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 $3.9 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 three industries as of December 31, 2024. 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 credit 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
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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, 2024, 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, 2024. 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
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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, increased work-from-home arrangements, 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.
Other Business 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.
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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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Risk management and strategy
The Company’s Information Security strategy prioritizes detection, analysis and response to known, anticipated or unexpected threats; effective management of security risks; and resiliency against incidents. The Company’s cybersecurity risk management processes include technical security controls, policy enforcement mechanisms, monitoring systems, employee training, contractual arrangements, tools and related services from third-party providers, and management oversight to assess, identify and manage material risks from cybersecurity threats. The Company implements risk-based controls to protect the Company’s information, information systems, business operations, products and related services, and the information of the Company’s customers. The Company has adopted security-control principles based on the Federal Financial Institutions Examination Council (FFIEC) Cyber Security Assessment Tool (CAT), and other industry-recognized standards, and contractual requirements, as applicable. The Company also leverages industry associations, third-party benchmarking, the results from regular internal and third-party audits, threat intelligence feeds, and other similar resources to inform the Company’s cybersecurity processes and allocate resources.
The Company maintains security programs that include physical, administrative and technical safeguards, and the Company maintains plans and procedures whose objective is to help the Company prevent and timely and effectively respond to cybersecurity threats or incidents. Through the Company’s cybersecurity risk management process, the Company continuously monitors cybersecurity vulnerabilities and potential attack vectors to Company systems, and the Company evaluates the potential operational and financial effects of any threat and of cybersecurity countermeasures made to defend against such threats. The Company continues to integrate the Company’s cyber practice within the Company’s Risk Oversight Committee, and Enterprise Risk Management program, both of which are overseen by the Company’s Board of Directors and provide frameworks for identifying and tracking cyber-related business and compliance risks across the Organization.The Company periodically engages third-party consultants to assist us in assessing, enhancing, implementing, and monitoring the Company’s cybersecurity risk management programs and responding to any incidents.
As part of the Company’s cybersecurity risk management process, the Company conducts an annual “tabletop” exercise during which the Company simulates cybersecurity incidents to ensure that the Company is prepared to respond to such an incident and to highlight any areas for potential improvement in the Company’s cyber incident preparedness. This exercise is conducted at both the technical level and senior management level. In addition, all employees are required to pass mandatory cybersecurity training courses on an annual basis and receive bi-weekly phishing simulations to provide “experiential learning” on how to recognize phishing attempts.
The Company has established a cybersecurity vendor risk management program, which is a cross-functional program that forms part of the Company’s Enterprise Risk Management program and is supported by the Company’s security, compliance, and third-party partners. Through this evolving program, the Company assesses the risks from cybersecurity threats that impact the Company’s third-party service providers with whom the Company shares personal identifying and confidential information. The Company continues to evolve the oversight processes to mature how the Company identifies and manages cybersecurity risks associated with the products or services the Company procures from third parties.
The Company has experienced, and may in the future experience, whether directly or through the Company’s third-party partners, cybersecurity incidents. While prior incidents have not materially affected the Company’s business strategy, results of operations or financial condition, and although the Company’s processes are designed to help prevent, detect, respond to, and mitigate the impact of such incidents, there is no guarantee that a future cyber incident would not materially affect the Company’s business strategy, results of operations or financial condition.
Governance
The Company’s Board of Directors has overall responsibility for risk oversight, with its committees assisting the Board in performing this function. The Company’s Board of Directors has delegated oversight of risks related to cybersecurity to two Board committees, the Risk Oversight Committee and Audit Committee, and each committee reports on its activities and findings to the Board on a quarterly cadence.The Audit Committee is charged with reviewing the Company’s cybersecurity processes for assessing key strategic, operational, and compliance risks. The Company’s Information Security Officer provides presentations to the Risk Oversight Committee and the Board, on cybersecurity risks quarterly. These briefings may include assessments of cyber risks, the threat landscape, updates on incidents, and reports on the Company’s investments in cybersecurity risk mitigation and governance. In the event of a potentially material cybersecurity event, the Incident Response Team (IRT) is notified and briefed, and meetings with that team and/or Executive Committee members are held, with the Board of Directors being briefed, as appropriate.
The Company’s Information Security Officer (ISO), James Hinks, leads our cybersecurity program and oversees the Company's Security Operations Team (SOC), supporting our security functions of identifying, preventing, detecting, responding, and recovering.The SOC team comprises personnel with extensive experience in information technology across the private and public sectors.Mr. Hinks holds multiple security accreditations and 25 years of experience in cybersecurity, software development, systems, networking, and other technology-related roles within public and private industries, with 15 years in IT leadership roles. Mr. Hinks has been
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employed with the Company since 2019, overseeing information security, disaster recovery, vendor management, and physical security.
ITEM 2. PROPERTIES
The Company's headquarters is located at 1421 Charleston Avenue, Mattoon Illinois. This location is also used by the deposit operations department of First Mid Bank. In addition, the Company owns facilities located at 1500 Wabash Avenue, Mattoon, Illinois, and 1420 Wabash Avenue, Mattoon, Illinois, which are used by branch support operations, and 1100 Broadway Avenue, Mattoon, Illinois which is used by loan 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 Insurance also uses a building owned by First Mid Bank at 1501 Broadway Avenue. First Mid Bank also conducts business through numerous facilities, owned, leased, and located on land only leases in twenty-eight counties throughout Illinois, six throughout Missouri, one county in Wisconsin, and one county in Texas. Of the eighty-two banking offices operated by First Mid Bank, sixty-one are owned, seventeen are leased from non-affiliated third parties, and four are located in land only leases with non-affiliated third parties. First Mid Bank also has an office in metro Indianapolis, Indiana that provides agency finance and loan production services and an office in Roscoe, Illinois that provides processing services for mortgage banking. In addition to having employees throughout the First Mid Bank footprint, First Mid Insurance Group and First Mid Wealth Management conduct business in numerous other facilities. First Mid Insurance leases facilities located in three counties in Illinois and two counties in Missouri from non-affiliated third parties. First Mid Wealth Management leases facilities located in three counties in Illinois from non-affiliated third parties.
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, 2024 was $100.2 million.
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.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
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 2024. 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 Item 1 – “Business” – “First Mid Bank” – “Dividends” and Note 16 – “Dividend Restrictions” herein.
The following table summarizes share repurchase activity for the fourth quarter of 2024:
ISSUER PURCHASES OF EQUITY SECURITIES
All of the repurchase activity that occurred during 2024 resulted from shares withheld to cover taxes on employee stock vesting. There were no other shares repurchased during 2024. 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. [Reserved]
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 for the years ended December 31, 2024, 2023, and 2022. 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.
For the Years Ended December 31, 2024, 2023, and 2022 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 $78.9 million, $68.9 million, and $73.0 million and diluted earnings per share were $3.30, $3.15, and $3.60 for the years ended December 31, 2024, 2023, and 2022, respectively. The following table shows the Company’s annualized performance ratios for the years ended December 31, 2024, 2023, and 2022:
Average common equity to average assets (non-GAAP) 10.76 % 9.61 % 9.77 %
Total assets at December 31, 2024, 2023, and 2022 were $7.52 billion, $7.59 billion, and $6.74 billion, respectively. Net loan balances increased to $5.60 billion at December 31, 2024, from $5.51 billion at December 31, 2023, and from $4.77 billion at December 31, 2022. The increase in 2024 was primarily due to organic growth within the established footprint. The increase in 2023 was primarily due to approximately $730.2 million of gross loans acquired, after purchase accounting adjustments, from Blackhawk Bank. The increase in 2022 was primarily due to approximately $418.5 million of loans acquired from Jefferson Bank.
Total deposit balances decreased to $6.06 billion at December 31, 2024 from $6.12 billion at December 31, 2023 which was an increase from $5.26 billion at December 31, 2022. The decrease in 2024 was due primarily to a reduction in brokered CDs and purchased CDs as part of the Company's strategy to reduce its cost of funds. The increase in 2023 was primarily due to $1.19 billion acquired from Blackhawk Bank.
Net interest margin (tax effected), defined as net interest income divided by average interest-earning assets, was 3.34% for 2024, 3.05% for 2023 and 3.13% for 2022. The increase in 2024 was primarily due to repricing of earning assets catching up to the increased cost of funding experience in 2023. The decrease in 2023 was primarily due to an increase in rates on interest-bearing deposits and borrowings.
Net interest income increased to $228.7 million in 2024 from $193.5 million in 2023 and $184.3 million in 2022. During 2024, the increase in net interest income was primarily due to the Blackhawk Bank acquisition being present for a full calendar year and the previously mentioned explanation for the increase in net interest margin (tax effected). During 2023, the increase in net interest income was primarily due to the acquisition of Blackhawk Bank.
Non-interest income increased to $96.3 million in 2024 compared to $86.8 million in 2023 and $74.7 million in 2022. The increase in 2024 was primarily due to the Blackhawk Bank acquisition being present for a full calendar year and the increase in insurance commissions due to the acquisition of Mid Rivers Insurance Group in 2024. The increase in 2023 was primarily due to the acquisition of Blackhawk Bank and an increase in insurance revenues.
Non-interest expenses increased to $215.0 million in 2024 compared to $185.7 million in 2023, and $162.9 million in 2022. The increase in 2024 is primarily due to increased employees and locations from the Blackhawk Bank acquisition being present for a full calendar year. The increase in 2023 was primarily due to the acquisition of Blackhawk Bank and nonrecurring costs tied to the acquisition and integration.
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Following is a summary of the factors that contributed to the changes in net income (in thousands):
Provision for credit losses 469 (1,298 )
Other income, including securities transactions 9,500 12,104
Increase (decrease) in net income $ 9,963 $ (4,017 )
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $29.8 million at December 31, 2024 compared to $20.1 million at December 31, 2023, and $19.2 million at December 31, 2022. Repossessed Assets balances totaled $2.2 million at December 31, 2024 compared to $1.2 million at December 31, 2023, and $4.4 million at December 31, 2022. The Company’s provision for credit losses was $5.6 million for 2024, compared to $6.1 million for 2023, and $4.8 million for 2022. The decrease of provision expense in 2024 was primarily due to the provision requirements in 2023 for the acquisition of Blackhawk Bank. The increase in provision expense for 2023 was primarily due to the acquisition of Blackhawk Bank.
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, 2024, 2023, and 2022 was 12.82%, 12.02%, and 12.40%, respectively. The Company’s total capital to risk weighted assets ratio at December 31, 2024, 2023, and 2022 was 15.37%, 14.84% and 15.20%, respectively. The increase in 2024 was primarily due to net income of the Company exceeding dividends paid to shareholders. The decrease in 2023 was primarily due to the acquisition of Blackhawk Bank.
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, 2024, 2023, and 2022 were $1.4 billion, $1.3 billion, and $1.2 billion, 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 consolidated 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. 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 (loss).
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 and acquisition activity, economic conditions, changes in policies, procedures and 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
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on off-balance sheet credit exposures is included in other liabilities in the consolidated balance sheets.
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 2024 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 consolidated balance sheets. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually.
Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
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 $3.1 million, $3.1 million, and $3.2 million for 2024, 2023, and 2022, respectively, were 3.28%, 3.00%, and 3.08% at December 31, 2024, 2023, and 2022, respectively. The Company’s
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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
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets
Investment securities
Liabilities and stockholders' equity
Deposits:
Other debt 1 — — % — — — % 14 — — %
Impact of non-interest-bearing funds 0.51 % 0.43 % 0.16 %
TE net yield on interest-earning assets 3.34 % 3.05 % 3.13 %
(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
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Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for the past two years (in thousands):
Increase (Decrease) Increase (Decrease)
Total Total
Change Volume (1) Rate (1) Change Volume (1) Rate (1)
Earning assets:
Investment securities:
Interest-bearing liabilities:
Deposits:
Federal funds purchased (9 ) (5 ) (4 ) 1 (7 ) 8
(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 $35.3 million or 17.9% in 2024 compared to an increase of $9.1 million or 4.8% in 2023. 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 increased primarily due to higher interest-bearing liability costs in 2023 being more than offset by the repricing of earning assets.
In 2024, average earning assets increased by $446.6 million, or 7.0%, and average interest-bearing liabilities increased by $268.8 million or 5.3%. These increases were primarily due to assets and liabilities acquired from Blackhawk Bank being present for the entire calendar year. Changes in average balances are shown below:
•
Average interest-bearing cash deposits held by the Company increased $62.9 million or 76.1% in 2024 compared to 2023. In 2023, average interest-bearing cash deposits held by the Company increased $26.1 million or 46.2% compared to 2022.
•
Average federal funds sold decreased $8.0 million or 96.4% in 2024 compared to 2023. In 2023, average federal funds sold increased $2.5 million or 43.8% compared to 2022.
•
Average certificates of deposit investments increased $1.2 million or 67.6% in 2024 compared to 2023. In 2023, average certificates of deposit investments increased $0.1 million or 3.8% compared to 2022.
•
Average loans increased by $478.6 million or 9.4% in 2024 compared to 2023. In 2023, average loans increased by $561.4 million or 12.4% compared to 2022.
•
Average securities decreased by $88.1 million or 7.1% in 2024 compared to 2023. In 2023, average securities decreased by $141.0 million or 10.2% compared to 2022.
•
Average interest-bearing deposits increased by $492.3 million or 11.6% in 2024 compared to 2023. In 2023, average deposits increased by $323.3 million or 8.2% compared to 2022.
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•
Average securities sold under agreements to repurchase decreased by $3.5 million or 1.60% in 2024 compared to 2023. In 2023, average securities sold under agreements to repurchase increased by $23.1 million or 11.4% compared to 2022.
•
Average borrowings and other debt decreased by $219.9 million or 37.7% in 2024 compared to 2023. In 2023, average borrowings and other debt increased by $193.0 million or 49.4% compared to 2022.
•
Net interest margin increased to 3.34% compared to 3.05% in 2023 and 3.13% in 2022. Asset yields increased by 52 basis points in 2024, and interest- bearing liabilities increased by 31 basis points.
Provision for Credit Losses
The provision for credit losses in 2024 was $5.6 million compared to $6.1 million in 2023 and $4.8 million in 2022. Nonperforming loans increased to $29.8 million at December 31, 2024 from $20.1 million at December 31, 2023 and $19.2 million at December 31, 2022. The decrease in provision expense in 2024 was primarily due to the required provision in 2023 tied to the Blackhawk Bank acquisition. The increase in provision expense in 2023 was primarily related to the acquisition of Blackhawk Bank. Net charge-offs were $4.1 million during 2024, $0.3 million during 2023 and $1.2 million during 2022. For information on credit loss experience and nonperforming loans, see “Nonperforming Loans and Nonperforming Other 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
Total non-interest income increased to $96.3 million in 2024 compared to $86.8 million in 2023 and $74.7 million in 2022. The primary reasons for the more significant year-to-year changes in other income components are as follows:
•
Wealth management revenues increased in 2024 primarily due to growth in net brokerage fees and trust management fees. The decrease in 2023 was primarily due to lower commodity prices and higher interest rates resulting in less farm management income. Total assets under management were $6.4 billion at December 31, 2024 compared to $6.1 billion at December 31, 2023 and $5.3 billion at December 31, 2022.
•
Insurance commissions increased in 2024 primarily due the acquisition of MRIG and PGIB Insurance being present the entire calendar year. The increase in 2023 was primarily due to higher commission and contingency income and the acquisition of PGIB Insurance.
•
Fees from service charges increased in 2024 primarily due to Blackhawk Bank being present the entire calendar year. The increase in 2023 was primarily due to the acquisition of Blackhawk Bank.
•
Net securities losses in 2024 were $433,000 compared to gains of $3.4 million in 2023 and $33,000 in 2022. The loss in 2024 was due to balance sheet restructuring. The gain in 2023 were primarily due to securities sold soon after the close of the acquisition of Blackhawk Bank.
•
The increase in mortgage banking income during 2024 was primarily due to Blackhawk Bank being present the entire calendar year. Loans sold balances were as follows:
•
$125.5 million (representing 821 loans) in 2024
•
$57.5 million (representing 413 loans) in 2023
•
$62.3 million (representing 422 loans) in 2022
First Mid Bank generally releases the servicing rights on loans sold into the secondary market.
•
Revenue from ATMs and debit cards increased in 2024 primarily due to Blackhawk Bank being present the entire calendar year and in 2023 primarily due to the acquisition of Blackhawk Bank.
•
Bank owned life insurance decreased during 2024 due to the lower interest rates during part of the year. The increase in 2023 was due to the addition of Blackhawk Bank and higher interest rates.
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•
Other income increased during 2024 primarily due to Blackhawk Bank being present the entire calendar year. Other income increased during 2023 primarily due to the acquisition of Blackhawk Bank.
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
Total non-interest expense increased to $215.0 million in 2024 from $185.7 million in 2023 and $162.9 million in 2022. 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, increased in 2024 was due to former Blackhawk Bank employees being present the entire calendar year, increase in the bonus accrual, incentive compensation, share based compensation, merit increases and applicable payroll taxes The increase in 2023 was primarily due to the acquisition of Blackhawk Bank, an increase in incentive compensation and commission, increases for merit raises and applicable payroll taxes, and an increase in employee group insurance expense, partially offset by a decline in bonus accrual expense. There were 1,198 full-time equivalent employees at December 31, 2024, compared to 1,187 at December 31, 2023, and 1,043 at December 31, 2022.
•
Occupancy and equipment expense increased primarily due to additional properties added in the acquisition of Blackhawk Bank being present the entire calendar year. The increase in 2023 was primarily due to increases in depreciation, equipment and other property related expenses from the acquisition of Blackhawk Bank.
•
Net other real estate owned expense decreased in 2024 primarily due to the large expenses occurring in 2023. The increase in 2023 was primarily due to properties sold or written down during the period.
•
FDIC insurance expense increased in 2024 due to the Blackhawk Bank assets being present the entire calendar year. The increase in FDIC insurance expense in 2023 was due to the acquisition of Blackhawk Bank and an increase in the assessment rate.
•
Amortization of other intangibles increased during 2024 primarily due to additional core deposit intangibles added from the acquisitions of Blackhawk Bank being present the entire calendar year. The increase in 2023 was due to the additional core deposit intangibles added with the acquisition of Blackhawk Bank.
•
Legal and professional expense primarily increased due to nonrecurring expenses associated with technology investment upgrades. The increase in 2023 was due to normal inflationary increases.
•
ATM and debit card expenses increased during 2024 primarily due to an increase in electronic transactions following the acquisition of Blackhawk Bank being present the entire calendar year. The increase in 2023 was primarily due to an increase in electronic transactions following the acquisition of Blackhawk Bank.
•
Other operating expenses decreased in 2024 primarily due to the majority of acquisition costs associated with Blackhawk Bank occurring in 2023. The increase during 2023 was primarily due to the acquisition of Blackhawk Bank and nonrecurring costs associated with the closing and integration.
Income Taxes
Income tax expense amounted to $25.5 million in 2024 compared to $19.5 million in 2023, and $18.3 million in 2022. Effective tax rates were 24.5% for 2024, 22.0% for 2023, and 20.1% for 2022. The Company files U.S. federal and state of Florida, Illinois, Indiana, Missouri, and Wisconsin income tax returns.
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Analysis of Consolidated 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
At December 31, 2024, the amortized cost of the Company’s investment portfolio decreased by $106.3 million from December 31, 2023 primarily due to sales of securities partially offset by purchases designed to raise the rate of return of the portfolio, calls, maturities and paydowns. The decrease in 2023 was primarily due to the amortization of the portfolio and securities sold after the acquisition of Blackhawk 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, 2024 for certain investment securities (in thousands):
Average Credit Rating of Fair Value at December 31, 2024 (1)
Amortized Estimated Not
Cost Fair Value AAA AA +/- A +/- BBB +/- < BBB - Rated
Available-for-sale:
Held-to-maturity:
Equity securities:
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Loans
The loan portfolio (net of unearned interest) is the largest category of the Company’s earning assets. The following table summarizes the composition of the loan portfolio, including loans held for sale, for the last five years (dollars in thousands):
Outstanding
Loan balances increased by $91.9 million or 1.6% from December 31, 2023 to December 31, 2024. Loan balances increased by $754.4 million or 15.6% from December 31, 2022 to December 31, 2023 of which approximately $730.2 million of gross loans acquired, after purchase accounting adjustments, from Blackhawk Bank. The balances of loans sold into the secondary market were $125.3 million in 2024 compared to $62.2 million in 2023. The balance of real estate loans held for sale, included in the balances shown above, amounted to $6.6 million and $5.0 million as of December 31, 2024 and 2023, 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, 2024 and 2023, First Mid Bank did have industry loan concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):
Principal % Outstanding Principal % Outstanding
balance Loans balance Loans
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, 2024, by contractual maturities (in thousands):
Maturity (1)
One yearor less(2) Over 1 through5 years Over5 years Total
(1)
Based upon remaining contractual maturity.
(2)
Includes demand loans, past due loans and overdrafts.
As of December 31, 2024, loans with maturities over one year consisted of approximately $2.7 billion in fixed rate loans and approximately $1.9 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.
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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 “modified”. 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.
Restructured loans are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven. Repossessed assets represent property acquired as the result of borrower defaults on loans. These assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure or repossession. Write-downs occurring at foreclosure are charged against the allowance for 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,
The $9.9 million increase in nonaccrual loans during 2024 resulted from the net of $18.8 million of loans put on nonaccrual status, offset by $4.7 million of loans transferred to other real estate owned, $3.3 million of loans charged off and $0.8 million of loans becoming current or paid-off.
The following table summarizes the composition of nonaccrual loans (dollars in thousands):
Balance % of Total Balance % of Total
Construction and land development $ 6 — % $ — — %
Multifamily residential properties — — % — — %
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Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $1.4 million, $412,000 and $103,000 for the years ended December 31, 2024, 2023, and 2022, respectively.
The $1.6 million increase in repossessed assets during 2024 resulted from the net of $5.3 million of additional assets repossessed, $3.7 million of repossessed assets sold, $47,000 of writedowns on existing assets, and no deferred fair value marks were recognized. The following table summarizes the composition of repossessed assets (dollars in thousands):
Balance % of Total Balance % of Total
Commercial real estate 527 19.4 % 0 —
Repossessed assets sold during 2024 resulted in net gains of $1.3 million related to real estate asset sales and $57,000 of net gains related to other assets sales. The Company also recognized no deferred gains, recorded $47,000 of write downs on one real estate properties owned, and recorded no change in fair market value discount.
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 credit 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, 2024, the Company’s loan portfolio included $630.6 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $507.6 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $42.1 million from $588.5 million at December 31, 2023 while loans concentrated in other grain farming increased $35.1 million from $472.5 million at December 31, 2023. 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 credit losses within the agricultural portfolio. The Company also has $1.0 billion of loans to lessors of non-residential buildings and $557.3 million of loans to lessors of residential buildings and dwellings.
The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the Board of Directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed. 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.
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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):
Adjustment for adoption of ASU 2016-13 — — — — 1,672
Charge-offs:
Construction and land development — 14 2 205 13
Recoveries:
Construction and land development 5 — 100 — —
The ratio of the allowance for credit losses to nonperforming loans was 235.2% as of December 31, 2024 compared to 341.2% as of December 31, 2023. The decrease in this ratio is primarily due to a increase 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 2024, the Company had net charge-offs of $4.1 million compared to $313,000 in 2023. During 2024, there were significant charge-offs of two commercial real estate loans to 2 borrowers of $451,000, one agricultural operating loan to one borrower of $2.1 million, and a significant charge-off of one commercial operating loan to one borrower of $466,000. During 2023, there were significant charge-offs of one agricultural operating loan to one borrower of $181,000 and a significant charge-off of one commercial operating loan to one borrower of $353,000.
At December 31, 2024, the allowance for credit losses amounted to $70.2 million or 1.24% of total loans. At December 31, 2023, the allowance for credit losses amounted to $68.7 million or 1.23% of total loans. 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.
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The allowance for credit losses, in management's judgment, was allocated as follows to cover probable credit losses (dollars in thousands):
% of loans to % of loans to % of loans to
% of loans to % of loans to
Allowance forcredit losses totalloans Allowance forcredit losses totalloans
Construction and land development $ 1,743 3.6 % $ 1,666 3.9 %
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, 2024, 2023, and 2022 (dollars in thousands):
Demand deposits:
The following table sets forth the high and low month-end balances for the years ended December 31, 2024, 2023, and 2022 (in thousands):
In 2024, the average balance of deposits increased by $587.8 million from 2023. The increase in 2024 was primarily due to deposits added in the acquisition of Blackhawk Bank being present the entire calendar year. The increase in 2023 was primarily due to the acquisition of Blackhawk Bank, partially offset by higher rates driving outflows.
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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,
The balance of time deposits of $100,000 or more decreased $65.2 million from December 31, 2023 to December 31, 2024. The decrease was primarily due to intentional efforts to lower funding costs by reducing non-relationship time deposits. The balance of time deposits of $100,000 or more increased $279.5 million from December 31, 2022 to December 31, 2023. The increase in 2023 was primarily due to time deposits acquired from Blackhawk Bank.
In 2024 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of $261.2 million and $381.3 million in various checking accounts and time deposits as of December 31, 2024 and 2023, 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.
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Information relating to securities sold under agreements to repurchase and other borrowings as December 31, 2024, 2023, and 2022 is presented below (dollars in thousands):
Federal Home Loan Bank advances:
Average interest rate at end of period 3.30 % 4.41 % 2.52 %
Maximum outstanding at any month-end:
Federal funds purchased — — 10,000
Federal Home Loan Bank advances:
Averages for the period (YTD):
Federal funds purchased — 192 481
Federal Home Loan Bank advances:
Debt:
Loans due in one year or less — — 14
Average interest rate during the period 3.71 % 2.16 % 2.16 %
Securities sold under agreements to repurchase decreased $9.6 million during 2024 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, 2024, FHLB advances totaled $242.4 million with a weighted-average interest rate of 3.97% and maturities from March 2025 to December 2029. At December 31, 2023, FHLB advances totaled $263.6 million with a weighted-average interest rate of 3.58% and maturities from May 2024 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, 2024. This loan was renewed on April 5, 2024 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 Company and its subsidiary banks were in compliance with the existing covenants at December 31, 2024 and 2023.
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. On June 7, 2024, August 27, 2024, and September 6, 2024, the Company repurchased in open market transactions and subsequently cancelled $4.0 million, $15.0 million, and $1.0 million respectively, of the outstanding Notes. As a result, as of December 31, 2024, $76 million in aggregate principal amount of the Notes remain issued and outstanding.
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
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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.
On August 15, 2023, the Company assumed, as part of the Blackhawk Bancorp, Inc. acquisition, $7.5 million principal amount of 3.5% Fixed-to-Floating Rate Subordinated Notes due 2031 (“Blackhawk Subordinated Debt I”). Blackhawk Subordinated Debt I was issued pursuant to Indenture between the Company and UMB Bank, as trustee. This Indenture governs the terms of the Blackhawk Subordinated Debt I and provides that such notes are unsecured, subordinated debt obligations of the Company and will mature on May 14, 2031. From and including the date of issuance to, but excluding May 14, 2026, the notes will bear interest at an initial rate of 3.5% per annum. From and including May 14, 2026 to, but excluding the maturity date, the notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 285 basis points.
On August 15, 2023, the Company assumed, as part of the Blackhawk Bancorp, Inc. acquisition, $7.5 million principal amount of 3.875% Fixed-to-Floating Rate Subordinated Notes due 2036 (“Blackhawk Subordinated Debt II”). Blackhawk Subordinated Debt II was issued pursuant to Indenture between the Company and UMB Bank, as trustee. This Indenture governs the terms of the Blackhawk Subordinated Debt II and provides that such notes are unsecured, subordinated debt obligations of the Company and will mature on May 14, 2036. From and including the date of issuance to, but excluding May 14, 2031, the notes will bear interest at an initial rate of 3.875% per annum. From and including May 14, 2031 to, but excluding the maturity date, the notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 255 basis points.
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 $10.0 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 $10.3 million, 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 (6.81% and 7.25% at December 31, 2024 and 2023, 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 $4.0 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 (7.06% and 7.50% at December 31, 2024 and 2023, 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 $6.0 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 (6.91% and 7.35% at December 31, 2024 and 2023, respectively) and resets quarterly.
On August 15, 2023, the Company assumed the trust preferred securities of Blackhawk Statutory Trust I (“BHST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of Blackhawk Bancorp, Inc. The $1.0 million of trust preferred securities and an additional $31,000 investment in common equity of BHST I is invested in junior subordinated debentures issued to BHST I. The subordinated debentures mature in 2032, bear interest at three-month LIBOR plus 325 basis points (8.17% and 8.87% at December 31, 2024 and 2023, respectively) and resets quarterly.
On August 15, 2023, the Company assumed the trust preferred securities of Blackhawk Statutory Trust II (“BHST II”), a statutory business trust that was a wholly owned unconsolidated subsidiary of Blackhawk Bancorp, Inc. The $4.0 million of trust preferred securities and an additional $124,000 investment in common equity of BHST II is invested in junior subordinated debentures issued to BHST II. The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 205 basis points (7.25% and 7.69% at December 31, 2024 and 2023, respectively) and resets quarterly.
The trust preferred securities issued by Trust II, CLST I, FBTCST I, BHST I, and BHST II 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.
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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 or First Mid 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. The Company has also assumed prepayments of loan assets in amounts consistent with market expectations. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities, repricing points, and prepayments 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, 2024 (dollars in thousands):
Rate Sensitive Within
1 year 1-3 years 3-5 years Thereafter Total Fair Value
Interest-earning assets:
Interest-bearing liabilities:
The static GAP analysis shows that at December 31, 2024, 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.
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Capital Resources
At December 31, 2024, the Company’s stockholders' equity had increased approximately $53.2 million, or 6.7%, to $846.4 million from $793.2 million as of December 31, 2023. During 2024, net income contributed $78.9 million to equity before the payment of dividends to stockholders of $22.4 million. The change in market value of available-for-sale investment securities decreased stockholders' equity by $6.0 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, 2024, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $5.9 million as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $5.9 million 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. Beginning in 2023, shares for the DCP were purchased on the open market instead of being issued by the Company. The Company issued, pursuant to DCP:
•
0 common shares during 2024
•
0 common shares during 2023, and
•
8,378 common shares during 2022
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.
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 550,000 shares of common stock may be issued under the SI Plan. During 2024, 2023, and 2022, the Company awarded 80,332 and 45,986, and 63,150 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 2024, the Company repurchased 15,978 shares (0.07% of common shares) at a total price of approximately $659,000. During 2023, the Company repurchased 13,481 (0.06% of common shares) at a total price of approximately $465,000. All of these shares were a result of shares withheld for taxes on vested employee stock incentives. As of December 31, 2024, approximately $2.9 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 15% 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, 2024, 2023, and 2022, 32,936, 38,989, and 23,055 shares, respectively were issued pursuant to ESPP. As of December 31, 2024, there were 473,336 shares unassigned but available to be issued under the ESPP.
Capital Ratios
For 2024, 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, 2024, 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, 2024 follows:
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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 $130 million available in overnight federal fund lines, including $30 million from First Horizon Bank, N.A., $25 million from Zions Bank, $20 million from U.S. Bank, N.A., $20 million from BMO Bank, N.A., $20 million from Bankers' Bank., and $15 million from The Northern Trust Company. 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, 2024, First Mid Bank met these regulatory requirements.
•
First Mid Bank can borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the Federal Home Loan Bank collateral that can be pledged includes one-to-four family residential real estate loans and securities. At December 31, 2024, the excess collateral at the FHLB would support approximately $1,633.4 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, 2024, the Company had a revolving credit agreement in the amount of $15 million with The Northern Trust Company with an outstanding balance of $0 and $15 million in available funds. This loan was renewed on April 5, 2024 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is unsecured. The Company and its subsidiary banks were in compliance with the existing covenants at December 31, 2024 and 2023.
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, 2024 (in thousands):
Total Less than1 year 1-3 years 3-5 years More than5 years
For the year ended December 31, 2024, net cash of $124.4 million was provided from operating activities, $7.5 million was used in investing activities, and $138.8 million was used in financing activities. In total cash and cash equivalents decreased by $21.8 million from year-end 2023.
For the year ended December 31, 2023, net cash of $72.4 million was provided from operating activities, $474.4 million was provided from investing activities, and $556.2 million was used in financing activities. In total cash and cash equivalents decreased by $9.4 million from year-end 2022.
For the year ended December 31, 2022, net cash of $65.8 million was provided from operating activities, $178.7 million was used in investing activities, and $96.7 million was provided by financing activities. In total cash and cash equivalents decreased by $16.2 million from year-end 2021.
For the year ended December 31, 2024, the Company had $10 million of floating rate trust preferred securities outstanding through Trust II, in September 2016, the Company acquired $4 million of floating rate trust preferred securities from First Clover Leaf under Clover Leaf Statutory Trust I, on May 1, 2018, the Company acquired $6 million of floating rate trust preferred securities from First BancTrust Corporation, and on August 15, 2023, the Company also acquired $5.2 million of floating rate trust preferred securities from Blackhawk Bancorp, Inc. See Note 9 – “Repurchase Agreements and Other Borrowings” for a more detailed description.
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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
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, 2024, 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, 2024 Net Interest Income Return OnAverage Equity
Prime rate is 7.50%
Prime rate increase of:
Prime rate decrease of:
The following table shows the same analysis for First Mid Bank performance as of December 31, 2023:
Increase (Decrease) In
December 31, 2023 Net Interest Income Return OnAverage Equity
Prime rate is 8.50%
Prime rate increase of:
Prime rate decrease of:
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.
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The following table presents the Company's projected change in EVE, on a consolidated basis, for the various rate shock levels at December 31, 2024 and 2023 (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 (%)
As indicated above, at December 31, 2024, in the event of a sudden and sustained increase in prevailing market interest rates, the EVE would be expected to decrease 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 increase. At December 31, 2024, the estimated changes in EVE were inside 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets 39
Consolidated Statements of Income 40
Consolidated Statements of Comprehensive Income (Loss) 41
Consolidated Statements of Changes in Stockholders’ Equity 42
Consolidated Statements of Cash Flows 45
Notes to Consolidated Financial Statements 47
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Consolidated Balance Sheets
December 31, 2024 and 2023
(In thousands, except share data) 2024 2023
Assets
Cash and due from banks:
Certificates of deposit investments 3,500 1,470
Investment securities:
Equity securities, at fair value 4,439 4,074
Loans held for sale, at fair value 6,614 4,980
Less allowance for credit losses (70,182 ) (68,675 )
Liabilities and stockholders’ equity
Deposits:
Stockholders’ equity:
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Income
For the years ended December 31, 2024, 2023, and 2022
Interest income:
Interest on investment securities
Interest on certificates of deposit investments 144 98 37
Interest on federal funds sold 53 419 113
Interest on deposits with other financial institutions 7,900 5,107 492
Interest expense:
Interest on other borrowings 1 10 9
Interest on junior subordinated debentures 2,156 1,859 868
Other income:
Securities gains (losses), net (433 ) 3,383 33
Other expense:
Per share data:
Basic net income per common share $ 3.31 $ 3.17 $ 3.62
Diluted net income per common share 3.30 3.15 3.60
Cash dividends declared per common share 0.94 0.92 0.90
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2024, 2023, and 2022
Other comprehensive income (loss)
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2024, 2023, and 2022
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Loss Stock Total
Other comprehensive income (loss), net of tax — — — — (5,956 ) — (5,956 )
Dividends on common stock ($.94 per share) — — (22,371 ) — — — (22,371 )
Purchase of 15,978 treasury shares — — — — — (659 ) (659 )
Vested restricted shares/units compensation expense — 222 — 1,966 — — 2,188
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2024, 2023, and 2022
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
Other comprehensive income (loss), net of tax — — — — 15,080 — 15,080
Dividends on common stock ($.92 per share) — — (19,557 ) — — — (19,557 )
Purchase of 13,481 treasury shares — — — — — (465 ) (465 )
Deferred compensation — — — (765 ) — (375 ) (1,140 )
Vested restricted shares/units compensation expense — 215 — 1,330 — — 1,545
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2024, 2023, and 2022
(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
Other comprehensive income (loss), net of tax — — — — (150,676 ) — (150,676 )
Dividends on common stock ($.90 per share) — — (17,830 ) — — — (17,830 )
Purchase of 10,647 treasury shares — — — — — (340 ) (340 )
Vested restricted shares/units compensation expense — 185 — 1,584 — — 1,769
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
For the years ended December 31, 2024, 2023, and 2022
Cash flows from operating activities:
Gain on cash surrender value of bank owned life insurance — (976 ) —
Loss (gain) on investment securities, net 433 (3,383 ) (33 )
(Gain) loss on sale of other real property owned, net (1,317 ) 4,080 97
Loss on write down of premises and equipment 1,243 131 —
Loss on sale of other assets — — 125
Gain on sale of loans held for sale, net (3,596 ) (1,200 ) (1,159 )
Gain on repayment of subordinated debentures (493 ) — —
Increase in accrued interest receivable (3,557 ) (2,696 ) (6,717 )
Gain on equity securities — — (1,145 )
(Decrease) Increase in other liabilities (4,191 ) (1,674 ) 3,318
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments 245 1,180 1,225
Purchase of certificates of deposit investments (2,275 ) (245 ) (245 )
Proceeds from maturities of investment securities held-to-maturity — 668 5,000
Purchase of held-to-maturity investment securities (53 ) — —
Purchases of premises and equipment (4,945 ) (3,639 ) (5,020 )
Proceeds from sale of premises and equipment 7 — —
Proceeds from sales of other real property owned 3,637 2,461 996
Proceeds from bank owned life insurance death benefit — 2,048 —
Cash flows from financing activities:
(Decrease) increase in repurchase agreements (9,599 ) (7,693 ) 39,623
Repayment of subordinated debentures (19,455 ) — —
Direct expenses related to capital transactions — — (29 )
Purchase of treasury stock (659 ) (465 ) (340 )
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Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2024, 2023, and 2022
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned $ 4,683 $ 681 $ 383
Initial recognition of right-of-use assets 2,729 1,399 715
Initial recognition of lease liabilities 2,729 1,399 715
Supplemental disclosure of purchase of capital stock
Consideration paid:
See accompanying notes to consolidated financial statements.
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First Mid Bancshares, Inc.
Notes to 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. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America.
Acquisitions
Mid Rivers Insurance Group, Inc. During the quarter ended September 30, 2024, Mid Rivers Insurance Group, Inc. was acquired by the Company for a purchase price of $10.1 million and instantly merged into First Mid Insurance Group.
Purdum, Gray, Ingledue, Beck, Inc. During the quarter ended June 30, 2024, Purdum, Gray, Ingledue, Beck, Inc. was acquired by the Company for a purchase price of $10.2 million and instantly merged into First Mid Insurance Group.
Blackhawk Bancorp, Inc. On March 20, 2023, First Mid Bancshares, Inc. (“First Mid”) and Eagle Sub LLC, a newly formed Wisconsin limited liability company and wholly-owned subsidiary of First Mid (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Blackhawk Bancorp, Inc., a Wisconsin corporation (“Blackhawk”), pursuant to which, among other things, First Mid agreed to acquire 100% of the issued and outstanding shares of Blackhawk pursuant to a business combination whereby Blackhawk merged with and into Merger Sub, whereupon the separate corporate existence of Blackhawk cease and Merger Sub continue as the surviving company and a wholly-owned subsidiary of First Mid (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 $0.01 per share, of Blackhawk issued and outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by Blackhawk and dissenting shares) were converted into and become the right to receive 1.15 shares of common stock, par value $4.00 per share, of First Mid 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 First Mid at the closing of the Merger to Blackhawk’s shareholders and equity award holders was 3,290,222 shares of First Mid common stock valued at $93.5 million and $2,000 of cash in lieu of fractional shares.
The Blackhawk Merger closed August 15, 2023 and Blackhawk Bank was merged into First Mid Bank on December 1, 2023.
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.
Summary of Significant Accounting Policies
Segment Reporting
The Company operates as a single segment entity for financial reporting purposes and has adopted ASU 2023-07 during the year ended December 31, 2024. The Chief Financial Officer, Matt Smith (CFO), serves as the Company’s chief operating decision maker (CODM). The CODM allocates resources and assesses performance of the Company based on the consolidated performance, excluding all significant intercompany balances and transactions, of the Company and its wholly owned subsidiaries and does not significantly utilize disaggregated segment financial information for decision making and resource allocation. Management has reviewed the requirements of ASU 2023-07 and has determined that no additional segment disclosures are required. Specifically,
•
the Company does not use the tracked performance on the disaggregated segment level for decision-making or resource allocation purposes,
•
no significant segment-specific expenses or performance metrics are used internally for decision-making or resource allocation purposes, and
•
the level of financial consolidation presented in these financial statements aligns with the CODM’s internal reporting and decision-making process
Based on this assessment the Company’s financial statement disclosures fully comply with ASC 2023-07, and no additional qualitative segment disclosures are necessary.
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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. 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 (loss).
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 credit 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.
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The Company individually evaluates certain loans for impairment. A specific allowance is assigned to a loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a non-individually evaluated loan is more subjective. Generally, 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 and acquisition activity, economic conditions, changes in policies, procedures and underwriting, and concentrations. In addition, a twenty-four 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. 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.