EDGAR 10-K Filing

Company CIK: 700565
Filing Year: 2022
Filename: 700565_10-K_2022_0001564590-22-008213.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
Company and Subsidiaries
First Mid Bancshares, Inc. (the “Company”), formerly known as First Mid-Illinois Bancshares, Inc., is a financial holding company. The Company is engaged in the business of banking through its wholly owned subsidiaries, First Mid Bank & Trust, N.A. (“First Mid Bank”) and Jefferson Bank and Trust Company (“Jefferson Bank”). The Company offers insurance products and services to customers through its wholly owned subsidiary, First Mid Insurance Group, Inc. (“First Mid Insurance”). The Company offers trust, farm services, investment services, and retirement planning through its wholly owned subsidiary, First Mid Wealth Management Company. The Company also wholly owns a captive insurance company, First Mid Captive, Inc. In addition, the Company wholly owns three statutory business trusts, First Mid-Illinois Statutory Trust II (“First Mid Trust II”), Clover Leaf Statutory Trust I ("CLST Trust"), and FBTC Statutory Trust I ("FBTCST I"), all of which are unconsolidated subsidiaries of the Company. On February 22, 2021, the Company acquired Providence Bank, was merged into First Mid Bank on May 15, 2021. It is anticipated that Jefferson Bank will be merged into First Mid Bank in the second quarter of 2022.
The Company, a Delaware corporation, was incorporated on September 8, 1981, and pursuant to the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) became the holding company owning all of the outstanding stock of First National Bank, Mattoon (“First National”) on June 1, 1982. First National changed its name to First Mid-Illinois Bank & Trust, N.A. in 1992, and subsequently changed its name to First Mid Bank & Trust, N.A. in 2019. The Company has also acquired all the outstanding stock of a number of community banks or thrift institutions, and subsequently combined their operations with those of the Company and First Mid Bank.
Human Capital
The Company seeks to provide a work environment that attracts, develops, and retains top talent. The Company’s culture is derived from its core values: Integrity, Motivation, Professionalism, Accountability, Commitment, and Teamwork. These values are the framework for providing employees an engaging work experience that allows for career fulfillment and growth.
Diversity and Inclusion
The Company’s commitment to diversity starts with its Board of Directors, which oversees the culture and holds management accountable to build and maintain a diverse and inclusive environment. Management believes a diverse workforce is critical to sustainable success. As of December 31, 2021, the Company employed 994 employees with 94% of those full-time and 6% part-time. The Company’s current employee base include 71% females, 6.7% minorities, and 2% veterans. The Company’s commitment to diversity has resulted in increased minority hiring. The increased diversity within the Company’s team is due to its emphasis in partnering with organizations that enable job postings to reach a greater percentage of diverse applicants. The result is the Company’s minority workforce increased by 26% during 2021. The Company is proud of its workforce and the opportunity to further diversify its team going forward.
Maintaining a work environment where every employee is treated with dignity and respect is essential to ensuring that employees can devote their full attention to performing their jobs to the best of their ability. The Company understands that its success is dependent on continuing to strengthen its culture of inclusion.
Talent Engagement
During the last four years, the Company has partnered with a trusted industry leader to conduct an annual employee engagement survey. Employee participation in the engagement survey was 95% for 2021. The high level of participation in the survey provides the Company confidence that the results are meaningful and that the areas identified as needing improvement are genuine. The ability to target areas for improvement has resulted in the overall engagement score increasing each year.
The Company also has an Employee First Committee (“EFC”) whose purpose is to improve employee satisfaction and fulfillment by promoting fun, fellowship and generosity within the Company and the community across the Company footprint. Another purpose of the EFC is to raise money and supplies for local charities through events that are sponsored by the Company and staffed by its employees.
The Company’s CEO has an annual award called the Chairman’s Award for Excellence which allows employees to nominate peers who have gone above and beyond. This award recognizes individuals in the organization who have consistently performed above expectations or achieved extraordinary results while exemplifying the Company’s core values.
The CEO hosts an all employee call each quarter to share Company information and ongoing initiatives with Company employees. In addition to sharing important updates, employees are encouraged to submit questions in advance or during the call to be answered by management. Finally, a tradition of the quarterly call is to recognize the Company’s top performers, both at work and in the communities we serve.
Talent Development
The Company supports the personal and professional development of its employees in a variety of ways. First, the Company offers tuition reimbursement to support employees’ continued education and development by providing employees up to $3,500 annually for eligible educational courses. All employees also receive annual regulatory training, and, by partnering with a 3rd party, the Company can tailor the training to fit the job functions of its employees. In addition, employees can access a variety of career development content within the online learning management system to expand their skills.
The Company provides for development opportunities through a program that allows employees the opportunity to shadow other roles. This gives the employee the chance to observe and experience a new role and determine what positions might be an ideal fit for advancement opportunities. In addition, those that participate develop a broader knowledge of the Company as a whole.
Professional development training is provided to support job function, leadership, and compliance. In 2021, the Company implemented the Banker Basics Mentor Program. Frontline employees are chosen by management to mentor and train new hires on core systems, customer service and processing customer transactions. The new employee spends the first ten days of employment working one on one with a peer learning on the job. In addition, the implementation of Leadership Development Training in 2021, provided all managers with information to enhance their skills with the hiring process, coaching, crucial conversations, and employee engagement.
The Company also provides leadership training based on the book The Leadership Pipeline. This training is provided for executive, upper and mid-level management employees and is highly interactive. The purpose of this engaging program is to educate leaders that their role is to coach and mentor their team members. Regular one-on-one meetings with purposeful conversations is an expectation because it leads to better results and engagement of their team. After the formal training, the participants continue to expand their learning by participating in follow up cohort groups for the following six months.
Lastly, succession planning is conducted annually for the Company’s most senior leaders and high impact roles. The process includes identifying potential successors for different positions and assessing their readiness level to fill the role should it become vacant. Management focuses on intentional development with activities needed to prepare the employee for the next level.
Total Rewards
The Company is committed to offering a competitive total rewards package for its employees which includes compensation and benefits. The Company invested in its workforce during 2021 by readjusting job grade and pay ranges to better align positions with current market trends. Each position within the Company is placed in a job grade based on the necessary skill and experience needed to succeed in the position. Management provided complete transparency to team members by publishing each job grade and pay grade through a job value matrix.
The Company recently increased its entry level wage to $15/hour and provided market adjustments where necessary to address wage compression, so the Company is well positioned to attract and retain its workforce. The Company continually reviews its benefits compared to peers in the market and make changes as needed to ensure it remains competitive.
The Company offers a wide array of benefits for its employees including:
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Medical, Dental, and Vision Insurance Plans
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Flexible Spending Accounts
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Health Savings Accounts with a Company Matching Contribution
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Company provided Life Insurance
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Company provided Long Term Disability
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Company provided Premier Checking Account
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401(k) Plan including a Company Match
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Profit Sharing Contribution
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Employee Stock Purchase Plan with an Employee Discount
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Voluntary Ancillary Insurance Plans
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Paid Time Off (Vacation, Sick and Personal Time)
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Maternity/Paternity Paid Leave
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Tuition Reimbursement
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Computer Purchase Program
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Dress Professional Program
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Service Anniversary/Retirement Recognition & Award
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Chairman’s Award - Top Peer Recognition
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Volunteer Time Recognition
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Company Apparel - Company Paid 50%
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Opportunity for Bonus and Stock awards
Employee Health & Safety
The Company provides all employees with an assistance program that offers a variety of resources supporting health, financial, and emotional well-being for issues affecting their work or personal lives.
As a financial services institution, the Company’s employees were deemed essential workers during the COVID-19 pandemic. Employees were supported in several ways and some highlights of those items include:
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Provided personal protective equipment including face coverings, gloves, and face shields in customer facing sites;
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Added plexiglass barriers where appropriate;
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Scheduled deep cleaning protocols at locations;
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Developed a telecommuting policy that allowed non-customer facing positions to work remotely;
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Re-allocated open spaces at larger locations to allow for greater social distancing within teams;
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Temporarily suspended all nonessential business travel;
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Transformed job function training from in-person to virtual to limit exposure during the pandemic;
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Provided video conferencing capabilities to all employees;
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Provided employees additional sick time.
Finally, due to the Company’s financial strength and stability, the Company avoided any layoffs, furloughs, or salary adjustments during the pandemic.
Encouraging Volunteerism
The Company invests in and contributes to the growth and development of its communities. The Commitment to the Communities program encourages employees to be engaged in the communities where they live and work. In 2021, the Company’s employees volunteered 13,706 hours to organizations in their communities. The Company also encourages employees to serve in leadership roles in these organizations as part of their professional development. Over 50% of the Company’s workforce contributed to its annual United Way campaign which resulted in a total contribution to the United Way of over $125,000.
Business Strategies
Vision Statement. The Company’s vision statement is to be a nimble, independent, community-focused financial organization committed to quality, growth and earned independence for the benefit of all stakeholders.
Growth Strategy. The Company believes that growth of revenues and its customer base is vital to the goal of increasing the value of its shareholders’ investment. The Company strives to create shareholder value by maintaining a strong balance sheet and increasing profits.
Management attempts to grow in two primary ways:
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by organic growth through adding new customers and selling more products and services to existing customers; and
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by strategic acquisitions.
Virtually all of the Company’s customer-contact personnel, in each of its business lines, are engaged in organic growth efforts to one degree or another. These personnel attempt to match products and services with the particular financial needs of individual customers and prospective customers. Many senior officers of the organization are required to attend monthly meetings where they report on their business development efforts and results. Executive management uses these meetings as an educational and risk management opportunity as well. Cross-selling opportunities are encouraged and measured between the business lines.
Within the community banking line, the Company has focused on a variety of lending and deposit services products that meet the needs of the communities it serves. The Company has achieved significant growth in these areas. Total commercial real estate loans have increased from $682 million at December 31, 2016 to $1.7 billion at December 31, 2021. Of this increase, approximately $55 million was the result of the acquisition of First Bank during the second quarter of 2018, $50 million was the result of the acquisition of Soy Capital Bank (“SCB”) during the fourth quarter of 2018, $95 million was the result of loans acquired from Stifel Bank during the second quarter of 2020, $204.7 million was the result of loans acquired from Providence Bank during the first quarter of 2021 and $121.5 million was the result of loans acquired from Stifel Bank during the third quarter of 2021. Approximately 65% of the Company’s total revenues were derived from lending activities in the fiscal year ended December 31, 2021. The Company has also focused on growing its commercial and retail deposit base through growth in checking, money markets and customer repurchase agreement balances. The wealth management line has focused its growth efforts on estate planning and investment services for individuals and employee benefit services for businesses as well as, farm management and brokerage services. The insurance brokerage line has focused on increasing property and casualty, senior insurance products and group medical insurance for businesses and personal lines insurance to individuals.
Growth through acquisitions has been an integral part of the Company’s strategy for an extended period of time. When reviewing acquisition possibilities, the Company focuses on those organizations where there is a cultural fit with its existing operations and where there is a strong likelihood of building shareholder value.
Customer Strategy. The Company uses its market and customer knowledge to build relationships that provide high-value customer experiences that continually improve customer satisfaction and loyalty.
Employee Strategy. The Company strives for employee engagement at all levels of the organization. The judgments, experiences and capabilities of these employees are used to create an environment where meeting the needs of our customer, communities and stockholders is always a priority.
Strategy for Operations & Infrastructure. Operationally, the Company centralizes most administrative and operational tasks within its home office in Mattoon, Illinois. This allows branches to maintain customer focus, helps assure compliance with banking regulations, keeps fixed administrative costs at as low a level as practicable, and allows for better management of risk inherent in the business. The Company also utilizes technology where practicable in daily banking activities to reduce the potential for human error. While the Company does not employ every new technology that is introduced, it attempts to be competitive with other banking organizations with respect to operational and customer technology.
Shareholder Strategy. The Company strives to provide a competitive dividend as well as the opportunity for stock price appreciation.
Risk Management Strategy. The Company maintains a comprehensive risk management framework. The Company has initiated an Enterprise Risk Management (“ERM”) process whereby management assesses the relevant risks inherent in the business, determines internal controls and procedures are in place to address the various risks, develops a structure for monitoring and reporting risk indicators and trends over time, and incorporates action plans to manage risk positions. The ERM process was not undertaken as a result of any weaknesses or deficiencies identified during the Company’s control assessments but rather is part of the Company’s effort to continually assess and improve by taking a more holistic approach to risk management. The Company's Chief Risk Management Officer is responsible for facilitating the ERM process. The Company utilizes a comprehensive set of operational policies and procedures that have been developed over time. These policies are continually reviewed by management, the Chief Risk Management Officer, and the Board of Directors. The Company’s internal audit function completes procedures to ensure compliance with these policies. While there are several risks that pertain to the business of banking, three risks that are inherent with most banking companies are credit risk, interest rate risk, and liquidity risk.
In the business of banking, credit risk is an important risk as losses from uncollectible loans can diminish capital, earnings and shareholder value. In order to address this risk, the lending function of First Mid Bank and Jefferson Bank receive significant oversight from executive management and the Board of Directors. An important element of credit risk management is the quality, experience and training of the loan officers. The Company has invested, and will continue to invest, significant resources to ensure the quality, experience and training of our loan officers in order to keep credit losses at a minimum. In addition to the human element of credit risk management, the Company’s loan policies address the additional aspects of credit risk. Most lending personnel have signature authority that allows them to lend up to a certain amount based on their own judgment as to the creditworthiness of a borrower. The amount of the signature authority is based on the lending officers’ experience and training. The Senior Loan Committee, consisting of the most experienced lenders within the organization, must approve all underwriting decisions in excess of $4 million and up to $15 million. The Board of Directors must approve all underwriting decisions in excess of $15 million. The legal lending limit for First Mid Bank was $93.6 million at December 31, 2021. While the underlying nature of lending will result in some amount of loan losses, First Mid's loan loss experience has been good with average net charge offs amounting to $3.5 million (0.15% of total loans) over the past five years. Nonperforming loans were $22.0 million (0.55% of total loans) at December 31, 2021. These percentages have historically compared well with peer financial institutions and continue to do so today.
Interest rate and liquidity risk are two other forms of risk embedded in the banking business. The Company’s Asset Liability Management Committee, consisting of experienced individuals, from various departments, who monitor all aspects of interest rates and maturities of interest earning assets and interest paying liabilities, manages these risks. The underlying objectives of interest rate and liquidity risk management are to shelter the Company’s net interest margin from changes in interest rates while maintaining adequate liquidity reserves to meet unanticipated funding demands. The Company uses financial modeling technology as a tool for evaluating these risks. Despite the tools and methods used to monitor this risk, a sustained unfavorable interest rate environment will lead to some amount of compression in the net interest margin. During 2021, the Company’s net interest margin on a tax-effected basis decreased to 3.21% from 3.27% in 2020 primarily due to less accretion income and lower interest rates in a more competitive and challenging interest rate environment.
Markets and Competition
The Company has active competition in all areas in which First Mid Bank and Jefferson Bank do business. The bank competes for commercial and individual deposits and loans with many Illinois, Missouri and Texas banks, savings and loan associations, and credit unions. The principal methods of competition in the banking and financial services industry are quality of services to customers, ease of access to facilities, on-line services and pricing of services, including interest rates paid on deposits, interest rates charged on loans, and fees charged for fiduciary and other banking services.
During 2021, First Mid Bank operated branches in the Illinois counties of Adams, Champaign, Christian, Clark, Coles, Cumberland, Douglas, Edgar, Effingham, Jackson, Jefferson, Knox, Lawrence, Macon, Madison, Moultrie, McClean, Peoria, Piatt, Saline, St Clair, Wabash, White and Williamson, and in Missouri counties of Boone, Lincoln, Cole, Camden, Saint Charles and Saint Louis, and the Texas county of Tarrant. Each branch primarily serves the community in which it is located. First Mid Bank served forty-seven different communities with fifty-two separate locations in Illinois, fourteen locations in Missouri, one location in Texas, and a loan production office in Indiana.
Jefferson Bank, which was acquired on February 14, 2022, currently operates branches in the Missouri counties of Saint Charles and Saint Louis.
Website
The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission (“SEC”) can be accessed, free of charge, through this website and at www.sec.gov as soon as reasonably practicable after these materials are filed with the SEC.
COVID-19
The COVID-19 outbreak was an unprecedented event that provided significant economic uncertainty for a broad spectrum of industries. The Company is focused on supporting its customers, communities and employees during this unique operating environment. Throughout this document, we describe the impact COVID-19 has had, actions taken as a result of COVID-19, and certain risks to the Company that COVID-19 created or exacerbated, as well as management's outlook on the current COVID-19 situation.
2020 Loan Purchase
On April 21, 2020, First Mid Bank completed an acquisition of loans in the St. Louis metro market totaling $183 million.
2021 Loan Purchase
During 2021, First Mid Bank completed an acquisition of loans in the St. Louis Metro market totaling $208 million. There were no loans purchased with deteriorated credit. First Mid Bank also assumed $219 million of related customer deposits and recorded a core deposit intangible asset of approximately $4.9 million that is being amortized on an accelerated basis over ten years.
LINCO Bancshares, Inc.
On September 25, 2020, the Company and Eval Sub Inc., a wholly owned subsidiary of the Company ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with LINCO Bancshares, Inc., the former parent of Providence Bank ("LINCO"), and the sellers as defined therein, pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business combination whereby Merger Sub merged with and into LINCO, whereupon the separate corporate existence of Merger Sub ceased and LINCO continued as the surviving company and a wholly owned subsidiary of the Company (the "Merger").
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $1.00 per share, of LINCO issued and outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by LINCO) was converted into and became the right to receive, cash or 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. On an aggregate basis, the total consideration paid by the Company at the closing of the Merger was $103.5 million in cash and 1,262,246 shares of the Company’s common stock, provided that the shareholders of LINCO have collectively elected pursuant to the Merger Agreement to receive varying amounts of cash or shares of common stock of the Company as consideration in the Merger. In addition, immediately prior to the closing of the proposed merger, LINCO paid a special dividend to its shareholders in the aggregate amount of $13 million.
The Merger closed on February 22, 2021 and Providence Bank was merged in First Mid Bank on May 15, 2021.
Delta Bancshares Company
On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Delta Merger Sub”), entered into an Agreement and Plan of Merger (the “Delta Merger Agreement”) with Delta Bancshares Company, a Missouri corporation (“Delta”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a business combination whereby Delta will merge with and into Merger Sub, whereupon the separate corporate existence of Delta will cease and Merger Sub will continue as the surviving company and a wholly-owned subsidiary of First Mid (the “Delta Merger”). The Delta Merger was completed on February 14, 2022.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $10.00 per share, of Delta issued and outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by Delta) converted into and became the right to receive cash and 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. On an aggregate basis, the total consideration paid by the Company at the closing of the Merger to Delta’s shareholders and option holders was approximately $15.2 million in cash and 2,292,270 shares of Company common stock. Delta’s outstanding stock vested upon consummation of the Merger, and all outstanding Delta options that are unexercised prior to the effective time of the Merger were cashed out.
It is anticipated that Delta’s wholly owned bank subsidiary, Jefferson Bank, will be merged with and into First Mid Bank during the second quarter of 2022. At the time of the bank merger, Jefferson Bank’s banking offices will become branches of First Mid Bank. As of December 31, 2021, Jefferson Bank had total consolidated assets of approximately $718 million, loans of approximately $424 million and total deposits of approximately $560 million.
Supervision and Regulation General
Financial institutions, financial services companies, and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the Office of the Comptroller of the Currency (the “OCC”), the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”), the Missouri Division of Finance (“MDOF”), the Internal Revenue Service and state taxing authorities. Any change in applicable laws, regulations or regulatory policies may have material effects on the business, operations and prospects of the Company, First Mid Bank and Jefferson Bank. The Company is unable to predict the nature or extent of the effects that fiscal or monetary policies, economic controls or new federal or state legislation may have on its business and earnings in the future.
Federal and state laws and regulations generally applicable to financial institutions and financial services companies, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance fund and the depositors, rather than the stockholders, of financial institutions.
The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and do not purport to be complete and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and its subsidiaries.
Financial Modernization Legislation
The 1999 Gramm-Leach-Bliley Act (the “GLB Act”) significantly changed financial services regulation by expanding permissible non-banking activities of bank holding companies and removing certain barriers to affiliations among banks, insurance companies, securities firms and other financial services entities. These activities and affiliations can be structured through a holding company structure or, in the case of many of the activities, through a financial subsidiary of a bank. The GLB Act also established a system of federal and state regulation based on functional regulation, meaning that primary regulatory oversight for a particular activity generally resides with the federal or state regulator having the greatest expertise in the area. Banking is supervised by banking regulators, insurance by state insurance regulators and securities activities by the SEC and state securities regulators. The GLB Act also requires the disclosure of agreements reached with community groups that relate to the Community Reinvestment Act, and contains various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry.
The GLB Act repealed the anti-affiliation provisions of the Glass-Steagall Act and revised the Bank Holding Company Act of 1956 (the “BHCA”) to permit qualifying holding companies, called “financial holding companies,” to engage in, or to affiliate with companies engaged in, a full range of financial activities, including banking, insurance activities (including insurance portfolio investing), securities activities, merchant banking and additional activities that are “financial in nature,” incidental to financial activities or, in certain circumstances, complementary to financial activities. A bank holding company’s subsidiary banks must be “well-capitalized” and “well-managed” and have at least a “satisfactory” Community Reinvestment Act rating for the bank holding company to elect and maintain its status as a financial holding company.
A significant component of the GLB Act’s focus on functional regulation relates to the application of federal securities laws and SEC oversight of some bank securities activities previously exempt from broker-dealer registration. Among other things, the GLB Act amended the definitions of “broker” and “dealer” under the Securities Exchange Act of 1934, as amended, to remove the blanket exemption for banks. Under the GLB Act, banks may conduct securities activities without broker-dealer registration only if the activities fall within a set of activity-based exemptions designed to allow banks to conduct only those activities traditionally considered to be primarily banking or trust activities.
Securities activities outside these exemptions, as a practical matter, need to be conducted by a registered broker-dealer affiliate. The GLB Act also amended the Investment Advisers Act of 1940 to require the registration of banks that act as investment advisers for mutual funds. The Company believes that it has taken the necessary actions to comply with these requirements of the GLB Act and the regulations adopted under them.
Anti-Terrorism Legislation
The USA PATRIOT Act of 2001 included the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “IMLAFA”). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers, and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. The Company has established policies and procedures for compliance with the IMLAFA and the related regulations. The Company has designated an officer solely responsible for ensuring compliance with existing regulations and monitoring changes to the regulations as they occur.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law on July 21, 2010. Generally, the Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law. The Act, among other things:
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Resulted in the Federal Reserve issuing rules limiting debit-card interchange fees.
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After a three-year phase-in period which began January 1, 2013, existing trust preferred securities for holding companies with consolidated assets greater than $15 billion and all new issuances of trust preferred securities are removed as a permitted component of a holding company’s Tier 1 capital. Trust preferred securities outstanding as of May 19, 2010 that were issued by bank holding companies with total consolidated assets of less than $15 billion, such as the Company, will continue to count as Tier 1 capital.
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Provides for new disclosure and other requirements relating to executive compensation and corporate governance.
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Changes standards for Federal preemption of state laws related to federally chartered institutions and their subsidiaries.
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Provides mortgage reform provisions including (i) a customer’s ability to repay, (ii) restricting variable-rate lending by requiring the ability to repay to be determined for variable-rate loans by requiring lenders to evaluate using the maximum rate that will apply during the first five years of a variable-rate loan term, and (iii) making more loans subject to provisions for higher cost loans and new disclosures.
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Creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.
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Permanently increases the deposit insurance coverage to $250 thousand and allows depository institutions to pay interest on checking accounts.
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Requires publicly traded bank holding companies with assets of $10 billion or more to establish a risk committee responsible for enterprise-wide risk management practices.
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Limits and regulates, under the provisions of the Act known as the Volker Rule, a financial institution's ability to engage in proprietary trading or to own or invest in certain private equity and hedge funds.
Basel III
In September 2010, the Basel Committee on Banking Supervision proposed higher global minimum capital standards, including a minimum Tier 1 common capital ratio and additional capital and liquidity requirements. On July 2, 2013, the Federal Reserve Board approved a final rule to implement these reforms and changes required by the Dodd-Frank Act. This final rule was subsequently adopted by the OCC and the FDIC.
The final rule included new risk-based capital and leverage ratios, which were phased in from 2015 to 2019, and refined the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and First Mid Bank beginning in 2015 were: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The rule also
established a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk weighted assets and increased by that amount each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount.
The final rule also made three changes to the proposed rule of June 2012 that impacted the Company. First, the proposed rule required banking organizations to include accumulated other comprehensive income (“AOCI”) in common equity tier 1 capital. AOCI includes accumulated unrealized gains and losses on certain assets and liabilities that have not been included in net income. Under existing general risk-based capital rules, most components of AOCI are not included in a banking organization's regulatory capital calculations. The final rule allowed community banking organizations to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The Company made this election.
Second, the proposed rule modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposure into two categories in order to determine the applicable risk weight. The final rule, however, retained the existing treatment for residential mortgage exposures under the general risk-based capital rules.
Third, the proposed rule required banking organizations with total consolidated assets of less than $15 billion as of December 31, 2009, such as the Company, to phase out over ten years any trust preferred securities and cumulative perpetual preferred securities from its Tier 1 capital regulatory capital. The final rule, however, permanently grandfathered into Tier 1 capital of depository institution holding companies with total consolidated assets of less than $15 billion as of December 31, 2009, any trust preferred securities or cumulative perpetual preferred stock issued before May 19, 2010.
The Company
General. As a registered financial holding company under the BHCA that has elected to become a financial holding company under the GLB Act, the Company is subject to regulation by the Federal Reserve Board. In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to First Mid Bank and to commit resources to support First Mid Bank in circumstances where the Company might not do so absent such policy. The Company is subject to inspection, examination, and supervision by the Federal Reserve Board.
Activities. As a financial holding company, the Company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. A bank holding company that is not also a financial holding company is limited to engaging in banking and such other activities as determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
No Federal Reserve Board approval is required for the Company to acquire a company (other than a bank holding company, bank, or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. However, the Company generally must give the Federal Reserve Board after-the-fact notice of these activities. Prior Federal Reserve Board approval is required before the Company may acquire beneficial ownership or control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank, or savings association.
If any subsidiary bank of the Company ceases to be “well-capitalized” or “well-managed” under applicable regulatory standards, the Federal Reserve Board may, among other actions, order the Company to divest its depository institution. Alternatively, the Company may elect to conform its activities to those permissible for a bank holding company that is not also a financial holding company.
If any subsidiary bank of the Company receives a rating under the Community Reinvestment Act of less than “satisfactory”, the Company will be prohibited, until the rating is raised to “satisfactory” or better, from engaging in new activities or acquiring companies other than bank holding companies, banks, or savings associations.
Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve Board capital adequacy guidelines. The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies for 2019, which include the full phase in of the capital conservation buffer: a total capital to total risk-based capital ratio of not less than 10.50%, a Tier 1 risk-based ratio of not less than 8.50%, a common equity Tier 1 capital ratio of not less than 7.00%, and a Tier 1 leverage ratio of not less than 4.00%. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders’ equity, less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships), and total capital means Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital, limited amounts of unrealized gains on equity securities and a portion of the Company’s allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve Board’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.
As of December 31, 2021, the Company had regulatory capital, calculated on a consolidated basis, in excess of the Federal Reserve Board’s minimum requirements, and its capital ratios exceeded those required for categorization as well-capitalized under the capital adequacy guidelines established by bank regulatory agencies with a total risk-based capital ratio of 15.79%, a Tier 1 risk-based ratio of 12.51%, a common equity Tier 1 capital ratio of 12.06% and a leverage ratio of 9.05%.
Control Acquisitions. The Change in Bank Control Act prohibits a person or group of people from acquiring “control” of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the Company. In addition, any company is required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding common of the Company, or otherwise obtaining control of a “controlling influence” over the Company or First Mid Bank.
Interstate Banking and Branching. The Dodd-Frank Act expands the authority of banks to engage in interstate branching. The Dodd-Frank Act allows a state or national bank to open a de novo branch in another state if the law of the state where the branch is to be located would permit a state bank chartered by that state to open the branch.
Privacy and Security. The GLB Act establishes a minimum federal standard of financial privacy by, among other provisions, requiring banks to adopt and disclose privacy policies with respect to consumer information and setting forth certain rules with respect to the disclosure to third parties of consumer information. The Company has adopted and disseminated its privacy policies pursuant to the GLB Act. Regulations adopted under the GLB Act set standards for protecting the security, confidentiality, and integrity of customer information, and require notice to regulators, and in some cases, to customers, in the event of security breaches. A number of states have adopted their own statutes requiring notification of security breaches. In addition, the GLB Act requires the disclosure of agreements reached with community groups that relate to the CRA, and contains various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry.
First Mid Bank and Jefferson Bank
General. First Mid Bank is a national bank, chartered under the National Bank Act. Jefferson Bank is a Missouri chartered bank. The FDIC insures the deposit accounts of the banks. The Bank is a member of the Federal Reserve System and is subject to the examination, supervision, reporting and enforcement requirements of the OCC, as the primary federal regulator of national banks, and the FDIC, as administrator of the deposit insurance fund.
Deposit Insurance. As an FDIC-insured institution, banks are required to pay deposit insurance premium assessments to the FDIC. A number of requirements with respect to the FDIC insurance system have affected results, including insurance assessment rates.
On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent. Because the reserve ratio exceeded 1.35 percent, two deposit insurance assessment changes occurred under the FDIC regulations:
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Surcharges on large banks (total consolidated assets of $10 billion or more) ended; the last surcharge on large banks was collected on December 28, 2018.
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Small banks (total consolidated assets of less than $10 billion) were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15 percent to 1.35 percent, to be applied when the reserve ratio is at least 1.38 percent.
On August 20, 2019, the FDIC Board approved a Notice of Proposed Rulemaking which amended the Small Bank Credits regulation to permit credit usage when the reserve ratio is at least 1.35 percent (rather than 1.38%). Additionally, after eight quarters of credit usage, the FDIC would remit the remaining full nominal value to each bank. Eligible banks were notified on January 24, 2019 with a preliminary estimate of their share of small bank assessment credits. First Mid Bank’s Small Bank Credit was $931,853.
The Deposit Insurance Fund Reserve Ratio as of June 30, 2019 was 1.40 percent and therefore, Small Bank Assessment Credits were applied to second quarter assessment invoices (paid in September 2019). As a result, First Mid Bank received a credit of $256,944. The Deposit Insurance Fund Reserve Ratio as of September 30, 2019 was 1.41 percent and therefore, Small Bank Assessment Credits were also applied to third quarter assessment invoices (paid in December 2019). As a result, First Mid Bank received a credit of $254,705. These amounts were reversed from previously accrued expense. First Mid Bank had a remaining Small Bank Assessment Credit of $420,204 as of December 31, 2019. This remainder was applied to the fourth quarter assessment (paid in March 2020).
The Company expensed $1,604,000, $1,309,000 and $206,000 for its insurance assessment during 2021, 2020, and 2019 respectively. In addition to its insurance assessment, through March 29, 2019, each insured bank was subject to quarterly debt service assessments in connection with bonds issued by a government corporation that financed the federal savings and loan bailout. The Company expensed $12,000 for this assessment during 2019.
OCC Assessments. All national banks are required to pay supervisory fees to the OCC to fund the operations of the OCC. The amount of such supervisory fees is based upon each institution’s total assets, including consolidated subsidiaries, as reported to the OCC. During the years ended December 31, 2021, 2020, and 2019 the Company expensed supervisory fees totaling $745,000, $572,000, and $620,000, respectively. Changes in total expense are due to changes in assessment rates and increases in total assets of the bank.
Capital Requirements. The banking regulators established the following minimum capital standards for banks as of 2019, which include the full phase in of the capital conservation buffer in a total capital to total risk-based capital ratio of not less than 10.50%, a Tier 1 risk-based ratio of not less than 8.50%, a common equity Tier 1 capital ratio of not less than 7.00%, and a Tier 1 leverage ratio of not less than 4.00%. For purposes of these capital standards, Tier 1 capital and total capital consists of substantially the same components as Tier 1 capital and total capital under the Federal Reserve Board’s capital guidelines for bank holding companies (See “The Company-Capital Requirements”).
The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the banking regulators provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities, or securities trading activities.
During the year ended December 31, 2021, First Mid Bank was not required to increase capital to an amount in excess of the minimum regulatory requirements, and capital ratios exceeded those required for categorization as well-capitalized under the capital adequacy guidelines established by bank regulatory agencies. First Mid Bank's total risk-based capital ratio was 14.67%, Tier 1 risk-based ratio was 13.60%, common equity Tier 1 ratio was 13.60% and leverage ratio was 9.83%.
Prompt Corrective Action. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well-capitalized,” “adequately- capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and in the most severe cases, appointing a conservator or receiver for the institution.
Dividends. The National Bank Act impose limitations on the amount of dividends that may be paid by a bank. Generally, a bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank’s board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank’s year-to-date net income plus the bank’s adjusted retained net income for the two preceding years.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, First Mid Bank exceeded minimum capital requirements under applicable guidelines as of December 31, 2021. As of December 31, 2021, approximately $54.7 million was available to be paid as dividends to the Company by First Mid Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends if the OCC, as applicable, determines that such payment would constitute an unsafe or unsound practice.
Affiliate and Insider Transactions. First Mid Bank and Jefferson Bank are subject to certain restrictions under federal law, including Regulation W of the Federal Reserve Board, on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by First Mid Bank or Jefferson Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to “related interests” of such directors, officers, and principal stockholders.
First Mid Bank and Jefferson Bank are subject to restrictions under federal law that limits certain transactions with the Company, including loans, other extensions of credit, investments, or asset purchases. Such transactions by a banking subsidiary with any one affiliate are limited in amount to 10% of the bank’s capital and surplus and, with all affiliates together, to an aggregate of 20% of the bank’s capital and surplus. Furthermore, such loans and extensions of credit, as well as certain other transactions, are required to be secured in specified amounts. These and certain other transactions, including any payment of money to the Company, must be on terms and conditions that are or in good faith would be offered to nonaffiliated companies.
In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which First Mid Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the guidelines are of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the appropriate federal regulator, would constitute grounds for further enforcement action.
Community Reinvestment Act. First Mid Bank and Jefferson Bank are subject to the Community Reinvestment Act (CRA). The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service areas, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of its bank subsidiaries is reviewed by federal banking agencies in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or thrift or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. First Mid Bank received satisfactory CRA ratings from its regulator in its most recent CRA examination.
Consumer Laws and Regulations. In addition to the laws and regulations discussed above, First Mid Bank and Jefferson are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act and the Real Estate Settlement Procedures Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans to or marketing to or engaging in other types of transactions with such customers. Failure to comply with these laws and regulations could lead to substantial penalties, operating restrictions, and reputational damage to the financial institution.
Supplemental Item - Executive Officers of the Registrant
The executive officers of the Company are elected annually by the Company’s Board of Directors and are identified below.
Name (Age)
Position With Company
Joseph R. Dively (62)
Chairman of the Board of Directors, President and Chief Executive Officer
Michael L. Taylor (53)
Senior Executive Vice President and Chief Operating Officer
Matthew K. Smith (47)
Executive Vice President and Chief Financial Officer
Eric S. McRae (56)
Executive Vice President
Bradley L. Beesley (50)
Executive Vice President
Laurel G. Allenbaugh (61)
Executive Vice President
Clay M. Dean (47)
Executive Vice President
Amanda D. Lewis (42)
Executive Vice President
David Hiden (59)
Senior Vice President
Rhonda Gatons (50)
Senior Vice President
Jason Crowder (51)
Senior Vice President
Jordan Read (32)
Senior Vice President
Megan McElwee (34) (since 1/1/2022)
Vice President
Anya Schuetz (47)
Vice President
Joseph R. Dively, age 62, is the Chairman of the Board of Directors, President and Chief Executive Officer of the Company since January 1, 2014 and the President of First Mid Bank since May 2011. Prior to assuming these positions in the Company, he was the Senior Executive Vice President of the Company beginning in May 2011. He was with Consolidated Communications Holdings, Inc. in Mattoon, Illinois from 2003 to May 2011.
Michael L. Taylor, age 53, has been Senior Executive Vice President since 2014 and Chief Operating Officer since July 2017. He served as Chief Financial Officer of the Company from 2000 to 2017. He served as Executive Vice President from 2007 to 2014 and as Vice President from 2000 to 2007. He was with AMCORE Bank in Rockford, Illinois from 1996 to 2000.
Matthew K. Smith, age 47, has been Executive Vice President of the Company since November 2016 and Chief Financial Officer since July 2017. He served as Director of Finance from November 2016 to July 2017. He was Treasurer and Vice President of Finance and Investor Relations with Consolidated Communications, Inc from 1997 to 2016.
Eric S. McRae, age 56, has been Executive Vice President of the Company and Executive Vice President, Chief Lending Officer of First Mid Bank since January 2022. He was Chief Credit Officer from January 2017 to December 2021. He served as Senior Lender of First Mid Bank from December 2008 to December 2016 and he served as President of the Decatur region from 2001 to December 2008.
Bradley L. Beesley, age 50, has been Executive Vice President of the Company and Chief Trust & Wealth Management Officer of First Mid Bank since March 2015 and First Mid Wealth Management Company since July 2018. He served as Senior Vice President from May 2007 to March 2015.
Laurel G. Allenbaugh, age 61, has been Executive Vice President of the Company and Executive Vice President, Chief Operations Officer of First Mid Bank since April 2008. She served as Vice President of Operations from February 2000 to April 2008. She served as Controller of the Company and First Mid Bank from 1990 to February 2000.
Clay M. Dean, age 47, has been Executive Vice President of the Company since January 2019 and Senior Vice President of the Company since 2010 and Senior Vice President and Chief Insurance Services Officer of the First Mid Bank and Chief Executive Officer of First Mid Insurance since September 2014. He served as Senior Vice President, Chief Deposit Services Officer of First Mid Bank from November 2012 to September 2014 and as Senior Vice President, Director of Treasury Management of First Mid Bank from 2010 to 2012.
Amanda D. Lewis, age 42, has been Executive Vice President of the Company since January 2019 and Senior Vice President of the Company and Senior Vice President, Retail Banking Officer of First Mid Bank since September 2014. She served as Vice President, Director of Marketing from 2001 until September 2014.
David Hiden, age 59, has been Senior Vice President, Chief Information Officer of the Company since July 2018.
Rhonda Gatons, age 50, has been Senior Vice President of the Company and Director of Human Resources since March 2016. Prior to joining the Company, she was the Director of Human Resources at Midland States Bank.
Jason Crowder, age 51, has been Senior Vice President and General Counsel of the Company since August 2019. Prior to joining the Company, he was the Corporate Counsel of Petersen Health Care, Inc., from 2008 to July 2019, and an attorney at Heller, Holmes & Associates from 1996 to 2008.
Jordan Read, age 32, has been Senior Vice President and Chief Risk Officer of First Mid Bank since August 2021. He was Director of Internal Audit of Enterprise Bank and Trust from 2018 to 2021.
Megan McElwee, age 34, has been Vice President and Chief Credit Officer since January 2022. She served as Director of Credit Administration from 2021 to 2022, Credit Administration Manager from 2017 to 2021, and Credit Officer from 2011 to 2017.
Anya Schuetz, age 47, has been Vice President and Director of Project Management since 2013.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
Various risks and uncertainties, some of which are difficult to predict and beyond the Company’s control, could negatively impact the Company. As a financial institution, the Company is exposed to credit risk, interest rate and liquidity risk, operational risk, risks from economic and market conditions, and general business risks among others. Adverse experience with these or other risks could have a material impact on the Company’s financial condition and results of operations, as well as the value of its common stock.
Credit Risks
Loan customers or other counterparties may not be able to perform their contractual obligations resulting in a negative impact on the Company’s earnings. Overall economic conditions affecting businesses and consumers, including the current difficult economic conditions and market disruptions, could impact the Company’s credit losses. In addition, real estate valuations could also impact the Company’s credit losses as the Company maintains $2.8 billion in loans secured by commercial, agricultural, and residential real estate. A significant decline in real estate values could have a negative effect on the Company’s financial condition and results of operations. In addition, the Company’s total loan balances by industry exceeded 25% of total risk-based capital for each of five industries as of December 31, 2021. A listing of these industries is contained in under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Loans” herein. A significant change in one of these industries such as a significant decline in agricultural crop prices, could adversely impact the Company’s credit losses.
Deterioration in the real estate market could lead to losses, which could have a material adverse effect on the business, financial condition and results of operations or the Company. Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. Increases in commercial and consumer delinquency levels or declines in real estate market values would require increased net charge-offs and increases in the allowance for loan and lease losses, which could have a material adverse effect on our business, financial condition and results of operations and prospects.
The allowance for credit losses may prove inadequate or be negatively affected by credit risk exposures. The Company’s business depends on the creditworthiness of its customers. Management periodically reviews the allowance for loan and lease losses for adequacy considering economic conditions and trends, collateral values, and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. There is no certainty that the allowance for credit losses will be adequate over time to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries, or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for credit losses is not adequate, the Company’s business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.
The Company depends on the accuracy and completeness of information furnished by and on behalf of our customers and counterparties. In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. The Company may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause the Company to enter into unfavorable transactions, which could have a material adverse effect on financial condition and results of operations.
Interest Rate and Liquidity Risks
Changes in interest rates may negatively affect our earnings. Changes in market interest rates and prices may adversely affect the Company’s financial condition or results of operations. The Company’s net interest income, its largest source of revenue, is highly dependent on achieving a positive spread between the interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in interest rates could negatively impact the Company’s ability to attract deposits, make loans, and achieve a positive spread resulting in compression of the net interest margin.
Declines in the value of securities held in the investment portfolio may negatively affect the Company’s earnings and capital. The value of an investment in the portfolio could decrease due to changes in market factors. The market value of certain investment securities is volatile and future declines or other-than-temporary impairments could materially adversely affect the Company’s future earnings and capital. Continued volatility in the market value of certain of the investment securities, whether caused by changes in market perceptions of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities. This could have a material adverse impact on the Company’s accumulated other comprehensive loss and shareholders’ equity depending upon the direction of the fluctuations.
Furthermore, future downgrades or defaults in these securities could result in future classifications as other-than-temporarily impaired. The Company has invested in trust preferred securities issued by financial institutions and insurance companies, corporate securities of financial institutions, and stock in the Federal Home Loan Bank of Chicago and Federal Reserve Bank of Chicago. Deterioration of the financial stability of the underlying financial institutions for these investments could result in other-than-temporary impairment charges to the Company and could have a material impact on future earnings. For further discussion of the Company’s investments, see Note 4 - “Investment Securities.”
The Company may not have sufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs and for other corporate purposes. This type of liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. The Company’s liquidity can be affected by a variety of factors, including general economic conditions, market disruption, operational problems affecting third parties or the Company, unfavorable pricing, competition, the Company’s credit rating and regulatory restrictions. (See “Liquidity” herein for management’s actions to mitigate this risk.)
If the Company were unable to borrow funds through access to capital markets, it may not be able to meet the cash flow requirements of its depositors, creditors, and borrowers, or the operating cash needed to fund corporate expansion and other corporate activities. As seen starting in the middle of 2007, significant turmoil and volatility in worldwide financial markets can result in a disruption in the liquidity of financial markets and could directly impact the Company to the extent it needs to access capital markets to raise funds to support its business and overall liquidity position. These types of situations could affect the cost of such funds or the Company’s ability to raise such funds. If the Company were unable to access any of these funding sources when needed, it might be unable to meet customers’ needs, which could adversely impact its financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. For further discussion, see the “Liquidity” section.
Operational Risks
A failure in or breach of the Company's operational or security systems, or those of its third-party service providers, including as a result of cyber-attacks, could disrupt the Company's business, result in unintentional disclosure or misuse of confidential or proprietary information, damage the Company's reputation, increase our costs, and cause losses. As a financial institution, the company's operations rely heavily on the secure processing, storage, and transmission of confidential and other information on its computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in the company's online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of these systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity, or attempted theft of financial assets. Management cannot assert that any such failures, interruption or security breaches will not occur, or if they do occur that they will be adequately addressed. While certain protective policies and procedures are in place, the nature and sophistication of the threats continue to evolve. The Company may be required to expend significant additional resources in the future to modify and enhance these protective measures.
Additionally, the Company faces the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate its business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, its operational systems. Any failures, interruptions or security breaches in the Company's information systems could damage its reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.
If the Company’s stock price declines from levels at December 31, 2021, management will evaluate the goodwill balance for impairment, and if the values of the business has declined, the Company could recognize an impairment charge for its goodwill. Management performed its annual goodwill impairment assessment as of September 30, 2021. Based on these analyses, management concluded that the fair value of the Company’s reporting units exceeded the fair value of its assets and liabilities and, therefore, goodwill was not considered impaired. It is possible that management’s assumptions and conclusions regarding the valuation of the Company’s lines of business could change adversely, which could result in the recognition of impairment for goodwill, which could have a material effect on the Company’s financial position and future results of operations.
Human error, inadequate or failed internal processes and systems, and external events may have adverse effects on the Company. Operational risk includes compliance or legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards. Operational risk also encompasses transaction risk, which includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Losses resulting from operational risk could take the form of explicit charges, increased operational costs, harm to the Company’s reputation or forgone opportunities. Any of these could potentially have a material adverse effect on the Company’s reputation, financial condition, and results of operations.
The Company is exposed to various business risks that could have a negative effect on the financial performance of the Company. These risks include changes in customer behavior, changes in competition, new litigation or changes to existing litigation, claims and assessments, environmental liabilities, real or threatened acts of war or terrorist activity, adverse weather, changes in accounting standards, legislative or regulatory changes, taxing authority interpretations, and an inability on the Company’s part to retain and attract skilled employees.
In addition to these risks identified by the Company, investments in the Company’s common stock involve risk. The market price of the Company’s common stock may fluctuate significantly in response to a number of factors including volatility of stock market prices and volumes, rumors or erroneous information, changes in market valuations of similar companies, changes in securities analysts’ estimates of financial performance, and variations in quarterly or annual operating results.
Economic and Market Conditions Risks
Difficult economic conditions and market disruption have adversely impacted the banking industry and financial markets generally and may again significantly affect the business, financial condition, or results of operations of the Company. The Company’s success depends, to a certain extent, upon economic and political conditions, local and national, as well as governmental monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, money supply and other factors beyond the Company’s control may adversely affect its asset quality, deposit levels and loan demand and, therefore, its earnings.
The Company’s profitability depends significantly on economic conditions in the geographic region in which it operates. A large percentage of the Company’s loans are to individuals and businesses in Illinois, consequently, any decline in the economy of this market area could have a materially adverse effect on the Company’s financial condition and results of operations.
Decline in the strength and stability of other financial institutions may adversely affect the Company’s business. The actions and commercial soundness of other financial institutions could affect the Company’s ability to engage in routine funding transactions. Financial services institutions are interrelated as a result of clearing, counterparty or other relationships. The Company has exposure to different counterparties and executes transactions with various counterparties in the financial industry. Recent defaults by financial services institutions, and even rumors or questions about one or more financial services institutions or the financial services industry in general, led to market-wide liquidity problems in recent years and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. Any such losses could materially and adversely affect the Company’s results of operations.
The Company is subject to Environmental, Social and Governance (“ESG”) risks that could adversely affect its reputation and the market price of its securities. The Company is subject to a variety of risks arising from ESG matters. ESG matters include climate risk, hiring practices, the diversity of the work force, and racial and social justice issues involving the Company’s personnel, customers and third parties with whom it otherwise does business. Risks arising from ESG matters may adversely affect, among other things, reputation and the market price of the Company’s securities. Further, the Company may be exposed to negative publicity based on the identity and activities of those to whom it lends and with which it otherwise does business and the public’s view of the approach and performance of its customers and business partners with respect to ESG matters. Any such negative publicity could arise from adverse news coverage in traditional media and could also spread through the use of social media platforms. The Company’s relationships and reputation with its existing and prospective customers and third parties with which it does business could be damaged if it were to become the subject of any such negative publicity. This, in turn, could have an adverse effect on the Company’s ability to attract and retain customers and employees and could have a negative impact on the market price for securities. Investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations to address ESG matters when making investment and operational decisions. Certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to the risks posed by climate change and other ESG matters into their investment theses. These shifts in investing priorities may result in adverse effects on the market price of the Company’s securities to the extent that investors determine that the Company has not made sufficient progress on ESG matters.
The Company’s business could suffer if it fails to attract and retain skilled people. The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best employees in most of the activities the Company engages in can be intense. The Company may not be able to hire the best people for key roles or retain them. In addition, the transition to increased work-from-home arrangements, which is likely to survive the COVID-19 pandemic for many companies, may exacerbate the challenges of attracting and retaining talented and diverse employees as job markets may be less constrained by physical geography. Our current or future approach to in-office and work-from-home arrangements may not meet the needs or expectations of current or prospective employees or may not be perceived as favorable compared to the arrangements offered by competitors, which could adversely affect the Company’s ability to attract and retain employees. The loss of any key personnel or an inability to continue to attract, retain, and motivate key personnel could adversely affect the Company’s business.
Climate change could have a material negative impact on the Company and customers. The Company’s business, as well as the operations and activities of its customers, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to the Company and its customers, and these risks are expected to increase over time. Climate change presents multi-faceted risks, including: operational risk from the physical effects of climate events on the Company and its customers’ facilities and other assets; credit risk from borrowers with significant exposure to climate risk; transition risks associated with the transition to a less carbon-dependent economy; and reputational risk from stakeholder concerns about the Company’s practices related to climate change, the Company’s carbon footprint, and the Company’s business relationships with clients who operate in carbon-intensive industries. Federal and state banking regulators and supervisory authorities, investors, and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, and reputational risks and costs. The risks associated with climate change are changing and evolving in an escalating fashion, making them difficult to assess due to limited data and other uncertainties. The Company could experience increased expenses resulting from strategic planning, litigation, and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny, and reduced investor and stakeholder confidence due to the Company’s response to climate change and its climate change strategy, which, in turn, could have a material negative impact on business, results of operations, and financial condition.
Changes in the method pursuant to which the LIBOR and other benchmark rates are determined could adversely impact the Company’s business and results of operations. Our floating-rate funding, certain hedging transactions and certain of the products that we offer, such as floating-rate loans and mortgages, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as LIBOR, or to an index, currency, basket, or other financial metric. LIBOR and certain other benchmark rates are the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief Executive of the Financial Conduct Authority (“FCA”) announced that the FCA intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. However, the administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings until June 30, 2023 and will cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies have issued guidance strongly encouraging banking organizations to cease using the U.S. Dollar LIBOR as a reference rate in “new” contracts as soon as practicable and in any event by December 31, 2021. It is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, which rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-linked financial instruments. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, the Alternative Reference Rates Committee, a steering committee comprised of U.S. financial market participants, selected by the Federal Reserve Bank of New York, started in May 2018 to publish the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR. SOFR is a broad measure of the cost of overnight borrowings collateralized by Treasury securities that was selected by the Alternative Reference Rate Committee due to the depth and robustness of the Treasury repurchase market. At this time, it is impossible to predict whether SOFR will become a accepted alternative to LIBOR. The discontinuation of LIBOR, changes in LIBOR, or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that we own or have issued. In addition, such uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and operational costs and risks associated with client disclosures, discretionary actions taken or negotiation of fallback provisions, systems disruption, business continuity, and model disruption.
Other Business Risks
The ongoing COVID-19 pandemic and the measures intended to prevent its spread have had and may continue to have an adverse effect on the Company's operations, results of operations and financial condition, and the severity of these adverse effects depend on future developments which are highly uncertain and difficult to predict. The global health concerns related to COVID-19 and government actions implemented to reduce the spread of the virus have had an adverse impact on the macroeconomic environment. COVID-19 has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. These measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there is no assurance that these steps will be effective or achieve the desired positive economic results in a timely fashion. COVID-19 has impacted, and is likely to further adversely impact, the workforce and operations of the Company, and the operations of our borrowers, customers, and business partners. In particular, we may experience financial losses due to various operational factors impacting us or our borrowers, customers, or business partners, including but not limited to:
•
credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail, and restaurant industries, but across other industries as well;
•
declines in collateral values;
•
third party disruptions, including outages at network providers and other suppliers;
•
increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
•
operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
These factors may remain prevalent for a significant period and may continue to adversely affect the Company, results of operations and financial condition even after the COVID-19 outbreak has subsided. The extent to which the coronavirus outbreak impacts the Company’s operations, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. The full extent of the impacts on the Company’s operations or the global economy as a whole is not yet known. However, the effects could have a material impact on the Company’s results of operations and heighten other of our known risks.
The Company may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing stockholders. To maintain capital at desired or regulatory-required levels, to replace existing capital, or to complete acquisitions the Company may be required to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. The Company may sell these shares at prices below the current market price of shares, and the sale of these shares may significantly dilute stockholder ownership. The Company could also issue additional shares in connection with acquisitions of other financial institutions.
If the Company is unable to make favorable acquisitions or successfully integrate our acquisitions, the Company’s growth could be impacted. In the past several years, the Company has completed acquisitions of banks, bank branches and other businesses. We may continue to make such acquisitions in the future. When the Company evaluates acquisition opportunities, the Company evaluates whether the target institution has a culture similar to the Company, experienced management, and the potential to improve the financial performance of the Company. If the Company fails to successfully identify, complete, and integrate favorable acquisitions, the Company could experience slower growth. Acquiring other banks, bank branches or businesses involves various risks commonly associated with acquisitions, including, among other things: potential exposure to unknown or contingent liabilities or asset quality issues of the target institution, difficulty and expense of integrating the operations and personnel of the target institution, potential disruption to the Company (including diversion of management’s time and attention), difficulty in estimating the value of the target institution, and potential changes in banking or tax laws or regulations that may affect the target institution.
The Company and the banking industry are subject to government regulation, legislation, and policy. Government regulation, legislation and policy affect the Company and the banking industry as a whole, including the Company’s business and results of operations. The Company’s results of operations could be adversely affected by changes in how existing regulations are interpreted or applied by government agencies, or by the adoption of new government regulation, legislation, and policy. These changes may require the Company to invest significant funds and management attention and resources in order to reach compliance. In addition, any enforcement matters could impact supervisory and CRA ratings, which may restrict or limit the Company’s activities.
The Company operates in a highly competitive industry and market area. The Company faces substantial competition in all areas of its operations from a variety of different competitors, both within and beyond its principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and internet banks within the various markets in which the Company operates. The Company also faces competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
The Company's headquarters is located at 1421 Charleston Avenue, Mattoon Illinois. This location is also used by the loan and deposit operations departments of First Mid Bank. In addition, the Company owns facilities located at 1500 Wabash Avenue, Mattoon, Illinois, 1420 Wabash Avenue, Mattoon, Illinois, and 1100 Broadway Avenue, Mattoon, Illinois which are used by branch support operations, and a facility located at 1321 Charleston Avenue, Mattoon, Illinois which is used by First Mid Wealth Management Company.
The main office of First Mid Bank is located at 1515 Charleston Avenue, Mattoon, Illinois and is owned by First Mid Bank. First Mid Bank also owns a building located at 1520 Charleston Avenue, which is used by First Mid Insurance, and by First Mid Bank for back room operations. First Mid Bank also conducts business through numerous facilities, owned and leased, located in thirty-one counties throughout Illinois, seven throughout Missouri, and one county in Texas. Of the sixty-six other banking offices operated by First Mid Bank, forty-nine are owned and seventeen are leased from non-affiliated third parties. First Mid Bank also has a loan production office and an agency finance office in metro Indianapolis.
Jefferson Bank conducts business through various facilities, owned and leased, located in two counties throughout Missouri. Of the five banking offices operated by Jefferson Bank, four are owned and one is leased from a third party.
None of the properties owned by the Company are subject to any major encumbrances. The Company believes these facilities are suitable and adequate to operate its banking and related business. The net investment of the Company and subsidiaries in real estate and equipment at December 31, 2021 was $81.5 million.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
From time to time the Company and its subsidiaries may be involved in litigation that the Company believes is a type common to our industry. None of any such existing claims are believed to be individually material at this time to the Company, although the outcome of any such existing claims cannot be predicted with certainty.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER OF PURCHASES OF EQUITY SECURITIES
The Company’s common stock is included for quotation on the NASDAQ Stock Market, LLC under the trading symbol "FMBH".
The Company’s shareholders are entitled to receive dividends as are declared by the Board of Directors, which considered quarterly payment of dividends during 2021. The ability of the Company to pay dividends, as well as fund its operations, is dependent upon receipt of dividends from First Mid Bank. Regulatory authorities limit the amount of dividends that can be paid by First Mid Bank without prior approval from such authorities. For further discussion of the Bank’s dividend restrictions, see Item1 - “Business” - “First Mid Bank” - “Dividends” and Note 16 - “Dividend Restrictions” herein.
The following table summarizes share repurchase activity for the fourth quarter of 2021:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
per Share
(c) Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
(d) Approximate
Dollar Value
of Shares
that May
Yet Be
Purchased
Under the
Plans or
Programs at
End of Period
October 1, 2021 - October 31, 2021
-
$
-
-
$
4,732,000
November 1, 2021 - November 30, 2021
-
-
-
4,732,000
December 1, 2021 - December 31, 2021
7,752
42.00
7,752
4,406,000
Total
7,752
$
42.00
7,752
$
4,406,000
All of the repurchase activity that occurred during the fourth quarter of 2021 resulted from shares withheld to cover taxes on employee stock vesting. There were no other shares repurchased during 2021. Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries years ended December 31, 2021, 2020, and 2019. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report.
Forward-Looking Statements
This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses, and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1955. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are identified by use of the words “believe,” ”expect,” ”intend,” ”anticipate,” ”estimate,” ”project,” or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties, including those described in Item 1A. “Risk Factors” and other sections of the Company’s Annual Report on Form 10-K and the Company’s other filings with the SEC, and changes in interest rates, general economic conditions and those in the Company’s market area, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios and the valuation of the investment portfolio, the Company’s success in raising capital, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
COVID-19 Impact
The COVID-19 outbreak is an unprecedented event that provided significant economic uncertainty for a broad spectrum of industries. The spread of this outbreak caused significant disruptions in the U.S. economy and some of these impacts have been and will be long lasting. As it continues to evolve it is not clear when or how the pandemic-driven contraction will recover. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Many of the CARES Act provisions, as well as other recent legislative and regulatory efforts, are expected to have a material impact on financial institutions. The Company's strong track record and revenue diversification provide a solid foundation for earnings and capital. The Company is focused on supporting its customers, communities, and employees during this unique operating environment. Following is a description of the impact COVID-19 is having, actions taken as a result of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation.
Lending operations and accommodations to customers. Beginning in March 2020, First Mid Bank offered a 90-day commercial deferral program, primarily to hotel and restaurant borrowers. Subsequently, additional deferrals were still offered on an individual case basis and a broader program was offered to residential and consumer customers. As of December 31, 2021, a total of $6.8 million was deferred through these programs. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.
Beginning April 3, 2020, with the passage of the initial Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company actively participated in assisting existing and new customers with applications for resources through the program. The initial PPP loans had a two-year term, while those originated after June 5, 2020 had a five-year term. All PPP loans earned interest at 1%. As of December 31, 2021, the Company has approved and outstanding with the SBA seventy-one PPP loans totaling $16.0 million. The Company expects that most of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Under the program, the SBA will forgive all or a portion of the loan if, during a certain period, loans are used for qualifying expenses. If all or a portion of the loan is not forgiven, the borrower is responsible for repayment.
Employees. The Company has a business continuity plan in place that was executed in March 2020. Approximately half of the Company's workforce have the ability to work remotely with secure connections. In addition, various preventative and personal hygiene measures, in accordance with CDC guidelines have been implemented.
Asset impairment. The Company does not believe that any impairment exists due to COVID-19 to goodwill and other intangible assets, long-lived assets, mortgage servicing rights ("MSRs"), right of use assets, or available-for-sale investment securities at this time. While certain valuation assumptions and judgements changed to account for COVID-19 related circumstances, the Company did not have significant changes in methodology used to determine the fair value of assets in accordance with GAAP. It is uncertain whether any prolonged effects of COVID-19 will result in future impairment charges related to any of these assets.
Capital and liquidity. The Company's and First Mid Bank's capital levels are higher today than during the Great Recession of 2008. The Company’s current allowance for credit losses could absorb net charge offs greater than the total of all net charge offs over the last 20 years. The Company’s aggregate net charge offs over the last 20 years through December 31, 2021, were $37.0 million. Current capital levels also support the Company's loan stress testing of the most vulnerable industry sectors impacted by COVID-19. The Company also maintains access to multiple sources of liquidity. As of December 31, 2021, the Company's total liquidity sources could provide $1.7 billion of total available capacity.
Management's outlook. The Company's current financial position is strong and the fundamental earning capabilities of its currently existing operations is solid. Due to the uncertain economic outlook related to the COVID-19 crisis and the potential for loan losses and other asset impairments, it is anticipated that reserve levels will remain elevated compared to recent historical trends. All processes, procedures and internal controls are expected to continue as outlined in existing applicable policies despite remote working status of many employees. While the Company does not currently anticipate any material changes or deficiencies to its capital or liquidity sources, uncertainties about duration and overall effects on the economy could result in more adverse effects than expected.
For the Years Ended December 31, 2021, 2020, and 2019 Overview
This overview of management’s discussion and analysis highlights selected information in this document and may not contain all the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, you should carefully read this entire document. These have an impact on the Company’s consolidated financial condition and results of consolidated operations.
Net income was $51.5 million, $45.3 million, and $47.9 million and diluted earnings per share were $2.87, $2.70, and $2.87 for the years ended December 31, 2021, 2020, and 2019, respectively. The following table shows the Company’s annualized performance ratios for the years ended December 31, 2021, 2020, and 2019:
Return on average assets
0.90
%
1.05
%
1.25
%
Return on average common equity
8.38
%
8.24
%
9.49
%
Average common equity to average assets
10.72
%
12.76
%
13.17
%
Total assets at December 31, 2021, 2020, and 2019 were $5.99 billion, $4.73 billion, and $3.84 billion, respectively. Net loan balances increased to $3.94 billion at December 31, 2021, from $3.10 billion at December 31, 2020, and from $2.67 billion at December 31, 2019. The increase in 2021 was primarily due to approximately $829 million of loans acquired from Providence Bank and $208 million of loans purchased from Stifel Bank. Of the increase in 2020, approximately $183 million was loans purchased from Stifel Bank and $168 million was PPP loans.
Total deposit balances increased to $4.96 billion at December 31, 2021 from $3.69 billion at December 31, 2020 and from $2.92 billion at December 31, 2019. The increase in 2021 was primarily due to $990 million of deposits acquired from Providence Bank and $219 million of deposits acquired in association with loans purchased from Stifel Bank. The increase in 2020 was primarily due to approximately $62 million of deposits acquired from Stifel Bank for customer accounts in connection with loans acquired, increases in customers deposits for stimulus payments and PPP loan proceeds.
Net interest margin (tax effected), defined as net interest income divided by average interest-earning assets, was 3.21% for 2021, 3.27% for 2020 and 3.64% for 2019. In 2021 and 2020 the decrease was primarily due to less accretion income and a decline in interest rates.
Net interest income increased to $167.8 million in 2021 from $127.4 million in 2020 and $125.7 million in 2019. During 2021, the increase in net interest income resulted from growth in earning assets, primarily through acquisitions offset by growth in interest bearing liabilities with lower interest rates. During 2020, the increase in net interest income was primarily due to growth in earning assets offset by a decline in interest rates.
Non-interest income increased to $69.8 million in 2021 compared to $59.5 million in 2020 and $56.0 million in 2019. The increase in 2021 was primarily due to the acquisition of Providence Bank. The increase in 2020 was primarily due to increases in wealth management revenues, insurance commissions and mortgage banking income.
Non-interest expenses increased to $155.6 million in 2021 compared to $111.1 million in 2020, and $112.0 million in 2019. The increase in 2021 was primarily due to the acquisition of Providence Bank. The decrease in 2020 was primarily declines in occupancy and equipment, amortization of intangibles, ATM/debit card expense and acquisition costs offset by increases in salary and benefits and FDIC insurance assessment expense.
Following is a summary of the factors that contributed to the changes in net income (in thousands):
2021 vs 2020
2020 vs 2019
Net interest income
$
40,339
$
1,738
Provision for loan losses
(9,670
)
Other income, including securities transactions
10,247
3,503
Other expenses
(44,492
)
Income taxes
(826
)
Increase (decrease) in net income
$
6,220
$
(2,673
)
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $22.0 million at December 31, 2021 compared to $28.1 million at December 31, 2020, and $27.8 million at December 31, 2019. Repossessed Assets balances totaled $5.0 million at December 31, 2021 compared to $2.5 million at December 31, 2020, and $3.7 million at December 31, 2019. The Company’s provision for loan losses was $15.2 million for 2021, compared to $16.1 million for 2020, and $6.4 million for 2019. The decrease of provision expense in 2021 is primarily due to a decrease in classified loans and improved economic outlook. The increase in provision in 2020 was due to the adoption of ASU 2016-13 and impacts of COVID-19 on the operations and earnings of borrowers.
The Company’s capital position remains strong and the Company has consistently maintained regulatory capital ratios above the “well-capitalized” standards. The Company’s Tier 1 capital ratio to risk weighted assets ratio at December 31, 2021, 2020, and 2019 was 12.51%, 14.63%, and 14.79%, respectively. The Company’s total capital to risk weighted assets ratio at December 31, 2021, 2020, and 2019 was 15.79%, 18.82% and 15.74%, respectively. The decrease in these ratios during 2021 was primarily due to the increase in assets following the acquisition of Providence Bank. The increases in these ratios in 2020 were primarily due to subordinated debt that qualified as Tier 2 capital and net income added to retained earnings.
The Company’s liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company maintains various sources of liquidity to fund its cash needs. See “Liquidity” herein for a full listing of its sources and anticipated significant contractual obligations.
The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. The total outstanding commitments at December 31, 2021, 2020, and 2019 were $1.0 billion, $615.5 million, and $585.3 million, respectively. See Note 17 - “Commitments and Contingent Liabilities” herein for further information.
Critical Accounting Policies and Use of Significant Estimates
The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Company’s financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
Investment in Debt and Equity Securities. The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale. Securities classified as held-to-maturity are recorded at amortized cost. Available-for-sale and equity 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.
Allowance for Credit Losses - Held-to-Maturity Securities. Currently all the Company's held-to-maturity securities are government agency-backed securities for which the risk of loss is minimal. Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities.
Loans. Loans are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase discounts and premiums, fair value hedge accounting adjustments and deferred loan fees and costs. Accrued interest is reported separately and is included in interest receivable in the consolidated balance sheets.
Allowance for Credit Losses - Loans. The Company believes the allowance for credit losses for loans is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. The allowance for credit losses for loans represents the best estimate of losses inherent in the existing loan portfolio. An estimate of potential losses inherent in the loan portfolio are determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, the Company uses relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.
The allowance for credit losses is measured on a collective (pool) basis for non-impaired loans with similar risk characteristics. Historical credit loss experience provides the basis for the estimate of expected credit losses. Adjustments to historical loss information are made for relevant factors to each pool including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. The Company estimates the appropriate level of allowance for credit losses for impaired loans by evaluating them separately. A specific allowance is assigned to an impaired loan when expected cash flows or collateral are less than the carrying amount of the loan.
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period that the Company is exposed to credit risk via a contractual obligation to extend credit unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is included in other liabilities in the consolidated balance sheets.
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 credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.
Mortgage Servicing Rights. The Company has elected to measure mortgage servicing rights under the amortization method. Using this method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation reserve, to the extent that fair value is less than the carrying amount of servicing assets. Fair value in excess of the carrying amount of servicing assets is not recognized.
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. 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 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 consolidated balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment during 2019 as part of the goodwill impairment test and no impairment was deemed necessary.
As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the balance sheets. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually.
Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
ASC 820 establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:
•
Level 1 - quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 - inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 - inputs that are unobservable and significant to the fair value measurement.
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 11 - “Disclosures of Fair Values of Financial Instruments.”
Results of Operations
Net Interest Income
The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds.
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% was used for all years. 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 $2,624,000, $2,223,000, and $2,152,000 for 2021, 2020, and 2019, respectively, were 3.17%, 3.20%, and 3.58% at December 31, 2021, 2020, and 2019, respectively. 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 in the following table (dollars in thousands):
Year Ended
Year Ended
Year Ended
December 31, 2021
December 31, 2020
December 31, 2019
Average
Average
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
Balance
Interest
Rate
Assets
Interest-bearing deposits
$
268,523
$
0.13
%
$
140,470
$
0.19
%
$
66,085
$
1,702
2.58
%
Federal funds sold
1,335
-
0.03
%
1,149
0.24
%
1.80
%
Certificates of deposit investments
2,606
2.13
%
3,771
2.23
%
6,236
2.20
%
Investment securities
Taxable
923,600
15,598
1.69
%
545,525
11,376
2.09
%
616,234
15,662
2.54
%
Tax-exempt (Municipals)(TE)(1)
299,833
9,264
3.09
%
200,128
7,075
3.54
%
185,472
6,811
3.67
%
Loans (TE)(1)(2)(3)
3,778,174
160,362
4.24
%
3,046,814
127,552
4.19
%
2,598,718
127,547
4.91
%
Total earning assets
5,274,071
185,637
3.51
%
3,937,857
146,364
3.72
%
3,473,550
151,873
4.37
%
Cash and due from banks
95,902
87,194
82,197
Premises and equipment
79,913
59,068
59,590
Other assets
333,115
255,184
249,016
Allowance for credit losses
(53,188
)
(37,343
)
(26,996
)
Total assets
$
5,729,813
$
4,301,960
$
3,837,357
Liabilities and stockholders' equity
Deposits:
Demand deposits, interest-bearing
$
2,217,281
4,258
0.19
%
$
1,557,264
3,732
0.24
%
$
1,303,814
6,483
0.50
%
Savings deposits
611,379
0.08
%
469,276
0.09
%
437,549
0.13
%
Time deposits
671,056
4,292
0.64
%
531,834
8,593
1.62
%
630,369
11,866
1.88
%
Total interest-bearing deposits
3,499,716
9,037
0.26
%
2,558,374
12,751
0.50
%
2,371,732
18,939
0.80
%
Securities sold under agreements to repurchase
173,762
0.13
%
219,298
0.22
%
169,437
0.54
%
FHLB advances
107,518
1,514
1.41
%
106,688
1,851
1.73
%
109,630
2,706
2.47
%
Federal funds purchased
-
-
-
%
1.90
%
2.40
%
Subordinated debt
94,321
3,939
4.18
%
22,403
4.16
%
26,649
1,476
5.54
%
Junior subordinated debentures
19,105
2.83
%
18,936
3.60
%
-
-
-
%
Other debt
-
-
-
%
%
1,825
-
-
%
Total borrowings
394,706
6,225
1.58
%
368,506
3,978
1.08
%
308,157
5,108
1.67
%
Total interest-bearing liabilities
3,894,422
15,262
0.39
%
2,926,880
16,729
0.57
%
2,679,889
24,047
0.90
%
Demand deposits
1,164,877
777,435
608,106
Other liabilities
56,388
48,518
44,083
Stockholders’ equity
614,126
549,127
505,279
Total liabilities and stockholders' equity
$
5,729,813
$
4,301,960
$
3,837,357
Net interest income
$
170,375
$
129,635
$
127,826
Net interest spread
3.12
%
3.15
%
3.47
%
Impact of non-interest-bearing funds
0.09
%
0.12
%
0.17
%
TE net yield on interest-earning assets
3.21
%
3.27
%
3.64
%
(1)
Tax-exempt income is shown on a fully tax equivalent basis.
(2)
Nonaccrual loans have been included in the average balances. Balances are net of unaccreted discount related to loans acquired.
(3)
Includes loans held for sale
Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for the past two years (in thousands):
2021 Compared to 2020
2020 Compared to 2019
Increase (Decrease)
Increase (Decrease)
Total
Total
Change
Volume (1)
Rate (1)
Change
Volume (1)
Rate (1)
Earning assets:
Interest-bearing deposits
$
$
$
(104
)
$
(1,428
)
$
$
(2,377
)
Federal funds sold
(3
)
-
(3
)
(11
)
(15
)
Certificates of deposit investments
(28
)
(24
)
(4
)
(53
)
(55
)
Investment securities:
Taxable
4,222
6,728
(2,506
)
(4,286
)
(1,685
)
(2,601
)
Tax-exempt
2,189
3,171
(982
)
(260
)
Loans (2)
32,810
31,257
1,553
20,226
(20,221
)
Total interest income
39,273
41,319
(2,046
)
(5,509
)
19,963
(25,472
)
Interest-bearing liabilities:
Deposits:
Demand deposits, interest-bearing
1,397
(871
)
(2,751
)
1,096
(3,847
)
Savings deposits
(52
)
(164
)
(199
)
Time deposits
(4,301
)
1,849
(6,150
)
(3,273
)
(1,736
)
(1,537
)
Total interest-bearing deposits
(3,714
)
3,359
(7,073
)
(6,188
)
(605
)
(5,583
)
Securities sold under agreements to repurchase
(257
)
(87
)
(170
)
(423
)
(642
)
FHLB advances
(337
)
(351
)
(855
)
(71
)
(784
)
Federal funds purchased
(10
)
(5
)
(5
)
(5
)
(2
)
(3
)
Subordinated debt
3,008
3,004
-
Junior subordinated debentures
(141
)
(147
)
(794
)
(359
)
(435
)
Other debt
(16
)
(8
)
(8
)
-
Total borrowings
2,247
2,924
(677
)
(1,130
)
(1,848
)
Total interest expense
(1,467
)
6,283
(7,750
)
(7,318
)
(7,431
)
Net interest income
$
40,740
$
35,036
$
5,704
$
1,809
$
19,850
$
(18,041
)
(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)
Nonaccrual loans have been included in the average balances. Balances are net of unaccreted discount related to loans acquired.
Net interest income on a tax-effected basis increased $40.7 million or 31.4% in 2021 compared to an increase of $1.8 million or 1.4% in 2020. Net interest income on a tax-effected basis increased primarily due to the growth in average earnings assets including loans and interest-bearing deposits. The tax-effected net interest margin decreased primarily due to lower yields on interest earning assets.
In 2021, average earning assets increased by $1.3 billion, or 33.9%, and average interest-bearing liabilities increased by $967.5 million or 33.1%. These increases were primarily due to assets and liabilities acquired from Providence Bank and loans and deposits purchased from Stifel Bank. In 2020, average earning assets increased by $464.3 million or 13.4% and average interest-bearing liabilities increased $247.0 million or 9.2% compared with 2019. Changes in average balances are shown below:
•
Average interest-bearing deposits held by the Company increased $128.1 million or 91.2% in 2021 compared to 2020. In 2020, average interest-bearing deposits held by the Company increased $74.4 million or 112.6% compared to 2019.
•
Average federal funds sold increased $0.2 million or 16.2% in 2021 compared to 2020. In 2020, average federal funds sold increased $0.3 million or 42.7% compared to 2019.
•
Average certificates of deposit investments decreased $1.2 million or 30.9% in 2021 compared to 2020. In 2020, average certificates of deposit investments decreased $2.5 million or 39.5% compared to 2019.
•
Average loans increased by $731.4 million or 24.0% in 2021 compared to 2020. In 2020, average loans increased by $448.1 million or 17.2% compared to 2019.
•
Average securities increased by $477.8 million or 64.1% in 2021 compared to 2020. In 2020, average securities decreased by $56.1 million or 7.0% compared to 2019.
•
Average interest-bearing deposit liabilities increased by $941.3 million or 36.8% in 2021 compared to 2020. In 2020, average deposits increased by $186.6 million or 7.9% compared to 2019.
•
Average securities sold under agreements to repurchase decreased by $45.5 million or 20.80% in 2021 compared to 2020. In 2020, average securities sold under agreements to repurchase increased by $49.9 million or 29.4% compared to 2019.
•
Average borrowings and other debt increased by $71.7 million or 48.1% in 2021 compared to 2020. In 2020, average borrowings and other debt increased by $10.5 million or 7.6% compared to 2019.
•
Net interest margin increased to 3.21% compared to 3.27% in 2020 and 3.64% in 2019. Asset yields decreased by 21 basis points in 2021, and interest- bearing liabilities decreased by 18 basis points.
Provision for Loan Losses
The provision for loan losses in 2021 was $15,151,000 compared to $16,103,000 in 2020 and $6,433,000 in 2019. Nonperforming loans decreased to $22,036,000 at December 31, 2021 from $28,123,000 at December 31, 2020 and $27,818,000 at December 31, 2019. The decrease in provision expense in 2021 was primarily due to a decrease in classified loans and improved economic outlook. The increase in provision expense in 2020 was primarily due to the adoption of ASU 2016-13 and additional provision due to impacts of COVID-19 on borrower operations and earnings. Net charge-offs were $4,480,000 during 2021, $2,776,000 during 2020 and $5,711,000 during 2019. For information on loan loss experience and nonperforming loans, see “Nonperforming Loans and Repossessed Assets” and “Loan Quality and Allowance for credit losses” herein.
Other Income
An important source of the Company’s revenue is derived from other income. The following table sets forth the major components of other income for the last three years (in thousands):
Change From Prior Year
$
%
$
%
Wealth management revenues
$
20,407
$
16,153
$
15,570
$
4,254
26.3
%
$
3.7
%
Insurance commissions
18,927
17,477
16,029
1,450
8.3
%
1,448
9.0
%
Service charges
6,808
5,862
7,837
16.1
%
(1,975
)
-25.2
%
Securities gains
1,106
(982
)
-88.8
%
37.9
%
Mortgage banking
4,718
5,075
1,746
(357
)
-7.0
%
3,329
190.7
%
ATM / debit card revenue
11,974
8,962
8,491
3,012
33.6
%
5.5
%
Bank owned life insurance
3,039
1,730
1,755
1,309
75.7
%
(25
)
-1.4
%
Other
3,770
3,155
3,787
19.5
%
(632
)
-16.7
%
Total other income
$
69,767
$
59,520
$
56,017
$
10,247
17.2
%
$
3,503
6.3
%
Total non-interest income increased to $69.8 million in 2021 compared to $59.5 million in 2020 and $56.0 million in 2019. The primary reasons for the more significant year-to-year changes in other income components are as follows:
•
Wealth management revenues increased in 2021 due to increases in all business lines. The increase in 2020 was due to an increase in farm real estate brokerage fees and investment brokerage commissions offset by declines in market-based fees and farm management income. Total assets under management were $5.1 billion at December 31, 2021 compared to $4.5 billion at December 31, 2020 and $4.3 billion at December 31, 2019.
•
Insurance commissions increased in 2021 primarily due to increases in commission and fee income offset by a decline in contingency income. During 2020, the increase resulted from increases in contract bond revenue and contingency income.
•
Fees from service charges increased in 2021 primarily due to the acquisition of Providence Bank. These fees decreased in 2020 due to a decline in overdraft fees primarily resulting from increased assistance related to COVID-19 such as stimulus payments and increased unemployment benefits and less spending during the shelter-in-place period.
•
Net securities gains in 2021 were $124,000 compared to $1,106,000 in 2020 and $802,000 in 2019. Net securities gains were less in 2021 due to less securities being sold during the year. Sale of securities in 2020 resulted in greater net securities gains compared to the same period last year due to an increase in called securities resulting from the decline in interest rates during the first quarter of 2020.
•
The decrease in mortgage banking income during 2021 was due to a decline in mortgage refinancing activity and fees from loans sold in the secondary market. Loans sold balances were as follows:
•
$149.0 million (representing 1,011 loans) in 2021
•
$196.0 million (representing 1,315 loans) in 2020
•
$101.0 million (representing 741 loans) in 2019
First Mid Bank generally releases the servicing rights on loans sold into the secondary market.
•
Revenue from ATMs and debit cards increased in 2021 primarily due to the acquisition of Providence Bank and in 2020 due to an increase in electronic transactions.
•
Bank owned life insurance increased during 2021 due to $30 million of bank owned life insurance added by First Mid Bank and $30.3 million of bank owned life insurance acquired in the acquisition of Providence Bank. The slight decrease during 2020 was due to a decline in the change in cash surrender value compared to the same period last year.
•
Other income increased during 2021 primarily due to the acquisition of Providence Bank offset by a swap upfront fee received in 2020 that did not recur in 2021. Other income decreased during 2020 compared to 2019 primarily due to an increase in waived fees and decreases in fees charged, and activity from First Mid Captive that did not occur in the same period last year, offset by fee income received from derivative transactions.
Other Expense
The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations. The following table sets forth the major components of other expense for the last three years (dollars in thousands):
Change From Prior Year
$
%
$
%
Salaries and benefits
$
89,660
$
66,452
$
62,578
$
23,208
34.9
%
$
3,874
6.2
%
Occupancy and equipment
21,546
16,708
17,680
4,838
29.0
%
(972
)
-5.5
%
Other real estate owned, net
3,866
3,824
9104.8
%
(401
)
-90.5
%
FDIC insurance assessment expense
1,604
1,309
22.5
%
1,090
497.7
%
Amortization of other intangibles
5,391
5,062
5,848
6.5
%
(786
)
-13.4
%
Stationery and supplies
1,161
1,080
1,104
7.5
%
(24
)
-2.2
%
Legal and professional
6,730
5,427
5,164
1,303
24.0
%
5.1
%
Marketing and promotion
3,603
1,616
2,031
1,987
123.0
%
(415
)
-20.4
%
ATM / debit card expense
3,116
2,290
3,488
36.1
%
(1,198
)
-34.3
%
Other operating expenses
18,902
11,101
13,437
7,801
70.3
%
(2,336
)
-17.4
%
Total other expense
$
155,579
$
111,087
$
111,992
$
44,492
40.1
%
$
(905
)
-0.8
%
Total non-interest expense increased to $155.6 million in 2021 from $111.1 million in 2020 and $112.0 million in 2019. The primary reasons for the more significant year-to-year changes in other expense components are as follows:
•
Salaries and employee benefits, the largest component of other expense, increase due to additional employees from the acquisition of Providence Bank, merit increases in 2021 for continuing employees and an increase in incentive compensation, commissions, and share-based compensation. The increase in 2020 was primarily due to an increase in incentive compensation and commissions, group insurance expense, share-based compensation expense and increases for merit raises and applicable payroll taxes. There were 965 full-time equivalent employees at December 31, 2021, compared to 824 at December 31, 2020, and 827 at December 31, 2019.
•
Occupancy and equipment expense increased primarily due to additional properties added in the acquisition of Providence Bank and increases in expense for software and data processing. The decrease in 2020 due to a decline in expenses for software and uncapitalized equipment.
•
Net other real estate owned expense increased in 2021 primarily due to properties added in the acquisition of Providence Bank that were sold at prices lower than recorded book value and properties from branch operations that were closed during 2021 and moved to ORE and subsequently written down. The decrease in 2020 was primarily due to more gains on properties sold during 2020 than properties sold during 2019 and a decrease in property maintenance expense due to less properties currently owned.
•
FDIC insurance expense increased due to the additional assets added with the acquisition of Providence Bank offset by lower assessment rates. The increase in 2020 was due to less small business assessment credit applied during 2020 than in 2019 and an increase in assessment rates.
•
Amortization of other intangibles increased during 2021 due to additional core deposit intangibles added from the acquisition of Providence Bank and deposits added associated with the Stifel loan purchase. Amortization expense decreased during 2020 due to less amortization for core deposit intangibles.
•
ATM and debit card expenses increased primarily due to an increase in electronic transactions following the acquisition of Providence Bank. The decrease during 2021 was primarily due to growth incentives received that reduced expense.
•
Other operation expenses increased during 2021 primarily due to the acquisition of Providence Bank. Other operating expenses decreased during 2020 due to decreases in loan collection expense, business entertainment and seminar expenses and acquisition costs offset by increases in data processing costs.
•
On a net basis, all other categories of operating expenses increased during 2021 primarily due to an increase in fees associated with the acquisition of Providence Bank. The decrease during 2020 was due to declines in marketing and promotion expenses offset by an increase in legal and professional fees.
Income Taxes
Income tax expense amounted to $15,298,000 in 2021 compared to $14,472,000 in 2020, and $15,323,000 in 2019. Effective tax rates were 22.9% for 2021, 24.2% for 2020, and 24.2% for 2019. 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 2018.
Analysis of Balance Sheets
Securities
The Company’s overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the available-for-sale and held-to-maturity securities for the last three years (dollars in thousands):
December 31,
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Cost
Yield
Cost
Yield
Cost
Yield
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
213,599
1.22
%
$
132,083
1.25
%
$
175,970
2.39
%
Obligations of states and political subdivisions
383,991
2.40
%
237,886
2.72
%
172,460
2.98
%
Mortgage-backed securities: GSE residential
799,456
1.58
%
479,470
1.92
%
391,307
2.79
%
Other securities
32,575
4.30
%
10,740
5.22
%
4,028
3.44
%
Total securities
$
1,429,621
1.80
%
$
860,179
2.08
%
$
743,765
2.83
%
At December 31, 2021, the amortized cost of the Company’s investment portfolio increased by $569.4 million from December 31, 2020 primarily due to securities obtained in the acquisition of Providence Bank. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed.
The table below presents the credit ratings as of December 31, 2021 for certain investment securities (in thousands):
Average Credit Rating of Fair Value at December 31, 2021 (1)
Amortized
Estimated
Not
Cost
Fair Value
AAA
AA +/-
A +/-
BBB +/-
< BBB -
Rated
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
208,598
$
203,815
$
28,819
$
174,995
$
-
$
-
$
-
$
-
Obligations of state and political subdivisions
383,991
395,457
45,786
286,154
62,873
-
-
Mortgage-backed securities (2)
799,456
791,038
1,042
-
-
-
-
789,996
Other securities
30,546
31,112
-
-
-
2,501
-
28,611
Total available-for-sale
$
1,422,591
$
1,421,422
$
75,647
$
461,149
$
62,873
$
2,501
$
-
$
819,250
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
7,030
$
7,035
$
-
$
5,005
$
-
$
-
$
-
$
2,029
Equity securities:
Federal Agricultural Mtg Corp
$
$
$
-
$
-
$
-
$
-
$
-
$
(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.
Loans
The loan portfolio (net of unearned interest) is the largest category of the Company’s earning assets. The following table summarizes the composition of the loan portfolio, including loans held for sale, for the last five years (dollars in thousands):
% Outstanding
Loans
Construction and land development
$
145,118
3.6
%
$
122,479
$
94,142
$
50,619
$
107,594
Agricultural real estate
279,272
7.0
%
254,341
240,241
231,700
127,183
1-4 family residential properties
400,313
10.0
%
325,762
336,427
373,518
293,667
Multifamily residential properties
298,942
7.5
%
189,632
153,948
184,051
61,798
Commercial real estate
1,666,198
41.7
%
1,174,300
995,702
906,850
681,757
Loans secured by real estate
2,789,843
69.8
%
2,066,514
1,820,460
1,746,738
1,271,999
Agricultural loans
151,484
3.8
%
137,352
136,124
135,877
86,631
Commercial and industrial loans
832,008
20.8
%
738,313
528,973
557,011
444,263
Consumer loans
78,442
2.0
%
78,002
83,183
91,516
29,749
All other loans
143,746
3.6
%
118,238
126,607
113,377
106,859
Total loans
$
3,995,523
100.0
%
$
3,138,419
$
2,695,347
$
2,644,519
$
1,939,501
Loan balances increased by $857.1 million or 27.3% from December 31, 2020 to December 31, 2021 of which approximately $829 million were loans acquired from Providence Bank and $208 million were loans purchases from Stifel Bank. Loan balances increased by $443.1 million or 16.4% from December 31, 2019 to December 31, 2020 of which approximately $183 million were loans purchased from Stifel Bank and $168.3 million were PPP loans. The balances of loans sold into the secondary market were $149.0 million in 2021 compared to $196.4 million in 2020. The balance of real estate loans held for sale, included in the balances shown above, amounted to $2.7 million and $1.9 million as of December 31, 2021 and 2020, 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.
First Mid Bank does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage of total risk-based capital for the periods shown above. At December 31, 2021 and 2020, First Mid Bank did have industry loan concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):
December 31, 2021
December 31, 2020
Principal
% Outstanding
Principal
% Outstanding
balance
Loans
balance
Loans
Other grain farming
$
297,394
7.44
%
$
308,202
9.82
%
Lessors of non-residential buildings
696,730
17.44
%
420,175
13.39
%
Lessors of residential buildings and dwellings
468,362
11.72
%
313,268
9.98
%
Hotels and motels
159,410
3.99
%
124,755
3.98
%
Other gambling industries
57,549
1.44
%
119,549
3.81
%
The concentration of other gambling industries was less than 25% of total risk-based capital as of December 31, 2021 however is shown for comparative purposes. The Company had no further industry loan concentrations in excess of 25% of total risk-based capital.
The following table presents the balance of loans outstanding as of December 31, 2021, by contractual maturities (in thousands):
Maturity (1)
One year
or less(2)
Over 1 through
5 years
Over
5 years
Total
Construction and land development
$
36,500
$
79,061
$
29,557
$
145,118
Agricultural real estate
17,998
91,303
169,971
279,272
1-4 family residential properties
17,074
96,444
286,795
400,313
Multifamily residential properties
44,250
175,690
79,002
298,942
Commercial real estate
126,326
716,291
823,581
1,666,198
Loans secured by real estate
242,148
1,158,789
1,388,906
2,789,843
Agricultural loans
108,127
40,440
2,917
151,484
Commercial and industrial loans
278,602
354,715
198,691
832,008
Consumer loans
9,985
54,791
13,666
78,442
All other loans
46,835
24,087
72,824
143,746
Total loans
$
685,697
$
1,632,822
$
1,677,004
$
3,995,523
(1)
Based upon remaining contractual maturity.
(2)
Includes demand loans, past due loans and overdrafts.
As of December 31, 2021, loans with maturities over one year consisted of approximately $2.2 billion in fixed rate loans and approximately $1.1 billion in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding renewals and borrower requests, which are handled on a case-by-case basis.
Nonperforming Loans and Nonperforming Other Assets
Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and (c) loans not included in (a) and (b) above which are defined as “troubled debt restructurings”. Repossessed assets include primarily repossessed real estate and automobiles.
The Company’s policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due. The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal.
Troubled debt restructurings 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 credit losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs for subsequent declines in value are recorded in non-interest expense in other real estate owned along with other expenses related to maintaining the properties.
The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets (in thousands):
December 31,
Nonaccrual loans
$
18,105
$
23,750
$
25,118
$
27,298
$
16,659
Troubled debt restructurings which are performing in accordance with revised terms
3,931
4,373
2,700
2,451
Total nonperforming loans
22,036
28,123
27,818
29,749
17,513
Repossessed assets
5,019
2,493
3,720
2,595
2,834
Total nonperforming loans and repossessed assets
$
27,055
$
30,616
$
31,538
$
32,344
$
20,347
Nonperforming loans to loans, before allowance for credit losses
0.55
%
0.90
%
1.03
%
1.12
%
0.90
%
Nonperforming loans and repossessed assets to loans, before allowance for credit losses
0.68
%
0.98
%
1.17
%
1.22
%
1.05
%
The $5.6 million decrease in nonaccrual loans during 2021 resulted from the net of $4.6 million of loans put on nonaccrual status, offset by $0.2 million of loans transferred to other real estate owned, $3.8 million of loans charged off and $6.2 million of loans becoming current or paid-off.
The following table summarizes the composition of nonaccrual loans (dollars in thousands):
December 31, 2021
December 31, 2020
Balance
% of Total
Balance
% of Total
Construction and land development
$
0.1
%
$
0.7
%
Agricultural real estate
1.9
%
1.5
%
1-4 family residential properties
5,252
29.0
%
6,930
29.2
%
Multifamily residential properties
1,982
11.0
%
2,181
9.2
%
Commercial real estate
7,920
43.7
%
8,760
36.9
%
Loans secured by real estate
15,515
85.7
%
18,392
77.4
%
Agricultural loans
3.1
%
2.8
%
Commercial and industrial loans
1,851
10.2
%
4,372
18.4
%
Consumer loans
1.0
%
1.4
%
Total loans
$
18,105
100.0
%
$
23,750
100.0
%
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $308,000, $575,000 and $906,000 for the years ended December 31, 2021, 2020, and 2019, respectively.
The $2.5 million increase in repossessed assets during 2021 resulted from the net of $10.9 million of loans added through the acquisition of Providence Bank, $4.3 million of additional assets repossessed, $8.9 million of repossessed assets sold and a $3.1 million of net adjustments to discounts and premiums recorded at acquisition. The following table summarizes the composition of repossessed assets (dollars in thousands):
December 31, 2021
December 31, 2020
Balance
% of Total
Balance
% of Total
Construction and land development
$
3,004
59.9
%
$
1,436
57.6
%
1-4 family residential properties
0.2
%
2.8
%
Commercial real estate
1,968
39.2
%
39.4
%
Total real estate
4,984
99.3
%
2,489
99.8
%
Consumer loans
0.7
%
-
%
Total repossessed collateral
$
5,019
100.0
%
$
2,493
100.0
%
Repossessed assets sold during 2021 resulted in total net losses of $511,000, of which $512,000 of net losses were related to real estate asset sales and $766 of net gains was related to other repossessed assets sales. In addition, $3.1 million of write downs were recorded based on current property appraisals and $2.1 million of deferred fair value marks from previous acquisitions were recognized.
Loan Quality and Allowance for Credit Losses
The allowance for credit losses represents management’s estimate of the reserve necessary to adequately account for probable losses existing in the current portfolio. The provision for credit losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for credit losses. Management considers collateral values and guarantees in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates.
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 consumers’ ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. Management considers the allowance for credit 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 December 31, 2021, the Company’s loan portfolio included $430.8 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $297.4 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $39.1 million from $391.7 million at December 31, 2020 while loans concentrated in other grain farming increased $10.8 million from $308.2 million at December 31, 2020. 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 $159.4 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 $696.7 million of loans to lessors of non-residential buildings, $468.4 million of loans to lessors of residential buildings and dwellings, $57.5 million of loans to other gambling industries and $122.6 million of loans to nursing care facilities.
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. Most of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.
The Company minimizes credit risk by adhering to sound underwriting and credit review policies. Management and the Board of Directors of the Company review these policies at least annually. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor, and address asset quality problems in an accurate and timely manner. On a quarterly basis, the Board of Directors and management review the status of problem loans and determine a best estimate of the allowance. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for credit losses.
Analysis of the allowance for credit losses for the past five years and of changes in the allowance for these periods is summarized as follows (dollars in thousands):
Average loans outstanding, net of unearned income
$
3,778,142
$
3,003,488
$
2,598,718
$
2,276,500
$
1,836,617
Adjustment for adoption of ASU 2016-13
-
1,672
-
-
-
Allowance-beginning of period
41,910
28,583
26,189
19,977
16,753
Initial allowance on loans purchased with credit deterioration
2,074
-
-
-
-
Charge-offs:
Construction and land development
-
Agricultural real estate
-
-
-
-
-
1-4 family residential properties
1,477
1,111
Commercial real estate
1,743
Agricultural loans
-
-
Commercial and industrial loans
3,118
1,991
1,828
2,604
Consumer loans
1,405
1,254
Total charge-offs
5,634
3,844
6,326
2,993
5,195
Recoveries:
Construction and land development
-
-
-
-
Agricultural real estate
-
-
-
-
1-4 family residential properties
Commercial real estate
-
Agricultural loans
-
-
-
-
Commercial and industrial loans
Consumer loans
Total recoveries
1,154
1,068
Net charge-offs
4,480
2,776
5,711
2,455
4,238
Provision for loan losses
15,151
16,103
6,433
8,667
7,462
Allowance-end of period
$
54,655
$
41,910
$
26,911
$
26,189
$
19,977
Ratio of annualized net charge-offs to average loans
0.12
%
0.09
%
0.22
%
0.11
%
0.23
%
Ratio of allowance for credit losses to loans outstanding (less unearned interest at end of period)
1.37
%
1.34
%
1.00
%
0.99
%
1.03
%
Ratio of allowance for credit losses to nonperforming loans
248.0
%
149.0
%
96.7
%
88.0
%
114.1
%
The ratio of the allowance for credit losses to nonperforming loans was 248.0% as of December 31, 2021 compared to 149.0% as of December 31, 2020. The increase in this ratio is primarily due to a decline in nonperforming loans. Management believes that the overall estimate of the allowance for credit losses appropriately accounts for probable losses attributable to current exposures.
During 2021, the Company had net charge-offs of $4,480,000 compared to $2,776,000 in 2020. During 2021, there were significant charge-offs of two commercial real estate loans to two borrowers of $661,000 and significant charge-offs of five commercial operating loans to three borrowers of $2.9 million. During 2020, there were significant charge-offs of eight commercial real estate loans to five borrowers of $760,000 and significant charge-offs of eleven commercial operating loans to five borrowers of $1.7 million.
At December 31, 2021, the allowance for credit losses amounted to $54.7 million or 1.37% of total loans. At December 31, 2020, the allowance for credit losses amounted to $41.9 million or 1.34% of total loans. Excluding the fully guaranteed PPP loans, the ratio of allowance for credit losses to loans outstanding was 1.41%. The allowance is allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based on historical losses and other factors.
The allowance for credit losses, in management's judgment, was allocated as follows to cover probable loan losses (dollars in thousands):
December 31, 2021
December 31, 2020
December 31, 2019
December 31, 2018
% of loans to
% of loans to
% of loans to
% of loans to
Allowance for
credit losses
total
loans
Allowance for
credit losses
total
loans
Allowance for
credit losses
total
loans
Allowance for
credit losses
total
loans
Construction and land development
$
1,743
3.6
%
$
1,666
3.9
%
$
1,146
3.5
%
$
1.9
%
Agriculture real estate
1,257
7.0
%
1,084
8.1
%
1,093
8.9
%
1,246
8.8
%
1-4 family residential
2,330
10.0
%
2,322
10.4
%
1,386
12.5
%
1,504
14.1
%
Commercial real estate
26,246
49.2
%
19,660
43.4
%
11,198
42.6
%
11,102
41.3
%
Agricultural loans
3.8
%
1,526
4.4
%
1,386
5.1
%
5.1
%
Commercial and industrial
19,241
24.4
%
13,485
27.3
%
9,273
24.3
%
9,893
25.3
%
Consumer
2,855
2.0
%
2,167
2.5
%
1,429
3.1
%
3.5
%
Total allocated
54,655
100.0
%
41,910
100.0
%
26,911
100.0
%
26,189
100.0
%
Unallocated
-
NA
-
NA
-
NA
-
NA
Allowance at end of year
$
54,655
100.0
%
$
41,910
100.0
%
$
26,911
100.0
%
$
26,189
100.0
%
December 31, 2017
% of loans to
Allowance for
credit losses
total
loans
Residential real estate
$
16.2
%
Commercial / commercial real estate
16,546
70.8
%
Agricultural / agricultural real estate
1,742
11.0
%
Consumer
2.0
%
Total allocated
19,977
100.0
%
Unallocated
-
NA
Allowance at end of year
$
19,977
100.0
%
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 years ended December 31, 2021, 2020, and 2019 (dollars in thousands):
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
Demand deposits:
Non-interest-bearing
$
1,164,877
-
%
$
777,435
-
%
$
608,106
-
%
Interest-bearing
2,217,281
0.19
%
1,557,264
0.24
%
1,303,814
0.50
%
Savings
611,379
0.08
%
469,276
0.09
%
437,549
0.13
%
Time deposits
671,056
0.64
%
531,834
1.61
%
630,369
1.88
%
Total average deposits
$
4,664,593
0.19
%
$
3,335,809
0.38
%
$
2,979,838
0.64
%
The following table sets forth the high and low month-end balances for the years ended December 31, 2021, 2020, and 2019 (in thousands):
High month-end balances of total deposits
$
5,000,084
$
3,692,784
$
3,046,212
Low month-end balances of total deposits
3,725,741
2,873,260
2,917,366
In 2021, the average balance of deposits increased by $1.3 billion from 2020. The increase in 2021 was primarily due to approximately $990 million of deposits acquired from Providence Bank and $219 million of deposits acquired in association with loans purchased from Stifel Bank. Average non-interest bearing deposits increased $387.4 million, interest-bearing deposits increased by $660.0 million, savings accounts increased by $142.1 million, and time deposits increased $139.2 million. In 2020, the average balance of deposits increased by $356.0 million from 2019. The increase was primarily the result of deposit balances acquired from Stifel Bank and increases in customer balances due to stimulus payments and PPP loan funds received. Average non-interest bearing deposits increased $169.3 million, interest-bearing deposits increased by $253.5 million, savings accounts increased by $31.7 million, and time deposits decreased $98.5 million.
Balances of time deposits of $100,000 or more include time deposits maintained for public fund entities and consumer time deposits. The following table sets forth the maturity of time deposits of $100,000 or more (in thousands):
December 31,
3 months or less
$
86,790
$
72,945
$
81,910
Over 3 through 6 months
57,777
49,710
55,495
Over 6 through 12 months
82,644
88,682
95,725
Over 12 months
75,568
72,070
107,861
Total
$
302,779
$
283,407
$
340,991
The balance of time deposits of $100,000 or more increased $19.4 million from December 31, 2020 to December 31, 2021. The increase was primarily due to time deposits acquired from Providence Bank. The balance of time deposits of $100,000 or more decreased $57.6 million from December 31, 2019 to December 31, 2020. The decrease in 2020 was primarily due to time deposits that matured and were not renewed or replaced.
In 2021 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of $291.4 million and $227.6 million in various checking accounts and time deposits as of December 31, 2021 and 2020, respectively. These balances are subject to change depending upon the cash flow needs of the public entity.
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 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, subordinated debt and junior subordinated debentures.
Information relating to securities sold under agreements to repurchase and other borrowings as December 31, 2021, 2020, and 2019 is presented below (dollars in thousands):
At December 31:
Securities sold under agreements to repurchase
$
146,268
$
206,937
$
208,109
Federal funds purchased
-
-
5,000
Federal Home Loan Bank advances:
Fixed term - due in one year or less
25,113
18,984
39,000
Fixed term - due after one year
61,333
74,985
74,895
Subordinated debt
94,400
94,253
-
Junior subordinated debentures
19,195
19,027
18,858
Other debt
Due in one year or less
-
-
-
Due after one year
-
-
-
Total
$
346,309
$
414,186
$
345,862
Average interest rate at end of period
1.78
%
0.81
%
1.08
%
Maximum outstanding at any month-end:
Securities sold under agreements to repurchase
$
212,503
$
350,288
$
208,109
Federal funds purchased
-
8,000
5,000
Federal Home Loan Bank advances:
FHLB-overnight
-
-
25,000
Fixed term - due in one year or less
30,180
34,969
66,000
Fixed term - due after one year
97,877
104,974
74,895
Subordinated debt
94,400
94,256
-
Junior subordinated debentures
19,195
19,027
29,126
Debt:
Debt due in one year or less
-
5,000
-
Debt due after one year
-
-
6,549
Averages for the period (YTD):
Securities sold under agreements to repurchase
$
173,762
$
219,298
$
169,437
Federal funds purchased
-
Federal Home Loan Bank advances:
FHLB-overnight
-
1,831
7,148
Fixed term - due in one year or less
22,751
24,858
63,151
Fixed term - due after one year
84,766
79,999
39,331
Subordinated debt
94,321
22,403
-
Junior subordinated debentures
19,105
18,936
26,649
Debt:
Loans due in one year or less
-
-
Loans due after one year
-
-
1,825
Total
$
394,705
$
370,338
$
308,157
Average interest rate during the period
1.58
%
1.07
%
1.66
%
Securities sold under agreements to repurchase decreased $60.7 million during 2021 primarily due to the seasonal demands in balances and change in cash flow needs of various customers. FHLB advances represent borrowings by the First Mid Bank to economically fund loan demand. At December 31, 2021 FHLB advances totaled $86 million with a weighted-average interest rate of 1.66% and maturities from March 2022 to December 2029. At December 31, 2020 FHLB advances totaled $94 million with a weighted-average interest rate of 1.57% and maturities from February 2021 to December 2029.
The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $15 million. The balance on this line of credit was $0 as of December 31, 2021. This loan was renewed on April 9, 2021 for one year as a revolving credit agreement with a maximum available balance of $15 million. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of First Mid Bank. The Company and its subsidiary banks were in compliance with the existing covenants at December 31, 2021 and 2020.
On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the Company and the Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes are unsecured, subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding October 15, 2025, the Notes will bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 383 basis points,
or such other rate as determined pursuant to the Supplemental Indenture, provided that in no event shall the applicable floating interest rate be less than zero per annum.
The Company may, beginning with the interest payment date of October 15, 2025, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the Notes at any time, including prior to October 15, 2025, at the Company’s option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding the redemption date. At December 31, 2021, the recorded balance of the subordinated notes was $94,400,000.
On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through First Mid-Illinois Statutory Trust II (“Trust II”), a statutory business trust and wholly owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common equity of Trust II, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points) after June 15, 2011 (1.80% and 1.82% at December 31, 2021 and 2020, respectively). The net proceeds to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield Bancorp, Inc. in 2006.
On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First Clover Financial. The $4,000,000 of trust preferred securities and an additional $124,000 additional investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (2.05% and 2.07% at December 31, 2021 and 2020, respectively) and resets quarterly.
On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First BancTrust Corporation. The $6,000,000 of trust preferred securities and an additional $186,000 additional investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (1.90% and 1.92% at December 31, 2021 and 2020, respectively) and resets quarterly.
The trust preferred securities issued by Trust II, CLST I, and FBTCST I are included as Tier 1 capital of the Company for regulatory capital purposes. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1 capital for regulatory purposes. The final rule provided a five-year transition period, ending September 30, 2010, for application of the revised quantitative limits. On March 17, 2009, the Federal Reserve Board adopted an additional final rule that delayed the effective date of the new limits on inclusion of trust preferred securities in the calculation of Tier 1 capital until March 31, 2012. The application of the revised quantitative limits did not and is not expected to have a significant impact on its calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized. The Dodd-Frank Act, signed into law July 21, 2010, removes trust preferred securities as a permitted component of a holding company’s Tier 1 capital after a three-year phase-in period beginning January 1, 2013 for larger holding companies. For holding companies with less than $15 billion in consolidated assets, existing issues of trust preferred securities are grandfathered and not subject to this new restriction. New issuances of trust preferred securities, however, would not count as Tier 1 regulatory capital.
In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This rule is generally referred to as the “Volcker Rule.” On December 10, 2013, the federal banking agencies issued final rules to implement the prohibitions required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry regarding the adverse impact the final rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies approved a final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities. Under the final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets if (1) the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the offering proceeds received by the collateralized debt obligation were invested primarily in qualifying trust preferred collateral, and (3) the banking entity’s interests in the collateralized debt obligation was acquired on or prior to December 10, 2013. Although the Volcker Rule impacts many large banking entities, the Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company, First Mid Bank or Jefferson Bank.
Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of interest-bearing assets differ significantly from the maturity or repricing characteristics of interest-bearing liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company’s asset liability management committee (ALCO) oversees the interest rate sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as “static GAP” analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet.
The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at December 31, 2021 (dollars in thousands):
Rate Sensitive Within
1 year
1-2 years
2-3 years
3-4 years
4-5 years
Thereafter
Total
Fair Value
Interest-earning assets:
Federal funds sold and other interest-bearing deposits
$
77,695
$
-
$
-
$
-
$
-
$
-
$
77,695
$
77,695
Certificates of deposit investments
1,470
-
-
-
-
2,450
2,450
Taxable investment securities
165,381
135,670
160,081
97,149
149,715
330,669
1,038,665
1,038,669
Nontaxable investment securities
38,126
11,794
12,507
25,023
29,638
273,096
390,184
390,184
Loans
1,566,196
496,143
548,487
467,909
581,208
335,580
3,995,523
3,947,273
Total
$
1,848,868
$
644,587
$
721,075
$
590,081
$
760,561
$
939,345
$
5,504,517
$
5,456,271
Interest-bearing liabilities:
Savings and NOW accounts
$
528,417
$
180,774
$
180,774
$
180,774
$
180,774
$
827,775
$
2,079,288
$
2,079,288
Money market accounts
768,939
41,872
41,872
41,872
41,872
132,046
1,068,473
1,068,473
Other time deposits
417,991
81,146
29,135
15,483
18,233
562,052
562,304
Short-term borrowings/debt
146,268
-
-
-
-
-
146,268
146,274
Long-term borrowings/debt
44,307
20,135
10,000
11,199
94,400
20,000
200,041
195,660
Total
$
1,905,922
$
323,927
$
261,781
$
249,328
$
335,279
$
979,885
$
4,056,122
$
4,051,999
Rate sensitive assets - rate sensitive liabilities
$
(57,054
)
$
320,660
$
459,294
$
340,753
$
425,282
$
(40,540
)
$
1,448,395
Cumulative GAP
$
(57,054
)
$
263,606
$
722,900
$
1,063,653
$
1,488,935
$
1,448,395
Cumulative amounts as % of total rate sensitive assets
(1.0
)%
5.8
%
8.3
%
6.2
%
7.7
%
(0.7
)%
Cumulative ratio
(1.0
)%
4.8
%
13.1
%
19.3
%
27.0
%
26.3
%
The static GAP analysis shows that at December 31, 2021, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis. The Company’s ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank’s historical experience and with known industry trends. ALCO meets at least monthly to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities.
Capital Resources
At December 31, 2021, the Company’s stockholders' equity had increased $66 million, or 11.6%, to $633,894,000 from $568,228,000 as of December 31, 2020. During 2021, net income contributed $51,490,000 to equity before the payment of dividends to stockholders of $15.1 million. The change in market value of available-for-sale investment securities decreased stockholders' equity by $17.9 million, net of tax.
Stock Plans
Deferred Compensation Plan. The Company follows the provisions of the Emerging Issues Task Force Issue No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested” (“EITF 97-14”), which was codified into ASC 710-10, for purposes of the First Mid Bancshares, Inc. Amended and Restated Deferred Compensation Plan (“DCP”). At December 31, 2021, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $4,295,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $4,295,000 as an equity instrument (deferred compensation).
The DCP was effective as of June 1984. The purpose of the DCP is to enable directors, advisory directors, and key employees the opportunity to defer a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. The Company invests all participants’ deferrals in shares of common stock. Dividends paid on the shares are credited to participants’ DCP accounts and invested in additional shares. The Company issued, pursuant to DCP:
•
9,513 common shares during 2021
•
12,921 common shares during 2020, and
•
11,072 common shares during 2019
First Retirement and Savings Plan. The First Retirement Savings Plan ("401(k) plan") was effective beginning in 1985. Employees are eligible to participate in the 401(k) plan after three months of service with the Company. The Company offers common stock as an investment option for participants of the 401(k) plan. Beginning in 2016, shares for the 401(k) plan were purchased in the open market instead of being issued by the Company.
Dividend Reinvestment Plan. The Dividend Reinvestment Plan (“DRIP”) was effective as of October 1994. The purpose of the DRIP is to provide participating stockholders with a simple and convenient method of investing cash dividends paid by the Company on its common and preferred shares into newly issued common shares of the Company. All holders of record of the Company’s common or preferred stock are eligible to voluntarily participate in the DRIP. The DRIP is administered by Computershare Investor Services, LLC and offers a way to increase one’s investment in the Company. Of the $15,054,000 in common stock dividends paid during 2021, $333,000 or 2.2% was reinvested into shares of common stock of the Company through the DRIP. Approximately $333,000, $680,000 and $805,000 of common stock was purchased through reinvestment of dividends during 2021, 2020, and 2019, respectively.
Stock Incentive Plan. At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to succeed the Company’s 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.
A maximum of 149,983 shares of common stock may be issued under the SI Plan. During 2021, 2020, and 2019, the Company awarded 48,575 and 25,950, and 26,700 shares as stock and stock unit awards, respectively. This SI Plan is more fully described in Note 13 - Stock Incentive Plan.
Stock Repurchase Program. Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock.
During 2021, the Company repurchased 7,752 shares (0.05% of common shares) at a total price of approximately $326,000. All of these shares were a result of shares withheld for taxes on vested employee stock incentives. During 2020, the Company repurchased 6,288 (0.04% of common shares) at a total price of approximately $213,000. As of December 31, 2021, approximately $4.4 million remains available for purchase under the repurchase programs. Treasury stock is further affected by activity in the DCP.
Employee Stock Purchase Plan. At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP provides eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount through payroll deductions. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 600,000 shares of common stock may be issued under the ESPP. As of December 31, 2021 and 2020, 11,748 and 11,037 shares, respectively were issued pursuant to ESPP.
Capital Ratios
For 2021, the minimum regulatory ratios required for minimum capital adequacy purposes plus the capital buffer are 10.5% for the Total Risk-based capital ratio, 8.5% for the Tier 1 Risk-based capital ratio, 7.0% for the Common Equity Tier 1 capital ratio, and 4.0% for the Tier 1 Leverage ratio. The Company and First Mid Bank have capital ratios above the minimum regulatory capital requirements and, as of December 31, 2021, the Company and First Mid Bank had capital ratios above the levels required for categorization as well-capitalized under the capital adequacy guidelines established by the bank regulatory agencies. A tabulation of the Company and First Mid Bank's capital ratios as of December 31, 2021 follows:
Total Risk-
based
Capital Ratio
Tier One
Risk-based
Capital Ratio
Common Equity
Tier 1 Capital
Ratio
Tier One Leverage Ratio (Capital to Average Assets)
First Mid Bancshares, Inc. (Consolidated)
15.79
%
12.51
%
12.06
%
9.05
%
First Mid Bank
14.67
%
13.60
%
13.60
%
9.83
%
Liquidity
Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of the business. Financial obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing. The Company’s liquidity management focuses on the ability to obtain funds economically through assets that may be converted into cash at minimal costs or through other sources. The Company’s other sources of cash include overnight federal fund lines, Federal Home Loan Bank advances, the ability to borrow at the Federal Reserve Bank of Chicago, and the Company’s operating line of credit with The Northern Trust Company. Details for these sources include:
•
First Mid Bank has $100 million available in overnight federal fund lines, including $30 million from First Horizon Bank, $20 million from U.S. Bank, N.A., $10 million from Wells Fargo Bank, N.A., $15 million from The Northern Trust Company and $25 million from Zions Bank. Availability of the funds is subject to First Mid Bank meeting minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total average assets. As of December 31, 2021, First Mid Bank met these regulatory requirements.
•
First Mid Bank can borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the Federal Home Loan Bank. At December 31, 2021, the excess collateral at the FHLB would support approximately $699.7 million of additional advances for First Mid Bank.
•
First Mid Bank is a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged.
•
In addition, as of December 31, 2021, the Company had a revolving credit agreement in the amount of $15 million with The Northern Trust Company with an outstanding balance of $0 million and $15 million in available funds. This loan was renewed on April 9, 2021 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of First Mid Bank and includes requirements for operating and capital ratios. The Company and its subsidiary banks were in compliance with the existing covenants at December 31, 2021 and 2020.
Management continues to monitor its expected liquidity requirements carefully, focusing primarily on cash flows from:
•
lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions;
•
deposit activities, including seasonal demand of private and public funds;
•
investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Treasury and government agency securities; and
•
operating activities, including scheduled debt repayments and dividends to stockholders.
The following table summarizes significant contractual obligations and other commitments at December 31, 2021 (in thousands):
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
Time deposits
$
562,052
$
417,991
$
110,281
$
33,716
$
Debt
113,595
-
-
3,839
109,756
Other borrowings
232,714
171,381
30,134
11,199
20,000
Operating leases
17,423
2,587
4,285
2,850
7,701
Supplemental retirement
1,689
1,389
$
927,473
$
592,009
$
144,800
$
51,754
$
138,910
For the year ended December 31, 2021, net cash of $69.6 million was provided from operating activities, $482.5 million was used in investing activities, and $164.2 million was provided by financing activities. In total cash and cash equivalents decreased by $248.7 million from year-end 2020.
For the year ended December 31, 2020, net cash of $63.5 million was provided from operating activities, $562.4 million was used in investing activities, and $831.1 million was provided by financing activities. In total cash and cash equivalents increased by $332.2 million from year-end 2019.
For the year ended December 31, 2019, net cash of $62.8 million was provided from operating activities, $32.1 million was used in investing activities, and $87.1 million was used in financing activities. In total cash and cash equivalents decreased by $56.3 million from year-end 2018.
For the years ended December 31, 2021 and 2020, the Company also had $10 million of floating rate trust preferred securities outstanding through Trust II, and in September 2016, the Company acquired $4 million of floating rate trust preferred securities from First Clover Leaf under Clover Leaf Statutory Trust I and on May 1, 2018, the Company acquired $6 million of floating rate trust preferred securities from First BancTrust Corporation. See Note 9 - “Borrowings” for a more detailed description.
Effects of Inflation
Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are affected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company’s assets and liabilities that are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s market risk arises primarily from interest rate risk inherent in its lending, investing and deposit taking activities, which are restricted to First Mid Bank. For a discussion of how management of the Company addresses and evaluates interest rate risk see also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity.”
Based on the financial analysis performed as of December 31, 2021, which considers how the specific interest rate scenario would be expected to impact each interest-earning asset and each interest-bearing liability, the Company estimates that changes in the prime interest rate would impact First Mid Bank's performance, on a consolidated basis, as follows:
Increase (Decrease) In
December 31, 2021
Net Interest Income
Return On
Average Equity
($000)
(%)
2021=8.38%
Prime rate is 3.25%
Prime rate increase of:
200 basis points to 5.25%
$
4,318
3.1
%
0.64
%
100 basis points to 4.25%
2,136
1.5
%
0.32
%
Prime rate decrease of:
100 basis points to 2.25%
(3,733
)
(2.7
)%
(0.56
)%
200 basis points to 1.25%
(8,798
)
(6.3
)%
(1.33
)%
The following table shows the same analysis for First Mid Bank performance as of December 31, 2020:
Increase (Decrease) In
December 31, 2020
Net Interest Income
Return On
Average Equity
($000)
(%)
2020=8.24%
Prime rate is 3.25%
Prime rate increase of:
200 basis points to 5.25%
$
0.6
%
0.10
%
100 basis points to 4.25%
0.4
%
0.07
%
Prime rate decrease of:
100 basis points to 2.25%
1,446
1.4
%
0.24
%
200 basis points to 1.25%
0.3
%
0.06
%
The Company's Board of Directors has adopted an interest rate risk policy that establishes maximum decreases in the percentage change in net interest income of 5% in a 100 basis point rate shift and 10% in a 200 basis point rate shift. No assurance can be given that the actual net interest income would increase or decrease by such amounts in response to a 100 or 200 basis point increase or decrease in the prime rate because it is also affected by many other factors. The results above are based on one-time “shock” moves and ramped rate increases and do not take into account any management response or mitigating action.
Interest rate sensitivity analysis is also used to measure the Company’s interest risk by computing estimated changes in the Economic Value of Equity (“EVE”) of the First Mid Bank under various interest rate shocks. EVE is determined by calculating the net present value of each asset and liability category by rate shock. The net differential between assets and liabilities is the EVE. EVE is an expression of the long-term interest rate risk in the balance sheet as a whole.
The following table presents the Company's projected change in EVE, on a consolidated basis, for the various rate shock levels at December 31, 2021 and 2020 (in thousands). All market risk sensitive instruments presented in the tables are held-to-maturity or available-for-sale. The Bank has no trading securities.
Changes In
Economic Value of Equity
Interest Rates
(basis points)
Amount of Change
($000)
Percent of Change (%)
December 31, 2021
+200 bp
$
11,491
1.5
%
+100 bp
10,830
1.4
%
-200 bp
(231,797
)
(29.6
)%
-100 bp
(96,739
)
(12.3
)%
December 31, 2020
+200 bp
$
84,951
17.3
%
+100 bp
50,226
10.2
%
-200 bp
(85,484
)
(17.4
)%
-100 bp
(73,391
)
(14.9
)%
As indicated above, at December 31, 2021, in the event of a sudden and sustained increase in prevailing market interest rates, the EVE would be expected to increase if rates increased 100 or 200 basis points. In the event of a sudden and sustained decrease in prevailing market interest rates, The Company's EVE would be expected to decrease. At December 31, 2021, the estimated changes in EVE were outside the Company’s policy guidelines that normally allow for a change in capital of +/-10% from the base case scenario under a 100 basis point shock and within the guidelines of +/- 20% from the base case scenario under a 200 basis point shock. The general level of interest rates are at historically low levels and the bank is monitoring its position and the likelihood of further rate changes.
Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and declines in deposit balances, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the computation of EVE. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in First Mid Bank's portfolio change in future periods as market rates change. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Accounting Firm (BKD, LLP, Decatur, IL, Auditor Firm ID: 686)
Consolidated Balance Sheets
December 31, 2021 and 2020
(In thousands, except share data)
Assets
Cash and due from banks:
Non-interest bearing
$
90,907
$
75,152
Interest bearing
76,335
340,821
Federal funds sold
1,360
1,308
Cash and cash equivalents
168,602
417,281
Certificates of deposit investments
2,450
2,695
Investment securities:
Available-for-sale, at fair value
1,421,422
879,240
Held-to-maturity, at amortized cost (estimated fair value of $7,035 and $5,119 at December 31, 2021 and 2020, respectively)
7,030
5,016
Equity securities, at fair value
Loans held for sale
2,748
1,924
Loans
3,992,775
3,136,495
Less allowance for credit losses
(54,655
)
(41,910
)
Net loans
3,938,120
3,094,585
Interest receivable
19,868
19,287
Other real estate owned
4,984
2,489
Premises and equipment, net
81,484
58,206
Goodwill, net
111,853
104,992
Intangible assets, net
29,523
23,128
Bank owned life insurance
132,375
68,955
Right of use asset
15,116
17,209
Other assets
50,610
31,123
Total assets
$
5,986,582
$
4,726,348
Liabilities and stockholders’ equity
Deposits:
Non-interest bearing
$
1,246,673
$
936,926
Interest bearing
3,709,813
2,755,858
Total deposits
4,956,486
3,692,784
Repurchase agreements with customers
146,268
206,937
Interest payable
1,346
2,345
FHLB borrowings
86,446
93,969
Junior subordinated debentures, net
19,195
19,027
Subordinated debt, net
94,400
94,253
Lease liability
15,322
17,351
Other liabilities
33,225
31,454
Total liabilities
5,352,688
4,158,120
Stockholders’ equity:
Common stock, $4 par value; authorized 30,000,000 shares; issued 18,708,746 shares in 2021 and 17,361,898 shares in 2020; outstanding 18,080,303 shares in 2021 and 16,741,207 shares in 2020
76,835
71,449
Additional paid-in capital
340,419
297,806
Retained earnings
234,162
197,726
Deferred compensation
2,517
2,980
Accumulated other comprehensive income (loss)
(831
)
17,095
Less treasury stock at cost, 628,443 shares in 2021 and 620,691 shares in 2020
(19,208
)
(18,828
)
Total stockholders’ equity
633,894
568,228
Total liabilities and stockholders’ equity
$
5,986,582
$
4,726,348
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
For the years ended December 31, 2021, 2020, and 2019
(In thousands, except per share data)
Interest income:
Interest and fees on loans
$
159,684
$
126,814
$
126,825
Interest on investment securities
Taxable
15,598
11,449
15,662
Exempt from federal income tax
7,318
5,517
5,381
Interest on certificates of deposit investments
Interest on federal funds sold
-
Interest on deposits with other financial institutions
1,702
Total interest income
183,013
144,141
149,721
Interest expense:
Interest on deposits
9,037
12,751
18,939
Interest on securities sold under agreements to repurchase
Interest on FHLB borrowings
1,514
1,851
2,706
Interest on other borrowings
-
Interest on junior subordinated debentures
1,476
Interest on subordinated debt
3,939
-
Total interest expense
15,262
16,729
24,047
Net interest income
167,751
127,412
125,674
Provision for loan losses
15,151
16,103
6,433
Net interest income after provision for loan losses
152,600
111,309
119,241
Other income:
Wealth management revenues
20,407
16,153
15,570
Insurance commissions
18,927
17,477
16,029
Service charges
6,808
5,862
7,837
Securities gains, net
1,106
Mortgage banking revenue, net
4,718
5,075
1,746
ATM / debit card revenue
11,974
8,962
8,491
Bank owned life insurance
3,039
1,730
1,755
Other income
3,770
3,155
3,787
Total other income
69,767
59,520
56,017
Other expense:
Salaries and employee benefits
89,660
66,452
62,578
Net occupancy and equipment expense
21,546
16,708
17,680
Net other real estate owned expense
3,866
FDIC insurance expense
1,604
1,309
Amortization of intangible assets
5,391
5,062
5,848
Stationery and supplies
1,161
1,080
1,104
Legal and professional
6,730
5,427
5,164
ATM / debit card expense
3,116
2,290
3,488
Marketing and donations
3,603
1,616
2,031
Other expense
18,902
11,101
13,437
Total other expense
155,579
111,087
111,992
Income before income taxes
66,788
59,742
63,266
Income taxes
15,298
14,472
15,323
Net income
$
51,490
$
45,270
$
47,943
Per share data:
Basic net income per common share
$
2.88
$
2.71
$
2.88
Diluted net income per common share
2.87
2.70
2.87
Cash dividends declared per common share
0.85
0.81
0.76
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2021, 2020, and 2019
(In thousands)
Net income
$
51,490
$
45,270
$
47,943
Other comprehensive income (loss)
Unrealized gains (losses) on available-for-sale securities, net of taxes of $7,285, $(3,873), and $(6,258) for the years ended December 31, 2021, 2020 and 2019, respectively
(17,838
)
9,485
15,319
Unamortized holding losses on held to maturity securities transferred from available for sale, net of taxes of $0, $(15), and $(34) for December 31, 2021, 2020 and 2019, respectively
-
Less: reclassification adjustment for realized gains included in net income net of taxes of $36, $321, and $233 for the years ended December 31, 2021, 2020 and 2019, respectively
(88
)
(785
)
(569
)
Other comprehensive income (loss), net of taxes
(17,926
)
8,735
14,833
Comprehensive income
$
33,564
$
54,005
$
62,776
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2021, 2020, and 2019
(In thousands, except share and per share data)
Accumulated
Additional
Other
Common
Paid-In-
Retained
Deferred
Comprehensive
Treasury
Stock
Capital
Earnings
Compensation
Income (Loss)
Stock
Total
December 31, 2020
$
71,449
$
297,806
$
197,726
$
2,980
$
17,095
$
(18,828
)
$
568,228
Net income
-
-
51,490
-
-
-
51,490
Other comprehensive loss, net of tax
-
-
-
-
(17,926
)
-
(17,926
)
Dividends on common stock ($.850 per share)
-
-
(15,054
)
-
-
-
(15,054
)
Issuance of 8,616 common shares pursuant to the dividend reinvestment plan
-
-
-
-
Issuance of 9,513 common shares pursuant to the deferred compensation plan
-
-
-
-
Issuance of 27,750 restricted common shares pursuant to the 2017 stock incentive plan
-
-
-
-
Issuance of 2,375 common shares pursuant to the 2017 stock incentive plan
-
-
-
-
Issuance of 1,262,246 common shares pursuant to acquisition of LINCO Bancshares, Inc., net proceeds
5,049
39,142
-
-
-
-
44,191
Issuance of 25,000 common shares pursuant to acquisition of BBM & Associates, Inc., net proceeds
1,009
-
-
-
-
1,109
Issuance costs pursuant to acquisition of Delta Bancshares Company
-
(206
)
-
-
-
-
(206
)
Issuance of 11,748 common shares pursuant to employee stock purchase plan
-
-
-
-
Purchase of 7,752 treasury shares
-
-
-
-
-
(326
)
(326
)
Deferred compensation
-
-
-
-
(54
)
-
Grant of restricted stock units pursuant to the 2017 stock incentive plan
-
-
-
-
-
1,216
Release of restricted stock units pursuant to the 2017 stock incentive plan
-
(584
)
-
-
-
-
(584
)
Vested restricted shares/units compensation expense
-
-
(517
)
-
-
(332
)
December 31, 2021
$
76,835
$
340,419
$
234,162
$
2,517
$
(831
)
$
(19,208
)
$
633,894
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2021, 2020, and 2019
(In thousands, except share and per share data)
Accumulated
Additional
Other
Common
Paid-In-
Retained
Deferred
Comprehensive
Treasury
Stock
Capital
Earnings
Compensation
Income
Stock
Total
December 31, 2019
$
71,152
$
295,925
$
166,667
$
2,760
$
8,360
$
(18,255
)
$
526,609
Cumulative change in accounting principal for adoption of ASU 2016-13
-
-
(717
)
-
-
-
(717
)
December 31, 2019 (as adjusted for change in accounting principal)
71,152
295,925
165,950
2,760
8,360
(18,255
)
525,892
Net income
-
-
45,270
-
-
-
45,270
Other comprehensive income, net of tax
-
-
-
-
8,735
-
8,735
Dividends on common stock ($.810 per share)
-
-
(13,494
)
-
-
-
(13,494
)
Issuance of 13,804 common shares pursuant to the dividend reinvestment plan
-
-
-
-
Issuance of 12,921 common shares pursuant to the deferred compensation plan
-
-
-
-
Issuance of 24,867 restricted common shares pursuant to the 2017 stock incentive plan
-
-
-
-
Issuance of 11,037 common shares pursuant to employee stock purchase plan
-
-
-
-
Purchase of 6,288 treasury shares
-
-
-
-
-
(213
)
(213
)
Deferred compensation
-
-
-
-
(360
)
-
Tax benefit related to deferred compensation distributions
-
-
-
-
-
Grant of restricted stock units pursuant to the 2017 stock incentive plan
-
-
-
-
-
Release of restricted stock units pursuant to the 2017 stock incentive plan
-
(516
)
-
-
-
-
(516
)
Vested restricted shares/units compensation expense
-
(59
)
-
(140
)
-
-
(199
)
December 31, 2020
$
71,449
$
297,806
$
197,726
$
2,980
$
17,095
$
(18,828
)
$
568,228
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2021, 2020, and 2019
(In thousands, except share and per share data)
Accumulated
Additional
Other
Common
Paid-In-
Retained
Deferred
Comprehensive
Treasury
Stock
Capital
Earnings
Compensation
Income (Loss)
Stock
Total
December 31, 2018
$
70,876
$
293,937
$
131,392
$
2,761
$
(6,473
)
$
(16,629
)
$
475,864
Net income
-
-
47,943
-
-
-
47,943
Other comprehensive income, net of tax
-
-
-
-
14,833
-
14,833
Dividends on common stock ($.76 per share)
-
-
(12,668
)
-
-
-
(12,668
)
Issuance of 22,949 common shares pursuant to the dividend reinvestment plan
-
-
-
-
Issuance of 11,072 common shares pursuant to the deferred compensation plan
-
-
-
-
Issuance of 25,950 restricted common shares pursuant to the 2017 stock incentive plan
-
-
-
-
Issuance of 8,899 common shares pursuant to employee stock purchase plan
-
-
-
-
Purchase of 40,026 treasury shares
-
-
-
-
-
(1,293
)
(1,293
)
Deferred compensation
-
-
-
-
(333
)
-
Tax benefit related to deferred compensation distributions
-
-
-
-
-
Grant of restricted stock units pursuant to the 2017 stock incentive plan
-
-
-
-
-
Vested restricted shares/units compensation expense
-
(631
)
-
(334
)
-
-
(965
)
December 31, 2019
$
71,152
$
295,925
$
166,667
$
2,760
$
8,360
$
(18,255
)
$
526,609
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31, 2021, 2020, and 2019
(In thousands)
Cash flows from operating activities:
Net income
$
51,490
$
45,270
$
47,943
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
15,151
16,103
6,433
Depreciation, amortization and accretion, net
14,449
11,721
10,842
Change in cash surrender value of bank owned life insurance
(3,039
)
(1,730
)
(1,755
)
Stock-based compensation expense
1,304
Operating lease payments
(2,872
)
(2,766
)
(2,680
)
Gains on investment securities, net
(124
)
(1,106
)
(802
)
Losses on sales of other real property owned, net
5,725
(Gain) loss on write down of premises and equipment
-
(5
)
Gain on sale of other assets
(126
)
-
-
Gains on sale of loans held for sale, net
(4,256
)
(5,248
)
(1,504
)
Deferred income taxes
(3,355
)
(4,963
)
1,885
Decrease (increase) in accrued interest receivable
2,384
(3,710
)
1,304
Increase (decrease) in accrued interest payable
(1,812
)
Origination of loans held for sale
(149,807
)
(196,469
)
(101,714
)
Proceeds from sale of loans held for sale
153,239
201,613
102,906
Gains on equity securities
(499
)
(133
)
-
Increase in other assets
(13,719
)
(2,045
)
(4,680
)
Increase in other liabilities
5,463
5,713
3,282
Net cash provided by operating activities
69,596
63,541
62,828
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments
2,910
2,944
Purchase of certificates of deposit investments
(245
)
(980
)
-
Proceeds from sales of securities available-for-sale
9,061
60,900
Proceeds from maturities of securities available-for-sale
238,049
324,148
154,167
Proceeds from maturities of securities held-to-maturity
-
55,000
-
Purchases of securities available-for-sale
(692,234
)
(506,458
)
(188,608
)
Net increase in loans
(32,032
)
(445,694
)
(59,797
)
Purchases of premises and equipment
(3,702
)
(2,463
)
(4,103
)
Proceeds from sales of other real property owned
9,503
2,054
2,425
Investment in Bank Owned Life Insurance
(30,000
)
-
-
Net cash provided by acquisition
27,061
-
-
Net cash used in investing activities
(482,499
)
(562,422
)
(32,072
)
Cash flows from financing activities:
Net increase (decrease) in deposits
273,292
775,418
(71,320
)
Increase (decrease) in federal funds purchased
-
(5,000
)
5,000
Increase (decrease) in repurchase agreements
(60,669
)
(1,172
)
15,779
Proceeds from FHLB advances
5,000
19,000
50,000
Repayment of FHLB advances
(40,083
)
(39,000
)
(56,000
)
Proceeds from short-term debt
-
5,000
-
Proceeds from long-term debit
-
94,253
-
Repayment of short-term debt
-
(5,000
)
-
Repayment of long-term debt
-
-
(7,724
)
Repayment of junior subordinated debentures
-
-
(10,310
)
Proceeds from issuance of common stock
1,937
Direct expenses related to capital transactions
(206
)
-
-
Purchase of treasury stock
(326
)
(213
)
(1,293
)
Dividends paid on common stock
(14,721
)
(12,814
)
(11,863
)
Net cash provided by (used in) financing activities
164,224
831,082
(87,076
)
Increase (decrease) in cash and cash equivalents
(248,679
)
332,201
(56,320
)
Cash and cash equivalents at beginning of period
417,281
85,080
141,400
Cash and cash equivalents at end of period
$
168,602
$
417,281
$
85,080
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2021, 2020, and 2019
(In thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
$
16,261
$
16,645
$
23,544
Income taxes
18,966
18,624
15,556
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned
$
$
$
3,570
Fixed assets transferred to other real estate
3,971
-
-
Dividends reinvested in common stock
Initial recognition of right-of-use assets
-
-
14,116
Initial recognition of lease liabilities
-
-
14,116
Net tax benefit related to option and deferred compensation plans
-
Supplemental disclosure of purchase of capital stock of LINCO Bancshares, Inc.
Fair value of assets acquired
$
1,170,699
Consideration paid:
Cash paid
103,500
Common stock issued
44,191
Total consideration paid
147,691
Fair value of liabilities assumed
$
1,023,008
See accompanying notes to consolidated financial statements.
First Mid Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Accounting and Consolidation
The accompanying consolidated financial statements include the accounts of First Mid Bancshares, Inc. (“Company”) and its wholly owned subsidiaries: First Mid Bank & Trust, N.A. (“First Mid Bank”), First Mid Wealth Management Company, First Mid Insurance Group, Inc. (“First Mid Insurance”) and First Mid Captive, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the 2021 presentation and there was no impact on net income or stockholders’ equity from these reclassifications. The Company operates as a single segment entity for financial reporting purposes. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America.
COVID-19
The COVID-19 outbreak was an unprecedented event that continues to provide significant economic uncertainty for a broad spectrum of industries. The Company is focused on supporting its customers, communities, and employees during this unique operating environment. Throughout this document, the Company describes the impact COVID-19 is having, actions taken as a result of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation.
Acquisitions
Delta Bancshares Company. On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Delta Merger Sub”), entered into an Agreement and Plan of Merger (the “Delta Merger Agreement”) with Delta Bancshares Company, a Missouri corporation (“Delta”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a business combination whereby Delta will merge with and into Merger Sub, whereupon the separate corporate existence of Delta will cease and Merger Sub will continue as the surviving company and a wholly-owned subsidiary of First Mid (the “Delta Merger”). The Delta Merger was completed on February 14, 2022.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Delta Merger, each share of common stock, par value $10.00 per share, of Delta issued and outstanding immediately prior to the effective time of the Delta Merger (other than shares held in treasury by Delta) converted into and became the right to receive cash and 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. On an aggregate basis, the total consideration paid by the Company at the closing of the Delta Merger to Delta’s shareholders and option holders was approximately $15.2 million in cash and 2,292,270 shares of Company common stock. Delta’s outstanding stock options vested upon consummation of the Delta Merger, and all outstanding Delta options that were unexercised prior to the effective time of the Delta Merger were cashed out.
It is anticipated that Delta’s wholly owned bank subsidiary, Jefferson Bank, will be merged with and into First Mid Bank during the second quarter of 2022. At the time of the bank merger, Jefferson Bank’s banking offices will become branches of First Mid Bank. As of December 31, 2021, Jefferson Bank had total consolidated assets of approximately $718 million, loans of approximately $424 million and total deposits of approximately $560 million.
LINCO Bancshares, Inc. On September 25, 2020, the Company and Eval Sub Inc., a wholly owned subsidiary of the Company ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with LINCO Bancshares, Inc., the former parent of Providence Bank ("LINCO"), and the sellers as defined therein, pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business combination whereby Merger Sub merged with and into LINCO, whereupon the separate corporate existence of Merger Sub ceased and LINCO continued as the surviving company and a wholly owned subsidiary of the Company (the "LINCO Merger").
Subject to the terms and conditions of the Merger Agreement, at the effective time of the LINCO Merger, each share of common stock, par value $1.00 per share, of LINCO issued and outstanding immediately prior to the effective time of the LINCO Merger (other than shares held in treasury by LINCO) was converted into and become the right to receive, cash or 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. On an aggregate basis, the total consideration payable by the Company at the closing of the Merger was $103.5 million in cash and 1,262,246 shares of the Company’s common stock, provided that the shareholders of LINCO collectively elected pursuant to the Merger Agreement to receive varying amounts of cash or shares of common stock of the Company as consideration in the Merger. In addition, immediately prior to the closing of the proposed merger, LINCO paid a special dividend to its shareholders in the aggregate amount of $13 million.
The LINCO Merger closed on February 22, 2021, and Providence Bank merged into First Mid Bank on May 15, 2021.
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.
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.
2020 Loan Purchase
During 2020, First Mid Bank completed an acquisition of loans in the St. Louis metro market totaling $183 million. There were no loans purchased with deteriorated credit.
2021 Loan Purchase
During 2021, First Mid Bank completed an acquisition of loans in the St. Louis Metro market totaling $208 million. There were no loans purchased with deteriorated credit. First Mid Bank also assumed $219 million of related customer deposits and recorded a core deposit intangible asset of approximately $4.9 million that is being amortized on an accelerated basis over ten years.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company uses estimates and employs the judgments of management in determining the amount of its allowance for credit losses and income tax accruals and deferrals, in its fair value measurements of investment securities, and in the evaluation of impairment of loans, goodwill, investment securities, and premises and equipment. As with any estimate, actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses. In connection with the determination of the allowance for credit losses, management obtains independent appraisals for significant properties.
Fair Value Measurements
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 11 - “Disclosures of Fair Values of Financial Instruments.”
Cash and Cash Equivalents
For purposes of reporting cash flows, cash equivalents include non-interest bearing and interest-bearing cash and due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.
Certificates of Deposit Investments
Certificates of deposit investments have original maturities of three to five years and are carried at cost.
Investment Securities
The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale in accordance with ASC 320. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of the Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income.
Loans
Loans are stated at the principal amount outstanding net of unearned discounts, unearned income, and the allowance for credit losses. Unearned income includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximate the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding.
The Company’s policy is to discontinue the accrual of interest income on any loan that becomes ninety days past due as to principal or interest or earlier when, in the opinion of management there is reasonable doubt as to the timely collection of principal or interest. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectability of interest or principal.
Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or fair value, taking into consideration future commitments to sell the loans.
Allowance for Credit Losses
The Company believes the allowance for credit losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. An estimate of potential losses inherent in the loan portfolio is determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows, and estimated collateral values. In assessing these factors, the Company uses organizational history and experience with credit decisions and related outcomes. The allowance for credit losses represents the best estimate of losses inherent in the existing loan portfolio. The allowance for credit losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The Company evaluates the allowance for credit losses at least quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for credit losses is adjusted.
The Company estimates the appropriate level of allowance for credit losses by separately evaluating impaired and nonimpaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a nonimpaired loan is more subjective. Generally, the allowance assigned to nonimpaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including the volume and severity of identified classified loans, changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for credit losses would be required.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are charged to expense and determined principally by the straight-line method over the estimated useful lives of the assets. The estimated useful lives for each major depreciable classification of premises and equipment are as follows:
Buildings and improvements
20 years to 40 years
Leasehold improvements
5 years to 15 years
Furniture and equipment
3 years to 7 years
Goodwill and Intangible Assets
The Company has goodwill from business combinations, identifiable intangible assets assigned to core deposit relationships and customer lists acquired, and intangible assets arising from the rights to service mortgage loans for others.
Identifiable intangible assets generally arise from branches acquired that the Company accounted for as purchases. Such assets consist of the excess of the purchase price over the fair value of net assets acquired, with specific amounts assigned to core deposit relationships and customer lists primarily related to insurance agency. Intangible assets are amortized by the straight-line method over various periods up to fifteen years. Management reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” codified into ASC 350, the Company obtained an independent evaluation of its goodwill as of June 30, 2020 and also performed its annual testing of goodwill for impairment as of September 30, 2020 and each time 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.
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 credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.
Bank Owned Life Insurance
First Mid Bank 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.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula.
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax returns with each organization computing its taxes on a separate company basis. Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under tax laws.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences existing between the financial statement carrying amounts of assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry forwards. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an increase or decrease in income tax expense in the period in which such change is enacted.
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.
Captive Insurance Company
First Mid Captive, Inc. ("the Captive"), a wholly owned subsidiary of the Company which was formed and began operations in December 2019, is a Nevada- based captive insurance company. The Captive insures against certain risks unique to the operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today's insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,400,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company's consolidated financial statements and its federal income return.
Wealth Management Assets
Assets held in fiduciary or agency capacities by First Mid Wealth Management Company are not included in the consolidated balance sheets since such items are not assets of the Company or its subsidiaries. Fees from trust activities are recorded on a cash basis over the period in which the service is provided. Fees are a function of the market value of assets managed and administered, the volume of transactions, and fees for other services rendered, as set forth in the underlying client agreement with the First Mid Wealth Management Company. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on asset valuations and transaction volumes. Any out-of-pocket expenses or services not typically covered by the fee schedule for trust activities are charged directly to the trust account on a gross basis as trust revenue is incurred. First Mid Wealth Management Company managed assets totaling $5.1 billion and $4.5 billion at December 31, 2021 and 2020, respectively.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
Stock Incentive Awards
At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to succeed the Company's 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of
the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.
A maximum of 149,983 shares of common stock may be issued under the SI Plan. The Company awarded 48,575, 25,950 and 26,700 shares during 2021, 2020, and 2019, respectively as stock and stock unit awards.
Employee Stock Purchase Plan
At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid 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 December 31, 2021, 2020, and 2019, 11,748, 11,037 and 8,899 shares, respectively were issued pursuant to the ESPP.
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2021 substantially all the Company's leases are operating leases for real estate property for bank branches, ATM locations, and office space. For leases in effect 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.
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, receives commissions on premiums of new and renewed business policies. First Mid Insurance records commission revenue on direct bill policies as the cash is received. For agency bill policies, First Mid Insurance retains its commission portion of the customer premium payment and remits the balance to the carrier. In both cases, the entire performance obligation is held by the carriers.
Service charges on deposits. The Company generates revenue from fees charged for deposit account maintenance, overdrafts, wire transfers, and check fees. The revenue related to deposit fees is recognized at the time the performance obligation is satisfied.
ATM/debit card revenue. The Company generates revenue through service charges on the use of its ATM machines and interchange income from the use of Company issued credit and debit cards. The revenue is recognized at the time the service is used and the performance obligation is satisfied.
Other income. Treasury management fees and lock box fees are received and recorded after the service performance obligation is completed. Merchant bank card fees are received from various vendors; however, the performance obligation is with the vendors. The Company records gains on the sale of loans and the sale of OREO properties after the transactions are complete and transfer of ownership has occurred.
As each of the Company’s facilities are located in markets with similar economies, no disaggregation of revenue is necessary.
Adoption of New Accounting Guidance
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. The current accounting policies and procedures of the Company did not change, except for the elimination of Step 2 analysis.
Accounting Standards Update 2016-02, Leases (Topic 842)("ASU 2016-02"). On February 25, 2016, FASB issued ASU 2016-02 which creates Topic 842, Leases and supersedes Topic 840, Leases. ASU 2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among organizations. Under the new guidance, a lessee is required to record all leases with lease terms of more than 12 months on their balance sheet as lease liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new guidance is effective for public companies for fiscal years
beginning on or after December 15, 2018, and for private companies for fiscal years beginning on or after December 15, 2019. The Company adopted the guidance effective January 1, 2019 and recorded a right of use asset of $14.1 million and a lease liability of $14.1 million.
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. As ASU 2018-13 only revised disclosure requirements, it did not have a material impact 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 require 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 was effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.
Management formed an internal, cross functional committee in 2017 to evaluate implementation steps and assess the impact ASU 2016-13 would have on the Company’s consolidated financial statements. The committee assigned roles and responsibilities, key tasks to complete, and established a general timeline for implementation. The Company also engaged an outside consultant to assist with the methodology review and data validation, as well as other key aspects of implementing the standard. The committee met periodically to discuss the latest developments and ensure progress was being made. In addition, the committee kept current on evolving interpretations and industry practices related to ASU 2016-13. The committee evaluated and validated data resources and different loss methodologies. Key implementation activities for 2019 included finalization of models, establishing processes and controls, development of supporting analytics and documentation, policies and disclosure, and implementing parallel processing.
The Company adopted ASU 2016-13 using the modified retrospective method for financial assets measured at amortized cost-effective January 1, 2020. Results for the periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of approximately $717,000 upon adoption of ASU 2016-13. The transition adjustment included an increase to the allowance for credit losses on loans of $1.7 million and an increase to the allowance for credit losses on off-balance sheet credit exposure of $69,000. There was no allowance for credit losses recorded for held-to- maturity debt securities. The transition adjustment included corresponding increases in deferred tax assets.
The Company adopted ASU 2016-13 using the prospective transition approach for financial assets considered purchased credit deteriorated ("PCD") that were previously classified as purchase credit impaired ("PCI") and accounted for under ASC 310-30 effective January 1, 2020. In accordance with the standard, the Company did not reassess whether the PCI assets met the criteria of PCD assets as of the adoption date. The amortized cost of the PCD assets were adjusted to reflect the addition of $833,000 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost) will be accreted into interest income at the effective interest rate over the remaining life of the assets.
The following table illustrates the impact of ASU 2016-13 adoption (in thousands):
January 1, 2020
As reported
Pre-ASU
Impact of ASU
under ASU
2016-13
2016-13
2016-13
Adoption
Adoption
Assets:
Construction and Land Development
$
1,033
$
1,146
$
(113
)
Farm
1,323
1,093
1-4 Family Residential Properties
2,142
1,386
Commercial Real Estate
11,739
11,198
Agricultural
1,023
1,386
(363
)
Commercial and Industrial
9,428
9,273
Consumer
1,895
1,429
Allowance for credit losses for all loans
$
28,583
$
26,911
$
1,672
Liabilities:
Allowance for credit losses on off-balance sheet exposures
$
-
$
The following table illustrates the impact of ASU 2016-13 adoption for PCD assets previously classified as PCI included in the table above (in thousands):
January 1, 2020
As reported
Pre-ASU
Impact of ASU
under ASU
2016-13
2016-13
2016-13
Adoption
Adoption
Construction and Land Development
$
$
-
$
1-4 Family Residential Properties
Commercial Real Estate
Commercial and Industrial
-
Allowance for credit losses for all loans
$
1,198
$
$
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income included in stockholders’ equity as of December 31, 2021 and 2020 are as follows (in thousands):
Unrealized Gain
(Loss) on
Securities
December 31, 2021
Net unrealized losses on securities available-for-sale
$
(1,170
)
Tax benefit
Balance at December 31, 2021
$
(831
)
December 31, 2020
Net unrealized gains on securities available-for-sale
$
24,077
Tax expense
(6,982
)
Balance at December 31, 2020
$
17,095
Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the years ended December 31, 2021, 2020, and 2019, were as follows (in thousands):
Amounts Reclassified from Other Comprehensive Income
Affected Line Item in the
Statements of Income
Realized gains on available-for-sale securities
$
$
1,106
$
Securities gains, net (total reclassified amount before tax)
(36
)
(321
)
(233
)
Tax expense
Total reclassifications out of accumulated other comprehensive income
$
$
$
Net reclassified amount
See “Note 4 - Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.
Note 2 -- Earnings Per Share
Basic net income per common share available to common stockholders is calculated as net income less preferred stock dividends divided by the weighted average number of common shares outstanding. Diluted net income per common share available to common stockholders is computed using the weighted average number of common shares outstanding, increased by the assumed conversion of the Company’s convertible preferred stock and the Company’s stock options and restricted stock awarded, unless anti-dilutive.
The components of basic and diluted net income per common share available to common stockholders for the years ended December 31, 2021, 2020, and 2019 were as follows:
Basic net income per common share available to common stockholders:
Net income available to common stockholders
51,490,000
45,270,000
47,943,000
Weighted average common shares outstanding
17,886,998
16,716,880
16,675,269
Basic earnings per common share
$
2.88
$
2.71
$
2.88
Diluted net income per common share available to common stockholders:
Net income available to common stockholders
$
51,490,000
$
45,270,000
$
47,943,000
Weighted average common shares outstanding
17,886,998
16,716,880
16,675,269
Dilutive potential common shares:
Restricted stock awarded
52,009
45,976
34,207
Dilutive potential common shares
52,009
45,976
34,207
Diluted weighted average common shares outstanding
17,939,007
16,762,856
16,709,476
Diluted earnings per common share
$
2.87
$
2.70
$
2.87
There were no shares not considered in computing diluted earnings per share for the years ended December 31, 2021, 2020, and 2019.
Note 3 -- Cash and Due from Banks
Aggregate cash and due from bank balances of $0, $0, and $18,038,000 were maintained in satisfaction of statutory reserve requirements of the Federal Reserve Bank at December 31, 2021, 2020, and 2019, respectively. At December 31, 2021, the Company's cash accounts exceeded federal insurance limits by $21.6 million. There have been no losses on these accounts.
Note 4 -- Investment Securities
The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at December 31, 2021 and 2020 were as follows (in thousands):
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
(Losses)
Fair Value
December 31, 2021
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
208,598
$
$
(4,863
)
$
203,815
Obligations of states and political subdivisions
383,991
12,123
(657
)
395,457
Mortgage-backed securities: GSE residential
799,456
4,292
(12,710
)
791,038
Other securities
30,546
(105
)
31,112
Total available-for-sale
$
1,422,591
$
17,166
$
(18,335
)
$
1,421,422
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
5,001
$
$
-
$
5,006
Other securities
2,029
-
-
2,029
Total held-to-maturity
$
7,030
$
$
-
$
7,035
December 31, 2020
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
127,067
$
$
(788
)
$
127,069
Obligations of states and political subdivisions
237,886
11,995
(37
)
249,844
Mortgage-backed securities: GSE residential
479,470
12,038
(160
)
491,348
Other securities
10,740
(13
)
10,979
Total available-for-sale
$
855,163
$
25,075
$
(998
)
$
879,240
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
5,016
$
$
-
$
5,119
The Company also had $397,000 and $218,000 of equity securities, at fair value, as of December 31, 2021 and 2020, respectively. All the Company's held-to-maturity securities are government agency-backed securities for which the risk of loss is minimal. As such, as of December 31, 2021, the Company did not record an allowance for credit losses on its held-to-maturity securities.
Proceeds from sales of available-for-sale investment securities, realized gains and losses and income tax expense were as follows during the years ended December 31, 2021, 2020, and 2019 (in thousands):
Proceeds from sales
$
$
9,061
$
60,900
Gross gains
1,132
Gross losses
-
(26
)
(73
)
Income tax expense
The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity presented at amortized cost at December 31, 2021 and the weighted average yield for each range of maturities (dollars in thousands):
One
After 1
After 5
year or
through
through
After
less
5 years
10 years
ten years
Total
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
132,009
$
60,744
$
11,062
$
-
$
203,815
Obligations of state and political subdivisions
26,159
87,639
205,518
76,141
395,457
Mortgage-backed securities: GSE residential
13,677
309,961
467,400
-
791,038
Other securities
3,522
18,167
5,956
3,467
31,112
Total available-for-sale
$
175,367
$
476,511
$
689,936
$
79,608
$
1,421,422
Weighted average yield
1.55
%
2.04
%
1.67
%
2.11
%
1.80
%
Full tax-equivalent yield
1.72
%
2.22
%
1.87
%
2.64
%
2.01
%
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
5,001
$
-
$
-
$
-
$
5,001
Other securities
-
-
-
2,029
2,029
Total held-to-maturity
$
5,001
$
-
$
-
$
2,029
$
7,030
Weighted average yield
2.06
%
-
%
-
%
-
%
2.06
%
Full tax-equivalent yield
2.06
%
-
%
-
%
-
%
2.06
%
The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax- equivalent yields have been calculated using a 21% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at December 31, 2021.
Investment securities carried at approximately $590 million and $531 million at December 31, 2021 and 2020, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.
The following table presents the aging of gross unrealized losses and fair value by investment category as of December 31, 2021 and 2020 (in thousands):
Less than 12 months
12 months or more
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
December 31, 2021
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
48,316
$
(1,927
)
$
139,846
$
(2,936
)
$
188,162
$
(4,863
)
Obligations of states and political subdivisions
61,535
(657
)
-
-
61,535
(657
)
Mortgage-backed securities: GSE residential
562,699
(11,019
)
46,504
(1,691
)
609,203
(12,710
)
Other securities
7,976
(105
)
-
-
7,976
(105
)
Total
$
680,526
$
(13,708
)
$
186,350
$
(4,627
)
$
866,876
$
(18,335
)
December 31, 2020
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
59,211
$
(788
)
$
-
$
-
$
59,211
$
(788
)
Obligations of states and political subdivisions
5,380
(37
)
-
-
5,380
(37
)
Mortgage-backed securities: GSE residential
57,609
(160
)
2,377
-
59,986
(160
)
Other securities
3,977
(13
)
-
-
3,977
(13
)
Total
$
126,177
$
(998
)
$
2,377
$
-
$
128,554
$
(998
)
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At December 31, 2021, there were six available-for-sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $139,846,000 and unrealized losses of $2,936,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2020, there were no available-for-sale securities in a continuous unrealized loss position for
twelve months or more. There were no held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more at December 31, 2021 or 2020.
Obligations of states and political subdivisions. At December 31, 2021 and 2020 there were no obligations of states and political subdivisions in a continuous unrealized loss position for twelve months or more.
Mortgage-backed Securities: GSE Residential. At December 31, 2021 there were fifteen mortgage-backed securities with a fair value of $46,504,000 and unrealized losses of $1,691,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2020, there were two mortgage-backed security with a fair value of $2,377,000 and unrealized losses of $0 in a continuous unrealized loss position for twelve months or more.
Other securities. At December 31, 2021 and 2020, there were no other securities in a continuous unrealized loss position for twelve months or more.
Maturities of investment securities were as follows at December 31, 2021 (in thousands):
Amortized
Estimated
Cost
Fair Value
Available-for-sale:
Due in one year or less
$
165,155
$
161,689
Due after one-five years
162,158
166,550
Due after five-ten years
217,445
222,537
Due after ten years
78,377
79,608
623,135
630,384
Mortgage-backed securities: GSE residential
799,456
791,038
Total available-for-sale
1,422,591
1,421,422
Held-to-maturity:
Due in one year or less
5,001
5,006
Due after ten years
2,029
2,029
Total held-to-maturity
$
7,030
$
7,035
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Note 5 -- Loans and Allowance for Credit Losses
Loans are stated at the principal amount outstanding net of unearned discounts, unearned income, and allowance for credit losses. Unearned income includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximated the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding
. A summary of loans at December 31, 2021 and 2020 follows (in thousands):
Construction and land development
$
145,156
$
122,853
Agricultural real estate
279,001
254,662
1-4 family residential properties
399,932
325,480
Multifamily residential properties
298,974
189,265
Commercial real estate
1,666,764
1,176,290
Loans secured by real estate
2,789,827
2,068,550
Agricultural loans
151,344
137,333
Commercial and industrial loans
834,061
741,819
Consumer loans
78,538
78,023
All other loans
143,738
118,196
Gross loans
3,997,508
3,143,921
Less: Loans held for sale
2,748
1,924
3,994,760
3,141,997
Less:
Net deferred loan fees, premiums and discounts
1,985
5,502
Allowance for credit losses
54,655
41,910
Net loans
$
3,938,120
$
3,094,585
Net loans increased $844 thousand as of December 31, 2021 compared to December 31, 2020. Of this increase, approximately $838.4 million were loans purchased from Providence Bank, and $208 million were loans purchased from Stifel Bank. Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or fair value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties. Accrued interest on loans, which is excluded from the amortized cost of the balances above, totaled $14.7 million and $15.9 million at December 31, 2021 and 2020, respectively.
The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the board of directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed. The vast majority of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments. The Company’s lending can be summarized into the following primary areas:
Commercial Real Estate Loans. Commercial real estate loans are generally comprised of loans to small business entities to purchase or expand structures in which the business operations are housed, loans to owners of real estate who lease space to non-related commercial entities, loans for construction and land development, loans to hotel operators, and loans to owners of multi-family residential structures, such as apartment buildings. Commercial real estate loans are underwritten based on historical and projected cash flows of the borrower and secondarily on the underlying real estate pledged as collateral on the debt. For the various types of commercial real estate loans, minimum criteria have been established within the Company’s loan policy regarding debt service coverage while maximum limits on loan-to-value and amortization periods have been defined. Maximum loan- to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while the desired minimum debt coverage ratio is 1.20x.
Amortization periods for commercial real estate loans are generally limited to twenty years. The Company’s commercial real estate portfolio is well below the thresholds that would designate a concentration in commercial real estate lending, as established by the federal banking regulators.
Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund accounts receivable that are secured by business assets other than real estate. These loans are generally written for one year or less. Also, equipment financing is provided to businesses with these loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years. Commercial loans are often accompanied by a personal guaranty of the principal owners of a business. Like commercial real estate loans, the underlying cash flow of the business is the primary consideration in the underwriting process. The financial condition of commercial borrowers is monitored at least annually with the type of financial information required determined by the size of the relationship. Measures employed by the Company for businesses with higher risk profiles include the use of government-assisted lending programs through the Small Business Administration and U.S. Department of Agriculture.
Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop. Loan-to-value ratios on loans secured by farmland generally do not exceed 65% and have amortization periods limited to twenty-five years. Federal government-assistance lending programs through the Farm Service Agency are used to mitigate the level of credit risk when deemed appropriate.
Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties consisting of one-to-four units and home equity loans and lines of credit. The Company sells the vast majority of its long-term fixed rate residential real estate loans to secondary market investors. The Company also releases the servicing of these loans upon sale. The Company retains all residential real estate loans with balloon payment features. Balloon periods are limited to five years. Residential real estate loans are typically underwritten to conform to industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit scores. Loans secured by first liens on residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have amortization periods of twenty-five years or less. The Company does not originate subprime mortgage loans.
Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an automobile or other living expenses. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio, employment history, and collateral coverage. Typically, consumer loans are set up on monthly payments with amortization periods based on the type and age of the collateral.
Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or equipment purchases. Underwriting guidelines for these loans are consistent with those established for commercial loans with the additional repayment source of the taxing authority of the municipality.
Allowance for Credit Losses
The allowance for credit losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses expected over the remaining contractual life of the assets. The provision for credit losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit 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 credit losses by evaluating large, impaired loans separately from non-impaired loans.
Individually Evaluated 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 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 are less than the carrying amount of the loan. The carrying value of the loan reflects reductions from prior charge-offs.
Non-Individually evaluated loans
Non-individually evaluated 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.
Beginning January 1, 2020, the allowance for credit losses was estimated using the current expected credit loss model ("CECL"). The Company uses the Loss Rate method to estimate the historical loss rate for all non-individually evaluated loans. Under this method, the allowance for credit losses is measured on a collective (pool) basis for loans with similar risk characteristics. Historical credit loss experience provides the basis for the estimate of expected credit losses. For each pool, a historical loss rate is computed based on the average remaining contractual life of the pool. Adjustments to historical loss rates are made using qualitative factors relevant to each pool including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. In addition, a twelve-month forecast, using reasonable and supportable future conditions, is prepared that is used to estimate expected changes to existing and historical conditions in the current period.
The Company also considers specific current economic events occurring globally, in the U.S. and in its local markets. In March 2020, in response to the COVID-19 outbreak, its significant disruptions in the U.S. economy and impacts on local markets, First Mid Bank offered a 90-day commercial deferral program, primarily to hotel and restaurant borrowers. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings. These deferrals were, however, considered in the factors used to estimate the required allowance for credit losses for non-impaired loans. Other COVID-19 related impacts considered included revenue losses of businesses required to restrict or cease services, income loss to workers laid off as a result of COVID-19 restrictions, various federal and state government stimulus programs and additional deferral programs offered by First Mid Bank beginning in April 2020. Other events considered include the status of trade agreements with China, scheduled increases in minimum wage and changes to the minimum salary threshold for overtime provisions, current and projected unemployment rates, current and projected grain and oil prices and economies of local markets where customers work and operate.
Within each pool, risk elements are evaluated that have specific impacts to the borrowers within the pool. These, along with the general risks and events, and the specific lending policies and procedures by loan type described above, are analyzed to estimate the qualitative factors used to adjust the historical loss rates. During the current period, the following assumptions and factors were considered when determining the historical loss rate and any potential adjustments by loan pool.
During 2021, the following assumptions and factors were considered when determining the historical loss rate and any potential adjustments by loan pool.
Construction and Land Development Loans. The average life of the construction and land development segment was determined to be twelve months. Historical losses in this segment remained very low. Current activity in this industry was deemed essential and has continued during COVID-19. While staffing shortages and supply chain disruptions cause risk in this segment, most projects are associated with financially strong borrowers. The qualitative factor for this segment was decreased slightly.
Agricultural Real Estate Loans. The average life of the agricultural real estate segment was determined to be thirty-six months. Historical losses in the segment remain very low. Farmland values have remained steady over an extended period of time and there are no indications that this will change in the next year. There was a slight decrease to the qualitative factor for this segment.
1- 4 Family Residential Properties Loans. The average life of the 1-4 Family Residential segment was determined to be: Residential Real Estate-non-owner occupied, sixty months; Residential Real Estate-owner occupied, sixty months; Home Equity lines of credit, thirty months. COVID-19 has impacted the finances of consumers from layoffs and furloughs resulting from employers that must reduce or suspend operations. Increased risk in this segment includes consumer ability to make mortgage and rent payments. Some of this impact has been offset by governmental actions such as stimulus payments and extended unemployment benefits. First Mid Bank also offered short-term loan payment deferral to borrowers in this segment. The qualitative factors on both non-owner occupied and owner-occupied loans for this segment were decreased slightly.
Commercial Real Estate Loans. The average life of the commercial real estate segment was determined to be thirty-six months. This segment includes the Company's majority of exposure to the hotel industry which has been significantly impacted by COVID-19 events. Other impacted industries in this segment include restaurants and retail establishments. First Mid Bank has implemented deferral programs for borrowers in this segment in order to ease the impact to these borrowers. The qualitative factors on both non-owner occupied and owner-occupied loans for this segment were decreased slightly.
Agricultural Loans. The average life of the agricultural segment was determined to be eighteen months. Losses in this segment are very low and it is believed that borrowers in this segment will benefit from current governmental programs such as PPP and MFP. Many farmers are holding grain from the 2019 operating season and should be able to take advantage of an increase in prices. The qualitative factor of this segment was decreased slightly.
Commercial and Industrial Loans. The average life of the commercial and industrial segment was determined to be twenty-four months. The COVID-19 impacts include forced closures and scaled-back services for many industries within this segment including retailers, restaurants, and video gaming establishments. Some of this risk is offset by government relief programs as well as, First Mid Bank's payment deferral program. The qualitative factor for this segment was decreased slightly.
Consumer Loans. The average life of the consumer segment was determined to be thirty-six months. The financial status of many borrowers has been impacted by COVID-19 events including layoffs and reduced hours. Some of this impact has been offset by government stimulus programs, increased paid leave and increased and extended unemployment benefits, however these benefits are now expiring. Additionally, First Mid Bank has offered a short-term payment deferral program. The qualitative factor for this segment was decreased slightly.
Acquired Loans. Prior to January 1, 2020 loans acquired with evidence of credit deterioration since origination and for which it was probable that all contractually required payments would not be collected were considered purchased credit impaired at the time of acquisition. Purchase credit-impaired ("PCI") loans were accounted for under ASC 310-30, Receivables--Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), and were initially measured at fair value, which included 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 was 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.
Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date. Accordingly, on January 1, 2020, the amortized cost basis of the PCD loans were adjusted to reflect the addition of $833,000 to the allowance for credit losses.
For acquired loans not deemed purchased credit deteriorated at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit loss expense. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.
The following tables present the balance in the allowance for credit losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2021, 2020, and 2019 (in thousands):
Construction
and Land
Development
Agricultural
Real Estate
1-4 Family
Residential
Properties
Commercial
Real Estate
Agricultural
Loans
Commercial
and Industrial
Consumer
Loans
Total
Twelve months ended December 31, 2021
Beginning Balance
$
1,666
$
1,084
$
2,322
$
19,660
$
1,526
$
13,485
$
2,167
$
41,910
Initial allowance on loans purchased with credit deterioration
-
-
2,074
Provision for credit loss expense
(160
)
6,415
(544
)
7,940
1,350
15,151
Loans charged off
-
-
3,118
1,405
5,634
Recoveries collected
-
-
1,154
Ending balance
$
1,743
$
1,257
$
2,330
$
26,246
$
$
19,241
$
2,855
$
54,655
Twelve months ended December 31, 2020
Beginning Balance
(prior to adoption of ASC 326)
$
1,146
$
1,093
$
1,386
$
11,198
$
1,386
$
9,273
$
1,429
$
26,911
Impact of adopting ASC 326
(113
)
(363
)
1,672
Provision for credit loss expense
(239
)
8,581
5,869
16,103
Loans charged off
-
-
1,991
3,844
Recoveries collected
-
-
-
1,068
Ending balance
$
1,666
$
1,084
$
2,322
$
19,660
$
1,526
$
13,485
$
2,167
$
41,910
Twelve months ended December 31, 2019
Beginning Balance
$
$
1,246
$
1,504
$
11,102
$
$
9,893
$
$
26,189
Provision for credit loss expense
(153
)
1,268
1,827
1,053
1,394
6,433
Loans charged off
-
-
1,478
1,743
1,828
1,253
6,326
Recoveries collected
-
-
-
Ending balance
$
1,146
$
1,093
$
1,386
$
11,198
$
1,386
$
9,273
$
1,429
$
26,911
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 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.
The following table presents the amortized cost basis of collateral-dependent loans by class of loans that were individually evaluated to determine expected credit losses, and the related allowance for credit losses, as of December 31, 2021 (in thousands):
Collateral
Allowance
Real Estate
Business
Assets
Other
Total
for Credit
Losses
Construction and land development
$
$
-
$
-
$
$
1-4 family residential properties
3,703
-
-
3,703
Multifamily residential properties
1,746
-
-
1,746
-
Commercial real estate
10,290
-
-
10,290
Loans secured by real estate
16,222
-
-
16,222
1,171
Agricultural loans
-
-
-
Commercial and industrial loans
-
1,245
Consumer loans
-
-
-
All other loans
-
-
-
Total loans
$
16,547
$
$
$
17,820
$
1,753
Credit Quality
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, collateral support, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Company uses the following definitions for risk ratings, which are commensurate with a loan considered "criticized":
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current sound-worthiness and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered pass rated loans. The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2021 (in thousands):
Term Loans by Origination Year
Revolving
Risk rating
Prior
Loans
Total
December 31, 2021
Construction and land development loans
Pass
$
38,656
$
34,774
$
23,505
$
34,358
$
3,760
$
9,433
$
-
$
144,486
Special mention
-
-
-
-
-
-
Substandard
-
-
-
-
-
Total
$
38,766
$
34,774
$
23,505
$
34,841
$
3,760
$
9,472
$
-
$
145,118
Agricultural real estate loans
Pass
$
78,793
$
64,159
$
25,713
$
30,203
$
12,142
$
54,808
$
-
$
265,818
Special mention
4,028
6,087
-
11,699
Substandard
-
-
1,119
-
1,755
Total
$
79,665
$
64,418
$
30,133
$
30,774
$
12,268
$
62,014
$
-
$
279,272
1-4 family residential property loans
Pass
$
78,889
$
94,404
$
35,554
$
44,248
$
30,735
$
52,131
$
42,800
$
378,761
Special mention
-
1,934
2,601
1,196
6,505
Substandard
1,534
1,302
3,458
7,250
15,047
Total
$
79,478
$
94,900
$
39,022
$
46,049
$
36,794
$
60,577
$
43,493
$
400,313
Commercial real estate loans
Pass
$
568,200
$
417,334
$
299,973
$
174,448
$
150,811
$
304,585
$
-
$
1,915,351
Special mention
3,185
1,206
1,836
1,295
10,609
8,632
-
26,763
Substandard
2,007
6,242
1,179
4,646
8,238
-
23,026
Total
$
573,392
$
419,254
$
308,051
$
176,922
$
166,066
$
321,455
$
-
$
1,965,140
Agricultural loans
Pass
$
105,378
$
17,903
$
5,612
$
2,822
$
$
1,316
$
-
$
133,955
Special mention
13,725
2,648
-
17,036
Substandard
-
-
-
-
Total
$
119,453
$
18,357
$
8,260
$
2,972
$
$
1,505
$
-
$
151,484
Commercial and industrial loans
Pass
$
279,814
$
167,662
$
119,702
$
76,022
$
22,888
$
302,962
$
-
$
969,050
Special mention
1,463
-
3,953
Substandard
1,433
-
2,751
Total
$
280,933
$
168,095
$
121,298
$
76,825
$
23,389
$
305,214
$
-
$
975,754
Consumer loans
Pass
$
27,948
$
19,033
$
16,978
$
5,505
$
4,297
$
1,244
$
-
$
75,005
Special mention
-
-
-
Substandard
1,596
-
3,268
Total
$
28,601
$
19,145
$
17,324
$
6,192
$
4,340
$
2,840
$
-
$
78,442
Total loans
Pass
$
1,177,678
$
815,269
$
527,037
$
367,606
$
225,557
$
726,479
$
42,800
$
3,882,426
Special mention
18,807
2,354
11,947
2,519
13,769
16,798
66,235
Substandard
3,803
1,320
8,609
4,450
8,228
19,800
46,862
Total
$
1,200,288
$
818,943
$
547,593
$
374,575
$
247,554
$
763,077
$
43,493
$
3,995,523
Term Loans by Origination Year
Revolving
Risk Rating
Prior
Loans
Total
December 31, 2020
Construction & Land Development Loans
Pass
$
41,842
$
40,989
$
31,500
$
2,760
$
$
3,822
$
-
$
121,784
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
Total
$
41,842
$
41,117
$
31,500
$
3,277
$
$
3,872
$
-
$
122,479
Agricultural Real Estate Loans
Pass
$
73,630
$
34,412
$
37,839
$
16,138
$
13,559
$
58,291
$
-
$
233,869
Special Mention
1,845
3,970
1,106
11,232
-
19,155
Substandard
-
-
-
1,317
Total
$
75,475
$
38,382
$
39,172
$
16,815
$
14,729
$
69,768
$
-
$
254,341
1-4 Family Residential Property Loans
Pass
$
81,366
$
29,695
$
38,163
$
23,086
$
26,676
$
62,942
$
40,363
$
302,291
Special Mention
2,142
2,720
1,578
7,695
Substandard
1,915
1,859
1,996
7,516
1,499
15,776
Total
$
81,854
$
32,532
$
40,601
$
27,665
$
28,919
$
72,036
$
42,155
$
325,762
Commercial Real Estate Loans
Pass
$
368,750
$
237,119
$
171,591
$
148,283
$
143,400
$
215,616
$
-
$
1,284,759
Special Mention
2,469
1,300
6,108
11,262
6,741
16,947
-
44,827
Substandard
1,863
7,081
2,022
4,905
18,435
-
34,346
Total
$
373,082
$
238,459
$
184,780
$
161,567
$
155,046
$
250,998
$
-
$
1,363,932
Agricultural Loans
Pass
$
83,377
$
15,680
$
5,978
$
1,838
$
$
2,856
$
-
$
110,364
Special Mention
21,070
4,483
-
26,657
Substandard
-
-
-
-
Total
$
104,515
$
20,401
$
6,697
$
2,062
$
$
2,894
$
-
$
137,352
Commercial & Industrial Loans
Pass
$
371,683
$
132,148
$
70,497
$
78,890
$
42,439
$
114,904
$
-
$
810,561
Special Mention
4,116
32,130
1,101
-
39,415
Substandard
2,360
1,689
-
6,575
Total
$
376,688
$
166,638
$
71,878
$
81,068
$
43,676
$
116,603
$
-
$
856,551
Consumer Loans
Pass
$
31,609
$
21,384
$
12,084
$
8,279
$
3,150
$
1,022
$
-
$
77,528
Special Mention
-
-
-
Substandard
-
Total
$
31,624
$
21,424
$
12,219
$
8,375
$
3,218
$
1,142
$
-
$
78,002
Total Loans
Pass
$
1,052,257
$
511,427
$
367,652
$
279,274
$
230,730
$
459,453
$
40,363
$
2,941,156
Special Mention
29,692
44,049
8,731
15,165
9,344
30,525
137,799
Substandard
3,131
3,477
10,464
6,390
7,168
27,335
1,499
59,464
Total
$
1,085,080
$
558,953
$
386,847
$
300,829
$
247,242
$
517,313
$
42,155
$
3,138,419
The following table presents the Company’s loan portfolio aging analysis at December 31, 2021 and 2020 (in thousands):
Total
90 Days
Loans > 90
30-59 days
60-89 days
or More
Total
Total Loans
days and
Past Due
Past Due
Past Due
Past Due
Current
Receivable
Accruing
December 31, 2021
Construction and land development
$
$
$
$
$
144,557
$
145,118
$
-
Agricultural real estate
-
279,049
279,272
-
1-4 family residential properties
2,532
2,012
5,458
394,855
400,313
-
Multifamily residential properties
-
-
1,676
1,676
297,266
298,942
-
Commercial real estate
8,930
2,484
12,054
1,654,144
1,666,198
-
Loans secured by real estate
11,621
1,975
6,376
19,972
2,769,871
2,789,843
-
Agricultural loans
-
150,886
151,484
-
Commercial and industrial loans
1,156
1,839
830,169
832,008
-
Consumer loans
77,889
78,442
-
All other loans
1,854
-
-
1,854
141,892
143,746
-
Total loans
$
14,244
$
2,334
$
8,238
$
24,816
$
3,970,707
$
3,995,523
$
-
December 31, 2020
Construction and land development
$
-
$
-
$
$
$
122,351
$
122,479
$
-
Agricultural real estate
1,198
-
1,232
253,109
254,341
-
1-4 family residential properties
1,121
1,105
2,033
4,259
321,503
325,762
-
Multifamily residential properties
-
-
-
-
189,632
189,632
-
Commercial real estate
2,618
3,753
1,170,547
1,174,300
-
Loans secured by real estate
4,937
1,480
2,955
9,372
2,057,142
2,066,514
-
Agricultural loans
-
137,073
137,352
-
Commercial and industrial loans
2,426
1,420
3,854
734,459
738,313
-
Consumer loans
77,658
78,002
-
All other loans
-
-
-
-
118,238
118,238
-
Total loans
$
7,551
$
1,538
$
4,760
$
13,849
$
3,124,570
$
3,138,419
$
-
Individually Evaluated 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.
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 amount of interest income recognized by the Company within the periods stated above was due to loans modified in troubled debt restructurings that remain on accrual status.
Nonaccrual Loans
The following table presents the Company’s recorded balance of nonaccrual loans at December 31, 2021 and December 31, 2020 (in thousands). This table excludes performing purchased credit deteriorated loans and performing troubled debt restructurings.
Nonaccrual
with no
Allowance for
Nonaccrual
with no
Allowance for
Credit Loss
Nonaccrual
Credit Loss
Nonaccrual
Construction and land development
$
$
$
$
Agricultural real estate
1-4 family residential properties
5,252
5,252
6,747
6,930
Multifamily residential properties
1,982
1,982
2,181
2,181
Commercial real estate
7,554
7,920
7,345
8,760
Loans secured by real estate
15,050
15,515
16,794
18,392
Agricultural loans
Commercial and industrial loans
1,851
3,677
4,372
Consumer loans
Total loans
$
16,725
$
18,105
$
21,457
$
23,750
The aggregate principal balances of nonaccrual, past due ninety days or more loans were $18.1 million and $23.8 million at December 31, 2021 and 2020, respectively. Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $308,000, $921,000 and $906,000 in 2021, 2020, and 2019, respectively.
Subsequent to adoption of ASU 2016-13 on January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.
Troubled Debt Restructuring
The balance of troubled debt restructurings ("TDRs") at December 31, 2021 and 2020 was $5,792,000 and $9,502,000, respectively. Approximately $765,000 and $1,016,000 in specific reserves were established with respect to these loans as of December 31, 2021 and 2020, 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. There was no significant change between pre- and post-modification balances.
The following table presents the Company’s recorded balance of troubled debt restructurings at December 31, 2021 and 2020 (in thousands).
Troubled debt restructurings:
Agricultural real estate
$
$
-
1-4 family residential properties
1,353
1,603
Commercial real estate
3,355
5,170
Loans secured by real estate
4,953
6,773
Agricultural loans
Commercial and industrial loans
2,389
Consumer loans
All other loans
-
Total
$
5,792
$
9,502
Performing troubled debt restructurings:
Agricultural real estate
$
$
-
1-4 family residential properties
1,268
Commercial real estate
2,552
3,045
Loans secured by real estate
3,679
4,313
Commercial and industrial loans
Consumer loans
All other loans
-
Total
$
3,931
$
4,373
The following table presents loans modified as TDRs during the years ended December 31, 2021 and 2020 as a result of various modified loan factors (dollars in thousands). The change in the recorded investment from pre-modification to post-modification was not material.
December 31, 2021
December 31, 2020
Number of
Recorded
Type of
Number of
Recorded
Type of
Modifications
Investment
Modifications
Modifications
Investment
Modifications
Agricultural real estate
$
(a)
-
$
-
1-4 family residential properties
(a)(b)
(a)
Commercial real estate
(a)
3,622
(a)
Loans secured by real estate
1,107
3,709
Commercial and industrial loans
(a)
2,314
(a)
Consumer loans
(a)
(a)
All other loans
(a)
-
-
Total
$
1,434
$
6,031
Type of modifications:
(a) Change in payment terms
(b) Extension of maturity date
A loan is considered to be in payment default once it is ninety days past due under the modified terms. There was one loan modified as troubled debt restructurings during the prior twelve months that experienced defaults for years ended December 31, 2021. There were no loans modified as troubled debt restructuring during 2020.
At December 31, 2021 and 2020, the balance of real estate owned include $4,984,000 and $2,489,000 respectively of foreclosed real estate properties recorded as a result of obtaining physical possession of the property. At December 31, 2021 and 2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process was $411,000 and $713,000
Purchased Credit Deteriorated (PCD) Loans
During 2021, the Company acquired loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows (in thousands):
LINCO Acquisition
Purchase price of purchase credit deteriorated loans at acquisition
$
64,647
Allowance for credit losses at acquisition
(2,074
)
Non-credit discount/(premium) at acquisition
(187
)
Fair value of purchased credit deteriorated loans at acquisition
$
62,386
Note 6 -- Premises and Equipment, Net
Premises and equipment at December 31, 2021 and 2020 consisted of (in thousands):
Land
$
22,682
$
14,599
Buildings and improvements
67,225
53,147
Furniture and equipment
25,747
22,996
Leasehold improvements
4,736
3,636
Construction in progress
Subtotal
120,784
94,954
Accumulated depreciation and amortization
39,300
36,748
Total
$
81,484
$
58,206
Depreciation and amortization expense was $4.4 million, $3.8 million, and $3.6 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Note 7 -- Goodwill and Intangible Assets
The Company has goodwill from business combinations, intangible assets from branch acquisitions, identifiable intangible assets assigned to core deposit relationships and customer lists of business lines acquired. The following table presents gross carrying amount and accumulated amortization by major intangible asset class as of December 31, 2021 and 2020 (in thousands):
Gross
Carrying
Accumulated
Gross
Carrying
Accumulated
Value
Amortization
Value
Amortization
Goodwill
$
115,613
$
3,760
$
108,752
$
3,760
Intangibles from branch acquisition
3,015
3,015
3,015
3,015
Core deposit intangibles
39,435
24,085
32,355
20,910
Customer list intangibles
20,561
6,808
16,389
5,222
$
178,624
$
37,668
$
160,511
$
32,907
During the second quarter of 2021, goodwill of $1.4 million was recorded for the acquisition of certain assets used by BBM & Associates Inc., in connection with its trucking insurance business. All this goodwill was assigned to First Mid Insurance.
Goodwill of $9 million was provisionally recorded for the acquisition and merger of LINCO Bancshares, Inc. (“LINCO”) during the first quarter of 2021. All this goodwill was assigned to the banking segment of the Company. This goodwill was subsequently adjusted to $5.4 million to reflect adjustments made to finalize the purchase accounting.
The following table provides a reconciliation of the purchase price paid for the acquisition of LINCO and the amount of goodwill recorded (in thousands):
Unallocated purchase price
$
12,248
Less purchase accounting adjustments:
Fair value of securities
Fair value of loans, net
(2,818
)
Fair value of other real estate owned
Fair value of premises and equipment
6,360
Fair value of time deposits
(2,081
)
Fair value of FHLB advances
(975
)
Fair value of subordinated debentures
-
Core deposit intangible
2,025
Other assets
3,293
Other liabilities
(184
)
6,799
Resulting goodwill from acquisition
$
5,449
The unpaid principal balance of mortgage loans serviced for others was $90.2 million and $126.8 million at December 31, 2021 and 2020, respectively. The following table summarizes the activity pertaining to the mortgage servicing rights included in intangible assets as of December 31, 2021 and 2020 (in thousands):
December 31,
December 31,
Beginning balance
$
$
1,444
Valuation recovery
(273
)
Mortgage servicing rights amortized
(629
)
(593
)
I/O strip
(11
)
(62
)
Ending balance
$
$
Total amortization expense for the years ended December 31, 2021, 2020, and 2019 was as follows (in thousands):
Core deposit intangibles
$
3,176
$
3,164
$
3,729
Customer list intangibles
1,586
1,305
1,269
Mortgage servicing rights
$
5,391
$
5,062
$
5,848
Estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands):
For year ended 12/31/22
$
5,464
For year ended 12/31/23
4,804
For year ended 12/31/24
4,292
For year ended 12/31/25
3,861
For year ended 12/31/26
3,091
In accordance with the provisions of SFAS 142 ”Goodwill and Other Intangible Assets,” codified in ASC 350, the Company performed testing of goodwill for impairment as of September 30, 2021 and 2020, and determined, as of each of these dates, that goodwill was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets. The weighted average amortization period for core deposit, customer lists and total intangibles was 3.39, 4.51 and 3.86, respectively, at December 31, 2021.
Note 8 - Deposits
As of December 31, 2021 and 2020, deposits consisted of the following (in thousands):
Demand deposits:
Non-interest bearing
$
1,246,673
$
936,926
Interest-bearing
1,452,765
1,031,183
Savings
626,523
499,427
Money market
1,068,473
748,179
Time deposits
562,052
477,069
Total deposits
$
4,956,486
$
3,692,784
Total interest expense on deposits for the years ended December 31, 2021, 2020, and 2019 was as follows (in thousands):
Interest-bearing demand
$
1,547
$
1,462
$
2,741
Savings
Money market
2,711
2,270
3,742
Time deposits
4,292
8,593
11,866
Total
$
9,037
$
12,751
$
18,939
As of December 31, 2021, 2020, and 2019, the aggregate amount of time deposits in denominations of more than $250,000 was as follows (in thousands):
Time deposit balances in denominations of more than $250,000
$
117,887
$
98,277
$
107,285
The following table shows the amount of maturities for all time deposits as of December 31, 2021 (in thousands):
Less than 1 year
$
417,991
1 year to 2 years
81,146
2 years to 3 years
29,135
3 years to 4 years
15,483
4 years to 5 years
18,233
Over 5 years
Total
$
562,052
In 2021 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of approximately $291.4 million and $227.6 million in various checking accounts and time deposits as of December 31, 2021 and 2020, respectively. These balances are subject to change depending upon the cash flow needs of the public entity.
Note 9 -- Repurchase Agreements and Other Borrowings
As of December 31, 2021 and 2020 borrowings consisted of the following (in thousands):
Securities sold under agreements to repurchase
$
146,268
$
206,937
Federal Home Loan Bank (FHLB) fixed-term advances
86,446
93,969
Subordinated debt
94,400
94,253
Junior subordinated debentures
19,195
19,027
Total
$
346,309
$
414,186
Aggregate annual maturities of FHLB advances and debt (excluding unamortized discounts and premiums) at December 31, 2021 are (in thousands):
Subordinated
Jr. Subordinated
FHLB
Debt
Debentures
$
25,000
$
-
$
-
20,000
-
-
10,000
-
-
10,858
-
4,124
-
-
-
Thereafter
20,000
96,000
16,496
85,858
96,000
20,620
Unamortized discount
(1,600
)
(1,425
)
$
86,446
$
94,400
$
19,195
FHLB advances represent borrowings by First Mid Bank to fund loan demand. At December 31, 2021 the advances totaling $86 million were as follows:
Advance
Term (in years)
Interest Rate
Maturity Date
$
5,000,000
5.0
2.71%
March 21, 2022
5,000,000
1.0
0.00%
May 31, 2022
5,000,000
3.0
2.41%
May 31, 2022
5,000,000
3.0
2.12%
June 7, 2022
5,000,000
3.0
2.12%
June 7, 2022
5,000,000
8.0
2.40%
January 9, 2023
5,000,000
4.0
2.44%
May 30, 2023
5,000,000
3.5
1.51%
July 31, 2023
5,000,000
3.5
0.77%
September 11, 2023
10,000,000
5.0
1.45%
December 31, 2024
5,000,000
5.0
0.91%
March 10, 2025
5,857,785
10.0
2.64%
December 23, 2025
5,000,000
10.0
1.15%
October 3, 2029
5,000,000
10.0
1.12%
October 3, 2029
10,000,000
10.0
1.39%
December 31, 2029
Securities sold under agreements to repurchase were $146.3 million at December 31, 2021, a decrease of $60.7 million from $206.9 million at December 31, 2020 primarily due to seasonal cash needs of customers. Securities sold under agreements to repurchase have overnight maturities and a weighted average rate of 0.14%.
(In thousands)
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end
$
212,503
$
350,288
$
208,109
Average amount outstanding for the year
173,762
219,298
169,437
The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third-party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Company in a segregated custodial account under a tri- party agreement. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained, while mitigating the potential of over-collateralization in the event of counterparty default.
Repurchase agreements by class of collateral pledged are as follows (in thousands):
December 31, 2021
December 31, 2020
US Treasury securities and obligations of U.S. government corporations and agencies
$
53,782
$
37,423
Mortgage-backed securities: GSE: residential
92,486
168,480
Miscellaneous
-
1,034
Total
$
146,268
$
206,937
At December 31, 2021, there was no outstanding loan balance on the revolving credit agreement with The Northern Trust Company. This loan was renewed on April 9, 2021 for one year as a revolving credit agreement with a maximum available balance of $15 million. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all the stock of First Mid Bank. Management believes that the Company and its subsidiary banks were in compliance with all the existing covenants at December 31, 2021 and 2020.
On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the Company and the Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes are unsecured, subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding October 15, 2025, the Notes will bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 383 basis points, or such other rate as determined pursuant to the Supplemental Indenture, provided that in no event shall the applicable floating interest rate be less than zero per annum.
The Company may, beginning with the interest payment date of October 15, 2025, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the Notes at any time, including prior to October 15, 2025, at the Company’s option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding the redemption date.
The Company had approximately $1.6 million of costs, including a debt issuance discount of $1.3 million in connection with the debt issuance. This expense is being amortized to interest expense over the life of the notes. At December 31, 2021, the recorded balance of subordinated notes was $94,400,000.
On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through Trust II, a statutory business trust and wholly owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common equity of Trust II, a total of $10,310,000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points) after June 15, 2011 (1.80%and 1.82%at December 31, 2021 and 2020). The net proceeds to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield.
On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First Clover Financial. The $4 million of trust preferred securities and an additional $124,000 additional investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (2.05%and 2.07%at December 31, 2021 and 2020, respectively) and resets quarterly.
On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First BancTrust Corporation. The $6 million of trust preferred securities and an additional $186,000 additional investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (1.90% and 1.92% at December 31, 2021 and 2020, respectively) and resets quarterly.
The trust preferred securities issued by Trust II, CLST I, and FBTCSTI are included as Tier 1 capital of the Company for regulatory capital purposes. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1 capital for regulatory purposes. The final rule provided a five-year transition period, ending September 30, 2010, for application of the revised quantitative limits. On March 17, 2009, the Federal Reserve Board adopted an additional final rule that delayed the effective date of the new limits on inclusion of trust preferred securities in the calculation of Tier 1 capital until March 31, 2012. The application of the revised quantitative limits did not and is not expected to
have a significant impact on its calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized. The Dodd-Frank Act, signed into law July 21, 2010, removes trust preferred securities as a permitted component of a holding company’s Tier 1 capital after a three-year phase-in period beginning January 1, 2013 for larger holding companies. For holding companies with less than $15 billion in consolidated assets, existing issues of trust preferred securities are grandfathered and not subject to this new restriction. Similarly, the final rule implementing the Basel III reforms allows holding companies with less than $15 billion in consolidated assets as of December 31, 2009 to continue to count toward Tier 1 capital any trust preferred securities issued before May 19, 2010. New issuances of trust preferred securities, however would not count as Tier 1 regulatory capital.
In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This rule is generally referred to as the “Volcker Rule.” On December 10, 2013, the federal banking agencies issued final rules to implement the prohibitions required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry regarding the adverse impact the final rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets if (1) the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the offering proceeds received by the collateralized debt obligation were invested primarily in qualifying trust preferred collateral, and (3) the banking entity’s interests in the collateralized debt obligation was acquired on or prior to December 10, 2013. Although the Volcker Rule impacts many large banking entities, the Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company or First Mid Bank.
Note 10 -- Regulatory Capital
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Board of Governors of the Federal Reserve System (“Federal Reserve System”), and First Mid Bank follow similar minimum regulatory requirements established for national banks by the Office of the Comptroller of the Currency (“OCC”). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Quantitative measures established by each regulatory capital standards to ensure capital adequacy require the Company and its subsidiary bank to maintain a minimum capital amounts and ratios (set forth in the table below). Management believes that, as of December 31, 2021 and 2020, the Company and First Mid Bank all capital adequacy requirements.
As of December 31, 2021 and 2020, the most recent notification from the primary regulators categorized First Mid Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based capital, Tier 1 risk-based capital, Common Equity Tier 1 risk-based capital, and Tier 1 leverage ratios must be maintained as set forth in the table below. At December 31, 2021, there were no conditions or events since the most recent notification that management believes have changed this categorization.
Actual
Required Minimum For Capital Adequacy Purposes with Capital Buffer
To Be Well-Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2021
Total capital (to risk-weighted assets)
Company
$
674,310
15.79
%
$
448,344
>10.50%
N/A
N/A
First Mid Bank
624,150
14.67
%
446,711
>10.50%
$
425,439
> 10.00%
Tier 1 capital (to risk-weighted assets)
Company
534,277
12.51
%
362,945
> 8.50
N/A
N/A
First Mid Bank
578,517
13.60
%
361,623
> 8.50
340,351
> 8.00
Common equity tier 1 capital (to risk-weighted assets)
Company
515,082
12.06
%
298,896
> 7.00
N/A
N/A
First Mid Bank
578,517
13.60
%
297,807
> 7.00
276,535
> 6.50
Tier 1 capital (to average assets)
Company
534,277
9.05
%
236,151
> 4.00
N/A
N/A
First Mid Bank
578,517
9.83
%
235,337
> 4.00
294,171
> 5.00
December 31, 2020
Total capital (to risk-weighted assets)
Company
$
589,352
18.82
%
$
328,865
>10.50%
N/A
N/A
First Mid Bank
446,308
14.30
%
327,685
>10.50%
$
312,081
> 10.00%
Tier 1 capital (to risk-weighted assets)
Company
458,325
14.63
%
266,224
> 8.50
N/A
N/A
First Mid Bank
409,534
13.12
%
265,269
> 8.50
249,665
> 8.00
Common equity tier 1 capital (to risk-weighted assets)
Company
439,299
14.03
%
219,243
> 7.00
N/A
N/A
First Mid Bank
409,534
13.12
%
218,457
> 7.00
202,853
> 6.50
Tier 1 capital (to average assets)
Company
458,325
10.22
%
179,302
> 4.00
N/A
N/A
First Mid Bank
409,534
9.18
%
178,497
> 4.00
223,121
> 5.00
The Company's risk-weighted assets, capital and capital ratios for December 31, 2021 and 2020 were computed in accordance with Basel III capital rules which were effective January 1, 2015. Prior periods were computed following previous rules. See heading "Basel III" in the Overview section of this report for a more detailed description of Basel III rules. As of December 31, 2021 and 2020, the Company and First Mid Bank had capital ratios above the required minimums for regulatory capital adequacy, and First Mid Bank had capital ratios that qualified it for treatment as well-capitalized under the regulatory framework for prompt corrective action with respect to banks.
Note 11 -- Disclosures of Fair Values of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1
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 independently sources market parameters, including but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
Equity Securities. The fair value of current equity securities is determined by obtaining quoted market prices in an active market and are classified within Level 1. In cases where quoted market prices are not available, fair values are estimated by using quoted prices of securities with similar characteristics and are classified in Level 2 of the valuation hierarchy.
Derivatives. The fair value of derivatives is based on models using observable market data as of the measurement date and are therefore classified in Level 2 of the valuation hierarchy.
The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of December 31, 2021 and 2020 (in thousands):
Fair Value Measurements Using:
Quoted Prices in
Significant
Significant
Active Markets
Other
Unobservable
for Identical
Observable
Inputs
Fair Value
Assets (Level 1)
Inputs (Level 2)
(Level 3)
December 31, 2021
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
203,815
$
-
$
203,815
$
-
Obligations of states and political subdivisions
395,457
-
395,358
Mortgage-backed securities
791,038
-
791,038
-
Other securities
31,112
-
31,112
-
Total available-for-sale securities
1,421,422
-
1,421,323
Equity securities
-
-
Derivative assets: interest rate swaps
-
-
Total assets
$
1,422,628
$
$
1,422,132
$
Derivative liabilities: interest swaps
$
1,476
$
-
$
1,476
$
-
December 31, 2020
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
127,069
$
-
$
127,069
$
-
Obligations of states and political subdivisions
249,844
-
249,050
Mortgage-backed securities
491,348
-
491,348
-
Other securities
10,979
-
10,979
-
Total available-for-sale securities
879,240
-
878,446
Equity securities
Derivative assets: interest rate swaps
1,399
-
1,399
-
Total assets
$
880,857
$
$
880,038
$
Derivative liabilities: interest swaps
$
2,892
$
-
$
2,892
$
-
The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2021 and 2020 is summarized as follows (in thousands):
Obligations of State and Political
Subdivisions
December 31,
December 31,
Beginning balance
$
$
Transfers into Level 3
-
-
Transfers out of Level 3
-
-
Total gains or losses
Included in net income
Included in other comprehensive income (loss)
-
-
Purchases, issuances, sales and settlements
Purchases
-
-
Issuances
-
-
Sales
-
-
Settlements
(698
)
(184
)
Ending balance
$
$
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date
$
-
$
-
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.
Collateral Dependent Loans
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment and estimating fair value include using the fair value of the collateral for collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
Management establishes a specific allowance for loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a change in specific allowance has occurred as of December 31, 2021 was $7,987,000 and a fair value of $6,750,000 resulting in specific loss exposures of $1,237,000. As of December 31, 2020, the total carrying amount of loans for which a change specific allowance has occurred was $16,789,000. These loans had a fair value of $14,876,000 which resulted in specific loss exposures of $1,913,000.
When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for credit 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 credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real estate owned as of December 31, 2021 was $4,984,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $2,068,000. The total carrying amount of other real estate owned as of December 31, 2020 was $2,489,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $290,000.
Mortgage Servicing Rights
As of December 31, 2021, mortgage servicing rights had a carrying value of $468,000 and a fair value of $420,000 resulting in a valuation reserve of $47,000. As of December 31, 2020, mortgage servicing rights had a carrying value of $1,098,000 and a fair value of $516,000 resulting in a valuation reserve of $581,000. The fair value used to determine the valuation reserve for mortgage servicing rights was estimated using the discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the fair value hierarchy.
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2021 and 2020 (in thousands):
Fair Value Measurements Using
Quoted Prices
in Active
Significant
Significant
Markets for
Other
Unobservable
Identical Assets
Observable Inputs
Inputs
Fair Value
(Level 1)
(Level 2)
(Level 3)
December 31, 2021
Collateral dependent loans
$
6,750
$
-
$
-
$
6,750
Foreclosed assets held for sale
2,068
-
-
2,068
Mortgage servicing rights
-
-
December 31, 2020
Collateral dependent loans
$
14,876
$
-
$
-
$
14,876
Foreclosed assets held for sale
-
-
Mortgage servicing rights
-
-
Sensitivity of Significant Unobservable Inputs
The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at December 31, 2021.
Fair Value
Valuation
(in thousands)
Technique
Unobservable Inputs
Range (Weighted Average)
Collateral dependent loans
$
6,750
Third party valuations
Discount to reflect realizable value
0% - 40%
(20%)
Foreclosed assets held for sale
2,068
Third party valuations
Discount to reflect realizable value less estimated selling costs
0% - 40%
(35%)
Mortgage servicing rights
Third party valuations
PSA standard prepayment model rate
205 -513
(273)
The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at December 31, 2020.
Fair Value
Valuation
(in thousands)
Technique
Unobservable Inputs
Range (Weighted Average)
Collateral dependent loans
$
14,876
Third party valuations
Discount to reflect realizable value
0% - 40%
(20%)
Foreclosed assets held for sale
Third party valuations
Discount to reflect realizable value less estimated selling costs
0% - 40%
(35%)
Mortgage servicing rights
Third party valuations
PSA standard prepayment model rate
242 - 441
(384)
The following tables present estimated fair values of the Company’s financial instruments at December 31, 2021 and 2020 (in thousands):
Carrying
Fair
Amount
Value
Level 1
Level 2
Level 3
December 31, 2021
Financial assets
Cash and due from banks
$
167,242
$
167,242
$
167,242
$
-
$
-
Federal funds sold
1,360
1,360
1,360
-
-
Certificates of deposit investments
2,450
2,450
-
2,450
-
Available-for-sale securities
1,421,422
1,421,422
-
1,421,323
Held-to-maturity securities
7,030
7,034
2,029
5,005
-
Equity securities
-
-
Loans held for sale
2,748
2,748
-
2,748
-
Loans net of allowance for credit losses
3,938,120
3,889,870
-
-
3,889,870
Interest receivable
19,868
19,868
-
19,868
-
Federal Reserve Bank stock
13,845
13,845
-
13,845
-
Federal Home Loan Bank stock
6,484
6,484
-
6,484
-
Financial liabilities
Deposits
$
4,956,486
$
4,956,738
$
-
$
4,394,434
$
562,304
Securities sold under agreements to repurchase
146,268
146,274
-
146,274
-
Interest payable
1,346
1,346
-
1,346
-
Federal Home Loan Bank borrowings
86,446
86,248
-
86,248
-
Subordinated debentures
94,400
94,400
-
94,400
-
Junior subordinated debentures
19,195
15,012
-
15,012
-
December 31, 2020
Financial assets
Cash and due from banks
$
415,973
$
415,973
$
415,973
$
-
$
-
Federal funds sold
1,308
1,308
1,308
-
-
Certificates of deposit investments
2,695
2,695
-
2,695
-
Available-for-sale securities
879,240
879,240
-
878,446
Held-to-maturity securities
5,016
5,119
-
5,119
-
Equity securities
-
-
Loans held for sale
1,924
1,924
-
1,924
-
Loans net of allowance for credit losses
3,094,585
3,056,344
-
-
3,056,344
Interest receivable
19,287
19,287
-
19,287
-
Federal Reserve Bank stock
9,401
9,401
-
9,401
-
Federal Home Loan Bank stock
5,450
5,450
-
5,450
-
Financial liabilities
Deposits
$
3,692,784
$
3,697,105
$
-
$
3,215,715
$
481,390
Securities sold under agreements to repurchase
206,937
206,945
-
206,945
-
Interest payable
2,345
2,345
-
2,345
-
Federal Home Loan Bank borrowings
93,969
96,669
-
96,669
-
Subordinated debentures
94,253
94,253
-
94,253
-
Junior subordinated debentures
19,027
14,604
-
14,604
-
Note 12 -- Deferred Compensation Plan
The Company follows the provisions of ASC 710, for purposes of the First Mid Bancshares, Inc. Amended and Restated Deferred Compensation Plan (“DCP”). At December 31, 2021, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $4,295,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $4,295,000 as an equity instrument (deferred compensation). The DCP was effective as of June 1984. The purpose of the DCP is to enable directors, advisory directors, and key employees the opportunity to defer a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. The Company invests all participants’ deferrals in shares of common stock. Dividends paid on the shares are credited to participants’ DCP accounts and invested in additional shares. During 2021 and 2020, the Company issued 9,513 common shares and 12,921 common shares, respectively, pursuant to the DCP.
The Company also maintains deferred compensation arrangements that were acquired in the Soy Capital acquisition. Individual participants in the agreements are primarily business development employees in the First Mid Insurance and First Mid Wealth Management divisions. The total liabilities associated with these agreements are included in other liabilities on the Company's consolidated balance sheets as of December 31, 2021 and 2020.
Note 13 -- Stock Incentive Plan
At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to succeed the Company's 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.
A maximum of 149,983 shares are authorized under the SI Plan. There have been no options awarded since 2008. All previously issued, unexercised options expired on December 16, 2018. The Company awarded 48,575, 25,950 and 26,700 shares (under the 2017 Stock Incentive Plan) during 2021, 2020, and 2019, respectively, as stock and stock unit awards.
The following table summarizes the compensation cost, net of forfeitures, related to stock-based compensation for the years ended December 31, 2021, 2020, and 2019 (in thousands):
Stock and stock unit awards:
Pre-tax compensation expense
$
1,304
$
$
Income tax benefit
(274
)
(163
)
(95
)
Total share-based compensation expense, net of income taxes
$
1,030
$
$
The following table summarizes non-vested stock and stock unit activity for the years ended December 31, 2021, 2020, and 2019:
Weighted-avg
Weighted-avg
Weighted-avg
Grant-date
Grant-date
Grant-date
Shares
Fair Value
Shares
Fair Value
Shares
Fair Value
Nonvested, beginning of year
42,220
$
34.62
37,908
$
35.49
24,280
$
38.92
Granted
48,575
34.42
25,950
34.46
26,700
33.31
Vested
(28,355
)
35.02
(21,305
)
35.99
(13,072
)
37.42
Forfeited
(400
)
(34.34
)
(333
)
(33.31
)
0.00
Nonvested, end of year
62,040
$
34.27
42,220
$
34.62
37,908
$
35.49
Fair value of shares vested
$
993,094
$
766,774
$
489,110
The fair value of the awards is amortized to compensation expense over the vesting periods of the awards (four years for restricted stock unit awards and three years for restricted stock awards) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. As of December 31, 2021, 2020, and 2019, there was $1,684,000, $1,156,000, and $1,053,000, respectively, of total unrecognized compensation cost related to unvested stock and stock unit awards under the SI Plan.
Note 14 -- Retirement Plans
The Company has a defined contribution retirement plan which covers substantially all employees, and which provides for a Company contribution equal to 4% of each participant’s compensation and a Company matching contribution of up to 100% of the first 3% and 50% of the next 2% of pre-tax contributions made by each participant. Employee contributions are limited to the 402(g) limit of compensation. The total expense for the plan amounted to $3,649,000, $2,623,000 and $2,429,000 in 2021, 2020, and 2019, respectively. The Company also has an agreement in place to pay $50,000 annually for 20 years from the retirement date to a senior officer that retired December 31, 2013. Total expense under this agreement amounted to $27,000, $28,000 and $32,000 in 2021, 2020, and 2019 respectively. The current liability recorded for this agreement was $419,000 and $441,000, as of December 31, 2021 and 2020, respectively.
Note 15 -- Income Taxes
The components of federal and state income tax expense for the years ended 2021, 2020, and 2019 were as follows (in thousands):
Current
Federal
$
12,269
$
12,315
$
8,538
State
6,384
7,120
4,900
Total current
18,653
19,435
13,438
Deferred
Federal
(2,562
)
(3,318
)
1,368
State
(793
)
(1,645
)
Total deferred
(3,355
)
(4,963
)
1,885
Total
$
15,298
$
14,472
$
15,323
Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. federal tax rate of 21% to income before income taxes). The principal reasons for the difference are as follows (in thousands):
Expected income taxes
$
14,025
$
12,546
$
13,286
Effects of:
Tax-exempt income from bank owned life insurance
(575
)
(363
)
(563
)
Other tax exempt income
(2,072
)
(1,758
)
(1,701
)
Nondeductible interest expense
State taxes, net of federal taxes
4,417
4,325
4,280
Other items
(514
)
(323
)
(49
)
Total
$
15,298
$
14,472
$
15,323
Tax expense recorded by the Company during 2020 and 2019 did not include any interest or penalties. Tax expense recorded during 2021 included interest of approximately $2,100. Tax returns filed with the Internal Revenue Service and Illinois Department of Revenue are subject to review by law under a three-year statute of limitations. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2018.
The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 are presented below (in thousands):
Deferred tax assets:
Allowance for credit losses
$
12,957
$
11,858
Available-for-sale investment securities
-
Deferred compensation
4,025
3,486
Supplemental retirement
Core deposit premium and other intangible assets
-
Deferred loan costs
Stock compensation expense
Deferred revenue
Acquisition costs
Other
1,139
Total gross deferred tax assets
19,822
18,892
Deferred tax liabilities:
Deferred expenses
Intangibles amortization
6,480
5,034
Prepaid expenses
FHLB stock dividend
Depreciation
3,463
2,566
Purchase accounting
7,937
Accumulated accretion
Mortgage servicing rights
Available-for-sale investment securities
-
6,941
Other
-
Total gross deferred tax liabilities
12,523
23,755
Net deferred tax assets (liabilities)
$
7,299
$
(4,863
)
During 2021, a net deferred tax asset was recorded in other assets on the consolidated balance sheets. During 2020, a net deferred tax liability was recorded in other liabilities. No valuation allowance related to deferred tax assets was recorded at December 31, 2021 and 2020 as management believes it is more likely than not that the deferred tax assets will be fully realized.
Note 16 -- Dividend Restrictions
The National Bank Act imposes limitations on the amount of dividends that may be paid by a national bank, such as First Mid Bank. Generally, a national bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank’s board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank’s year-to-date net income plus the bank’s adjusted retained net income for the two preceding years. Factors that could adversely affect First Mid Bank’s net income include other-than- temporary impairment on investment securities that result in credit losses and economic conditions in industries where there are concentrations of loans outstanding that result in impairment of these loans and, consequently loan charges and the need for increased allowances for losses. See “Item 1A. Risk Factors,” Note 4 - “Investment Securities” and Note 5 - “Loans” for a more detailed discussion of the factors.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, First Mid Bank exceeded their minimum capital requirements under applicable guidelines as of December 31, 2021. As of December 31, 2021, approximately $54.7 million was available to be paid as dividends to the Company by First Mid Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends by First Mid Bank if the OCC determines that such payment would constitute an unsafe or unsound practice.
Note 17 -- Commitments and Contingent Liabilities
First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments.
The off-balance sheet financial instruments whose contract amounts represent credit risk at December 31, 2021 and 2020 were as follows (in thousands):
Unused commitments and lines of credit:
Commercial real estate
$
118,190
$
56,309
Commercial operating
529,035
396,345
Home equity
59,422
40,464
Other
293,339
112,327
Total
$
999,986
$
605,445
Standby letters of credit
$
14,403
$
10,048
Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded within ninety days. Lines of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long as there is no violation of any condition established in the loan agreement. Both commitments to originate credit and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the lines and some commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties. Standby letters of credit are primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers. The maximum amount of credit that would be extended under letters of credit is equal to the total off-balance sheet contract amount of such instrument at December 31, 2021 and 2020. The Company's deferred revenue under standby letters of credit was nominal.
The Company is also subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition of ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.
Note 18 -- Related Party Transactions
Certain officers, directors and principal stockholders of the Company and its subsidiaries, their immediate families or their affiliated companies (“related parties”) have loans with one or more of the subsidiaries. These loans are made in the ordinary course of business on substantially the same terms, including interest and collateral, as those prevailing for comparable transactions with others. Loans to related parties totaled approximately $123,614,000 and $55,125,000 at December 31, 2021 and 2020, respectively. Activity during 2021 and 2020 was as follows (in thousands):
Beginning balance
$
55,125
$
88,536
New loans
117,927
49,439
Loan repayments
(49,438
)
(1,511
)
Retired director no longer a related party
-
(81,339
)
Ending balance
$
123,614
$
55,125
Deposits from related parties held by First Mid Bank at December 31, 2021 and 2020 totaled $33,036,000 and $48,478,000, respectively.
Note 19 -- Business Combinations
On September 25, 2020, the Company and Eval Sub Inc., a newly formed Missouri corporation and wholly owned subsidiary of the Company ("Eval Merger Sub"), entered into an Agreement and Plan of Merger (the "LINCO Merger Agreement") with LINCO Bancshares, Inc., a Missouri corporation ("LINCO"), and the sellers as defined therein, pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business combination whereby Eval Merger Sub will merge with and into LINCO, whereupon the separate corporate existence of Eval Merger Sub will cease and LINCO will continue as the surviving company and a wholly owned subsidiary of the Company (the "LINCO Merger").
Subject to the terms and conditions of the LINCO Merger Agreement, at the effective time of the LINCO Merger, each share of common stock, par value $1.00 per share, of LINCO issued and outstanding immediately prior to the effective time of the LINCO Merger (other than shares held in treasury by LINCO) was converted into and became the right to receive, cash or 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. On an aggregate basis, the total consideration paid by the Company at the closing of the LINCO Merger was $103.5 million in cash and 1,262,246 shares of the Company’s common stock. In addition, immediately prior to the closing of the proposed merger, LINCO paid a special dividend to its shareholders in the aggregate amount of $13 million. The LINCO Merger closed on February 22, 2021.
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 February 22, 2021 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 $5.4 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
As Recorded by
Value
Adjustments
First Mid Bank
Assets
Cash and due from banks
$
130,561
$
-
$
130,561
Investment securities
119,234
119,498
Loans
838,377
(9,401
)
828,976
Allowance for loan losses
(8,656
)
6,583
(2,073
)
Other real estate owned
8,435
9,350
Premises and equipment
23,440
6,360
29,800
Goodwill
20,503
(15,054
)
5,449
Core deposit intangible
2,025
2,148
Right of use asset
-
Other assets
43,697
2,499
46,196
Total assets acquired
$
1,175,714
$
(5,015
)
$
1,170,699
Liabilities and stockholders' equity
Deposits
$
988,329
$
2,081
$
990,410
Securities sold under agreements to repurchase
-
-
-
FHLB advances
26,941
27,916
Other borrowings
-
-
-
Lease liability
-
Other liabilities
4,498
(610
)
3,888
Total liabilities assumed
1,019,768
3,240
1,023,008
Net assets acquired
$
155,946
$
(8,255
)
$
147,691
Consideration paid
Cash
$
103,500
Common stock
44,191
Total consideration paid
$
147,691
The Company has recognized approximately $9.1 million, pre-tax, of acquisition costs for the LINCO Merger. Of this amount, $8.6 million was recognized during 2021. These costs are included in salaries and benefits, legal and professional and other expense. Of the $9.4 million adjustment to loans, $11.1 million is being accreted to interest income over the remaining term of the loans. The remaining $1.7 million was the elimination of deferred fees and unearned discounts previously recorded by Providence Bank. The Company also recorded approximately $2 million directly to the allowance for credit losses for loans identified as PCD. Of the $838 million of loans acquired, approximately $64.6 million was identified as PCD.
The differences between fair value and acquired value of the assumed time deposits of $2.1 million and the assumed FHLB advances of $975,000, are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible assets, with a fair value of $2.1 million, are being amortized on an accelerated basis over its estimated life of 10 years.
The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the purchase accounting adjustments and acquisition expenses, had the LINCO Merger taken place at the beginning of the period (dollars in thousands, except per share data):
Twelve months ended December 31,
Net interest income
$
173,676
$
169,430
Provision for loan losses
15,351
18,242
Non-interest income
70,879
66,228
Non-interest expense
159,778
152,596
Income before income taxes
69,426
64,820
Income tax expense
15,994
15,944
Net income available to common stockholders
$
53,432
$
48,876
Earnings per share
Basic
$
2.99
$
2.72
Diluted
$
2.98
$
2.71
Basic weighted average shares outstanding
17,886,998
17,979,126
Diluted weighted average shares outstanding
17,939,007
18,025,102
Note 20 -- Leases
Effective January 1, 2019, the Company adopted ASU 2016-02 Leases (Topic 842). As of December 31, 2021, substantially all of the Company's leases are operating leases for real estate property bank branches, ATM locations, and office space. These leases are generally for periods of 1 to 25 years with various renewal options. The Company elected the optional transition method permitted by Topic 842. Under this method, an entity recognizes and measures leases that exist at the application date and prior comparative periods are not adjusted. In addition, the Company elected the package of practical expedients:
1.
An entity need not reassess whether any expired or existing contracts contain leases.
2.
An entity need not reassess the lease classification for any expired or existing leases.
3.
An entity needs to reassess initial direct costs for any existing leases.
The Company 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 not to 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 the 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):
Operating lease right-of-use assets
$
15,116
$
17,209
Operating lease liabilities
15,322
17,351
Weighted-average remaining lease term
6.6 years
7.3 years
Weighted-average discount rate
2.70
%
2.85
%
Certain of the Company's leases contain options to renew the lease; however, not all renewal options are included in the calculation of lease liabilities as they are not reasonably certain to be exercised. The Company's leases do not contain residual value guarantees or material variable lease payments. The Company does not have any other material restrictions or covenants imposed by leases that would impact the Company's ability to pay dividends or cause the Company to incur additional financial obligations.
Future minimum lease payments under operating leases are (in thousands):
Operating Leases
$
2,563
2,421
1,864
1,568
1,282
Thereafter
7,701
Total minimum lease payments
17,399
Less imputed interest
(2,077
)
Total lease liability
$
15,322
The components of lease expense for the twelve months ended December 31, 2021 and 2020 were as follows (in thousands):
Operating lease cost
$
2,515
$
2,717
Short-term lease cost
Variable lease cost
Total lease cost
3,646
3,264
Income from subleases
(527
)
(730
)
Net lease cost
$
3,119
$
2,534
As the Company elected not to separate lease and non-lease components, the variable lease cost primarily represents variable payment such as common area maintenance and copier expense. The Company does not have any material sub-lease agreements. Cash paid for amounts included in the measurement of lease liabilities was (in thousands):
Operating cash flows from operating leases
$
2,872
$
2,766
Note 21 -- Derivatives
The Company utilizes interest rate swaps, designated as fair value hedges, to mitigate the risk of changing interest rates on the fair value of fixed rate loans. For derivative instruments that are designed and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting loss or gain in the hedged asset attributable to the hedged risk, is recognized in current earnings.
Derivatives Designated as Hedging Instruments
The following table provides the outstanding notional balances and fair value of outstanding derivatives designated as hedging instruments as of December 31, 2021 and 2020 (in thousands):
Weighted Average
Balance Sheet
Remaining Maturity
Notional
Estimated
Derivative
Location
(Years)
Amount
Value
December 31, 2021
Interest rate swap agreements
Other liabilities
7.3
$
13,900
$
(1,476
)
December 31, 2020
Interest rate swap agreements
Other liabilities
8.3
$
14,334
$
(2,892
)
The effects of fair value hedges on the Company's income statement during the twelve months ended December 31, 2021 and 2020 were as follows (in thousands):
Derivative
Location of Gain (Loss) on Derivative
Interest rate swap agreements
Interest income on loans
$
(827
)
$
1,168
Derivative
Location of Gain (Loss) on Hedged Items
Interest rate swap agreements
Interest income on loans
$
$
(1,168
)
As of December 31, 2021, the following amounts were recorded on the balance sheet related to the cumulative basis adjustment for fair value hedges (in thousands):
Cumulative Amount of Fair Value Hedging
Line Item in the Balance Sheet in
Carrying Amount of
Adjustments Included in the Carrying
Which the Hedge Items are Included
the Hedged Assets
Amount of the Hedged Assets
Loans
$
13,234
$
Derivatives Not Designated as Hedging Instruments
The following table provides the outstanding notional balances and fair value of outstanding derivatives not designated as hedging instruments as of December 31, 2021 (in thousands):
Weighted Average
Balance Sheet
Remaining Maturity
Notional
Estimated
Location
(Years)
Amount
Value
December 31, 2021
Interest rate swap agreements
Other assets
6.0
$
40,886
$
Interest rate swap agreements
Other liabilities
6.0
40,886
(809
)
Note 22 -- Parent Company Only Financial Statements
Presented below are condensed balance sheets, statements of income and cash flows for the Company (in thousands):
First Mid Bancshares, Inc. (Parent Company)
Balance Sheets
December 31,
Assets
Cash
$
28,421
$
122,163
Premises and equipment, net
4,377
4,423
Investment in subsidiaries
713,296
553,150
Other assets
4,048
4,062
Total assets
$
750,142
$
683,798
Liabilities and stockholders’ equity
Liabilities
Debt
$
113,595
$
113,280
Other liabilities
2,653
2,290
Total liabilities
116,248
115,570
Stockholders’ equity
633,894
568,228
Total liabilities and stockholders’ equity
$
750,142
$
683,798
First Mid Bancshares, Inc. (Parent Company)
Statements of Income and Comprehensive Income
Years ended December 31,
Income:
Dividends from subsidiaries
$
28,075
$
29,663
$
38,688
Other income
Total income
28,084
29,706
38,700
Operating expenses
9,630
4,697
4,492
Income before income taxes and equity in undistributed earnings of subsidiaries
18,454
25,009
34,208
Income tax benefit
2,656
1,231
1,256
Income before equity in undistributed earnings of subsidiaries
21,110
26,240
35,464
Equity in undistributed earnings of subsidiaries
30,380
19,030
12,479
Net income
51,490
45,270
47,943
Other comprehensive income (loss), net of taxes
(17,926
)
8,735
14,833
Comprehensive income
$
33,564
$
54,005
$
62,776
First Mid Bancshares, Inc. (Parent Company)
Statements of Cash Flows
Years ended December 31,
Cash flows from operating activities:
Net income
$
51,490
$
45,270
$
47,943
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation, amortization, accretion, net
Dividends received from subsidiary
28,075
29,663
38,688
Equity in undistributed earnings of subsidiaries
(30,380
)
(19,030
)
(12,479
)
Increase in other assets
(206,880
)
(30,121
)
(39,042
)
Increase in other liabilities
1,760
1,349
(17,104
)
Net cash provided by (used in) operating activities
(155,585
)
27,235
18,131
Cash flows from investing activities:
Investment in subsidiary
-
(700
)
(343
)
Net cash from business acquisition
30,968
-
Net cash provided by (used in) investing activities
30,968
(700
)
(33
)
Cash flows from financing activities:
Repayment of short-term debt
-
(5,000
)
-
Proceeds from short-term debt
-
5,000
-
Repayment of long-term debt
-
-
(10,310
)
Issuance of subordinated debt
-
94,253
-
Proceeds from issuance of common stock
46,128
Payment to repurchase common stock
(326
)
(213
)
(1,293
)
Direct expense related to capital transactions
(206
)
-
-
Dividends paid on common stock
(14,721
)
(12,814
)
(11,863
)
Net cash provided by (used in) financing activities
30,875
81,836
(22,877
)
Increase (decrease) in cash
(93,742
)
108,371
(4,779
)
Cash at beginning of year
122,163
13,792
18,571
Cash at end of year
$
28,421
$
122,163
$
13,792
Note 23 -- Quarterly Financial Data - Unaudited
The following table presents summarized quarterly data for each of the two years ended December 31, 2021 and 2020 (in thousands):
Quarters ended in 2021
March 31
June 30
September 30
December 31
Selected operations data:
Interest income
$
40,816
$
46,635
$
49,263
$
46,299
Interest expense
4,052
3,888
3,767
3,555
Net interest income
36,764
42,747
45,496
42,744
Provision for loan losses
12,136
(560
)
1,103
2,472
Net interest income after provision for loan losses
24,628
43,307
44,393
40,272
Other income
17,749
17,535
16,359
18,124
Other expense
37,600
45,264
36,321
36,394
Income before income taxes
4,777
15,578
24,431
22,002
Income taxes
3,357
6,105
5,168
Net income
$
4,109
$
12,221
$
18,326
$
16,834
Basic earnings per common share
$
0.24
$
0.68
$
1.01
$
0.93
Diluted earnings per common share
0.24
0.68
1.01
0.93
Quarters ended in 2020
March 31
June 30
September 30
December 31
Selected operations data:
Interest income
$
34,741
$
35,535
$
36,295
$
37,570
Interest expense
4,868
3,953
3,778
4,130
Net interest income
29,873
31,582
32,517
33,440
Provision for loan losses
5,481
6,136
3,883
Net interest income after provision for loan losses
24,392
25,446
28,634
32,837
Other income
16,510
13,885
13,578
15,547
Other expense
27,731
26,098
26,927
30,331
Income before income taxes
13,171
13,233
15,285
18,053
Income taxes
3,172
3,096
3,720
4,484
Net income
$
9,999
$
10,137
$
11,565
$
13,569
Basic earnings per common share
$
0.60
$
0.61
$
0.69
$
0.81
Diluted earnings per common share
0.60
0.60
0.69
0.81
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid Bancshares, Inc.
Mattoon, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Mid Bancshares, Inc. (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 2, 2022, expressed an unqualified opinion.
Basis for Opinion
The financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses
As more fully described in Notes 1 and 5 to the consolidated financial statements, the Company estimates the allowance for credit losses (ACL) at a level that is appropriate to cover estimated credit losses on individually evaluated loans, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The determination of the ACL requires significant judgment reflecting the Company’s best estimate of expected credit losses. Expected credit losses are measured on a collective (pool) basis using a combination of loss-rate methods when the financial assets share similar risk characteristics. Loans that do not share similar risk characteristics are evaluated on an individual basis. Historical loss rates reflecting estimated life of loan losses are analyzed and applied to their respective loan segments comprised of loans not subject to individual evaluation. Historical loss rates are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition, as well as for certain known model limitations. Forecast factors are developed based on information obtained from external sources, as well as consideration of other internal information, and are included in the ACL model for a reasonable and supportable 12-month forecast period, with loss factors immediately reverting back to historic loss rates. Management continually reevaluates the other subjective and forecast factors included in its ACL analysis.
The primary reason for our determination that the ACL is a critical audit matter is that auditing the estimated ACL involved significant judgment and complex review. Auditing the ACL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s model selections, segmentation, weighted average life calculations, assessment of economic conditions and other environmental factors, assessment of forecast factors, evaluating the adequacy of specific allowances associated with individually evaluated loans and assessing the appropriateness of loan grades.
Our audit procedures related to the estimated ACL included the following procedures, among others.
•
Obtaining an understanding of the Company’s process for establishing the ACL, including model selection and the qualitative and forecast factor adjustments of the ACL and any limitations of the model
•
Testing the design and operating effectiveness of internal controls, including those related to technology over the ACL calculation, including data completeness and accuracy, verification of historical net loss data and calculated net loss rates, the establishment of qualitative and forecast adjustments, grading and risk classification of loans by segment, including internal independent loan review functions, establishment of reserves on individually evaluated loans and management’s review controls over the ACL as a whole
•
Testing of the completeness and accuracy of the information utilized in the calculation of the ACL, including reports used in management review controls over the ACL
•
Assessing the relevance and reliability of assumptions and data
•
Testing clerical and computational accuracy of the formulas within the ACL model
•
Evaluating how historical losses are determined for each segment
•
Evaluating segmentation of the loan portfolio for reasonableness based on risk characteristics of the pooled loans
•
Evaluating the qualitative factor and forecast adjustments, including assessing the basis and reasonableness for the adjustments
•
Evaluating management’s risk ratings of loans
•
Evaluating specific reserves on individually analyzed loans
•
Evaluating overall reasonableness of estimated reserve by considering and comparing past performance of the Company’s loan portfolio, trends in credit quality of the loan portfolio and trends in the credit quality of peer institutions
We have served as the Company’s auditor since 2005.
Decatur, Illinois
March 2, 2022

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2021. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that the Company’s disclosure controls and procedures as of December 31, 2021, were effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework (2013).”
Based on the assessment, management determined that, as of December 31, 2021, the Company’s internal control over financial reporting is effective, based on those criteria. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by BKD, LLP, an independent registered public accounting firm, as stated in their report following.
March 2, 2022
Joseph R. Dively
President and Chief Executive Officer
Matthew K. Smith
Chief Financial Officer
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fourth fiscal quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders First Mid Bancshares, Inc.
Mattoon, Illinois
Opinion on the Internal Control over Financial Reporting
We have audited First Mid Bancshares, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company and our report dated March 2, 2022 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Decatur, Illinois
March 2, 2022

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ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by Item 10 with respect to directors and director nominees is incorporated by reference to the Company’s Proxy Statement for the 2022 Annual Meeting of the Company’s shareholders under the captions “Proposal 1 - Election of Directors,” “Corporate Governance Matters” and “Section 16 - Beneficial Ownership Reporting Compliance.”
The information called for by Item 10 with respect to executive officers is incorporated by reference to Part I hereof under the caption “Supplemental Item - Executive Officers of the Company” and to the Company’s Proxy Statement for the 2022 Annual Meeting of the Company’s shareholders under the caption “Section 16 - Beneficial Ownership Reporting Compliance.”
The information called for by Item 10 with respect to audit committee financial expert is incorporated by reference to the Company’s Proxy Statement for the 2022 Annual Meeting of the Company’s shareholders under the captions “Audit Committee” and “Report of the Audit Committee to the Board of Directors.”
The information called for by Item 10 with respect to corporate governance is incorporated by reference to the Company’s Proxy Statement for the 2022 Annual Meeting of the Company’s shareholders under the caption “Corporate Governance Matters.”
The Company has adopted a code of conduct for directors, officers, and employees including senior financial management of the Company. This code of conduct is posted on the Company’s website. In the event that the Company amends or waives any provisions of this code of conduct, the Company intends to disclose the same on its website at www.firstmid.com.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the Company’s Proxy Statement for the 2022 Annual Meeting of the Company’s shareholders under the captions “Executive Compensation,” “Non-qualified Deferred Compensation,” "Potential Payments Upon Termination or Change in Control of the Company,” “Director Compensation,” "Corporate Governance Matters - Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report.”

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by Item 12 with respect to equity compensation plans is provided in the table below.
Equity Compensation Plan Information
Number of securities
Number of securities
remaining available
to be issued upon
Weighted-average
for future issuance
exercise of
exercise price of
under equity
outstanding options
outstanding options
compensation plans
Plan category
(a)
(b)
(c)
Equity compensation plans approved by security holders:
(A) Deferred compensation plan
-
$
-
305,722
(1)
(B) Stock incentive plan
-
-
302,899
(2)
Equity compensation plans not approved by security holders (3)
-
-
-
Total
-
$
-
608,621
(1)
Consists of shares issuable with respect to participant deferral contributions invested in common stock.
(2)
Consists of restricted stock and/or restricted stock units.
(3)
The Company does not maintain any equity compensation plans not approved by stockholders. The Company’s equity compensation plans approved by security holders consist of the Deferred Compensation Plan and the Stock Incentive Plan. Additional information regarding each plan is available in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Stock Plans” and Note 13 - Stock Incentive Plan herein.
The information called for by Item 12 with respect to security ownership is incorporated by reference to the Company’s Proxy Statement for the 2022 Annual Meeting of the Company’s shareholders under the caption “Voting Securities and Principal Holders Thereof.”

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information called for by Item 13 is incorporated by reference to the Company’s Proxy Statement for the 2022 Annual Meeting of the Company’s shareholders under the captions “Certain Relationships and Related Transactions” and “Corporate Governance Matters - Board of Directors.”

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is incorporated by reference to the Company’s Proxy Statement for the 2022 Annual Meeting of the Company’s shareholders under the caption “Fees of Independent Auditors.”
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement schedules of the Company are filed as part of this document under Item 8.
Financial Statements and Supplementary Data:
•
Consolidated Balance Sheets -- December 31, 2021 and 2020
•
Consolidated Statements of Income -- For the Years Ended December 31, 2021, 2020, and 2019
•
Consolidated Statements of Comprehensive Income -- For the Years Ended December 31, 2021, 2020, and 2019
•
Consolidated Statements of Changes in Stockholders’ Equity -- For the Years Ended December 31, 2021, 2020, and 2019
•
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2021, 2020, and 2019.
(a)(3) - Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that follows the Signature Page and immediately precedes the exhibits filed.