SecProbe.io

CORRESP
1
filename1.htm

    corresp_052611.htm

                                  June 3, 2011

United States Securities and Exchange Commission

Division of Corporation Finance

Mail Stop 4720

100 F Street, NE

Washington, DC 20549

ATTN: Ms. Chris Harley

Re:           First Mid-Illinois Bancshares, Inc.

Form 10-K for the Fiscal Year Ended December 31, 2010

Filed March 3, 2011

Form 10-Q for the Quarterly Period Ended March 31, 2011

Filed May 5, 2011

File No. 000-13368

Dear Ms. Harley:

We received your letter dated May 12, 2011 in which you requested that we provide certain information to you, together with, and to the extent applicable, certain proposed disclosures to be included in future First Mid-Illinois Bancshares, Inc.(“Company”) filings with the Securities and Exchange Commission (“Commission”) be revised. The Company has given its responses below. To facilitate the staff’s review, this letter includes each of the staff’s comments which are italicized and immediately followed by our response.

Form 10-K for the Fiscal Year Ended December 31, 2010

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

 1)

 We understand you “adhere to sound underwriting standards” as discussed at various points within your MD&A. To help an investor better understand the types of loans you offer and the related underwriting standards you adhere to, please expand your disclosure in future filings (by portfolio segment or class) to discuss the “key” standards you follow, such as, minimum loan-to-value ratios (L-T-Vs), as well as other credit documentation requirements.

Response

The Company will include the following language under the heading “Loan Quality and Allowance for Loan Losses” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in all future filings:

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

U.S. Securities & Exchange Commission

Division of Corporation Finance

ATTN: Mr. Hugh West

June 3, 2011

Page 2

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.

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 80% 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 substantially all 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.

U.S. Securities & Exchange Commission

Division of Corporation Finance

ATTN: Mr. Hugh West

June 3, 2011

Page 3

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.

Analysis of Balance Sheets

Loans

 2)

  In light of our comment above, and to help an investor better understand the underlying credit quality of your loan portfolio (including non-performing loans), please revise your disclosure in future filings to discuss weighted average L-T-Vs for each portfolio segment or class (it would be useful to provide such information in a comparative or tabular format, along with a narrative explaining any significant changes or trends).

Response

The Company does not maintain or calculate the weighted average L-T-V for each portfolio or class in a readily available reporting mechanism or form and does not believe this information could be practicably obtained.  As a result, the Company proposes not to include such information in its future filings.  The Company will however, as noted above, provide the additional detail requested by the Commission with respect to the Company’s loans.

Securities

 3)

 We note the presentation of defaults and deferrals as a percentage of remaining collateral. Please expand the tabular presentation of information related to the pooled trust preferred securities to include actual deferrals and defaults as a percentage of the original collateral, expected deferrals and defaults as a percentage of the remaining collateral and excess subordination as a percentage of the remaining performing collateral. Additionally, please disclose how you calculate excess subordination and discuss what the excess subordination percentage signifies, including relating it to other column descriptions, to allow an investor to understand why this information is relevant and meaningful.

Response

The Company will include the following disclosure for trust preferred securities in all future filings (items in bold type indicate new disclosure):

U.S. Securities & Exchange Commission

Division of Corporation Finance

ATTN: Mr. Hugh West

June 3, 2011

Page 4

The trust preferred securities are four trust preferred pooled securities issued by FTN Financial Securities Corp. (“FTN”). The following table contains information regarding these securities as of __________________:

Deal name

PreTSL I

PreTSL II

PreTSL VI

PreTSL XXVIII

Class

Mezzanine

Mezzanine

Mezzanine

Mezzanine C-1

Book value

$

$

$

$

Fair value

$

$

$

$

Unrealized gains/(losses)

$

$

$

$

Other-than-temporary impairment recorded in earnings

$

$

$

$

Lowest credit rating assigned

Number of performing banks / insurance companies

Number of issuers in default

Number of issuers in deferral

Original collateral

$

$

$

$

Actual defaults & deferrals as a % of original collateral

%

%

%

%

Remaining collateral

$

$

$

$

Actual defaults & deferrals as a % of remaining collateral

%

%

%

%

Expected defaults & deferrals as a % of remaining collateral

%

%

%

%

Performing collateral

$

$

$

$

Current balance of class

$

$

$

$

Subordination

$

$

$

$

Excess subordination

$

$

$

$

Excess subordination as a % of remaining performing collateral

%

%

%

%

Cash Flow Analysis Assumptions:

Discount rate

%

%

%

%

Defaults & deferrals (1)

%

%

%

%

Recovery assumption (2)

%

%

%

%

Prepayment assumption (3)

%

%

%

%

(1) 2% annually for 2 years and 36 basis points annually thereafter

(2) With 2 year lag

(3) Every 5 years beginning after 2013

The trust preferred pooled securities are Collateralized Debt Obligations (“CDOs”) backed by a pool of debt securities issued by financial institutions. The collateral consists of trust-preferred securities and subordinated debt securities issued by banks, bank holding companies and insurance companies. Performing collateral is the amount of remaining collateral less the balances of collateral in deferral or default. Subordination is the amount of performing collateral in excess of the current balance of a specified class and all classes senior to the specified class.  Excess subordination is the amount that the performing collateral balance exceeds the current outstanding balance of the specific class, plus all senior classes. It is a static measure of credit enhancement, but does not incorporate all of the structural elements of the security deal. This amount can also be impacted by future defaults and deferrals, deferring balances that cure or redemptions of securities by issuers. A negative excess subordination indicates that the current performing collateral of the security would be insufficient to pay the current principal balance of the class notes after all of the senior classes notes were paid. However, the performing collateral balance excludes the collateral of issuers currently deferring their interest payments. Because these issuers are expected to resume payment in the future (within five years of the first deferred interest period), a negative excess subordination does not necessarily mean a class note holder will not receive a greater than projected or even full payment of cash flow at maturity.

U.S. Securities & Exchange Commission

Division of Corporation Finance

ATTN: Mr. Hugh West

June 3, 2011

Page 5

Item 8. Financial Statements and Supplementary Data

Notes to the Consolidated Financial Statements

Note 5-Loans

4)  Please expand your future filings to address the following:

·

Disclose the Company’s policy for recording payments received on non-accrual financing receivables and the policy for determining past due or delinquency status pursuant to ASC 310-10-50-6 (b) and (e);

Response

The Company will include the following language in its “Notes to the Consolidated Financial Statements” in all future filings:

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 non-accrual 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.

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 t