank advances:
Fixed term – due in one year or less	14,000			—			29,000			29,000
Fixed term – due after one year	81,708			60,038			90,791			90,745
Debt:
Debt due after one year	9,375			10,313			6,257			7,724
Junior subordinated debentures	28,792			24,000			29,042			29,000
Total	$	275,537		$	249,739		$	312,850		$	348,799
Average interest rate at end of period	1.26		%	1.00		%	1.17		%	1.30		%
Maximum outstanding at any month-end:
Securities sold under agreements to repurchase	$	178,587		$	163,626		$	191,557		$	192,330
Federal funds purchased	11,750			20,000			—			22,000
Federal Home Loan Bank advances:
FHLB-Overnight	30,000			30,000			—			30,000
Fixed term – due in one year or less	14,000			5,000			29,000			29,000
Fixed term – due after one year	86,016			60,061			90,791			101,745
Debt:
Debt due in one year or less	—			4,000			—			—
Debt due after one year	10,313			14,063			6,279			10,313
Junior subordinated debentures	30,221			24,000			29,042			30,221
Averages for the period (YTD):
Securities sold under agreements to repurchase	$	155,023		$	144,674		$	182,466		$	140,622
Federal funds purchased	3,510			3,996			—			3,794
Federal Home Loan Bank advances:
FHLB-overnight	14,740			8,598			—			9,434
Fixed term – due in one year or less	4,663			2,356			29,000			16,510
Fixed term – due after one year	64,345			46,452			90,760			71,757
Debt:
Loans due in one year or less	—			658			—			548
Loans due after one year	9,836			12,632			6,845			9,555
Junior subordinated debentures	25,862			23,956			29,014			27,391
Total	$	277,979		$	243,322		$	338,085		$	279,611
Average interest rate during the period	1.23		%	1.02		%	1.68		%	1.52		%

Securities sold under agreements to repurchase decreased ~~$13.7~~$34.6 million during the first ~~six~~three months of ~~2018~~2019 primarily due to the seasonal declines in balances and cash flow needs of various customers. FHLB advances represent borrowings by First Mid Bank and ~~First~~Soy Capital Bank to economically fund loan demand.

At ~~June 30, 2018~~March 31, 2019 the fixed term advances consisted of ~~$96~~$120 million as follows:

~~$5 million advance with a 3-month maturity, at 2.11%, due August 23, 2018~~

~~$5 million advance with a 6-month maturity, at 2.10%, due October 16, 2018~~

~~$10 million advance with a 3-year maturity, at 1.42%, due November 5, 2018~~

~~$5 million advance with a 1.5-year maturity, at 1.49%, due December 28, 2018~~

$4 million advance with a 3-year maturity, at 1.72%, due April 12, 2019

$15 million advance with a 6-month maturity, at 2.68%, due May 13, 2019

$5 million advance with a 2-year maturity, at 1.56%, due June 28, 2019

$10 million advance with a 11-month maturity, at 2.81%, due August 30, 2019

$5 million advance with a 15-month maturity, at 2.63%, due September 27, 2019

$2 million advance with a 5-year maturity, at 1.89%, due October 17, 2019

$10 million advance with a 14-month maturity, at 2.88%, due November 29, 2019

$5 million advance with a 1.5-year maturity, at 2.67%, due December 27, 2019

$4 million advance with a 3-year maturity, at 2.40%, due January 9, 2020

$5 million advance with a 2.5-year maturity, at 1.67%, due January 31, 2020

$5 million advance with a 4-year maturity, at 1.79%, due April ~~30,~~13, 2020

$10 million advance with a 1.5 year maturity, at 2.95%, due May 29, 2020