ITEM 1A. RISK FACTORS
Variousrisks anduncertainties,someof which aredifficulttopredict andbeyondtheCompany’scontrol, couldnegativelyimpacttheCompany.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 commonstock.
Credit Risks
Loan customers or other counterparties may not be able to perform their contractual obligations resulting in a negative impact on the Company’s earnings. Overall economic conditions affecting businesses and consumers, including the current difficult economic conditions and market disruptions, could impact the Company’s credit losses. In addition, real estate valuations could also impact the Company’s credit losses as the Company maintains $2.8 billion in loans secured by commercial, agricultural, and residential real estate. A significant decline in real estate values could have a negative effect on the Company’s financial condition and results of operations. In addition, the Company’s total loan balances by industry exceeded 25% of total risk-based capital for each of five industries as of December 31, 2021. A listing of these industries is contained in under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Loans” herein. A significant change in one of these industries such as a significant decline in agricultural crop prices, could adversely impact the Company’s credit losses.
Deterioration in the real estate market could lead to losses, which could have a material adverse effect on the business, financial condition and results of operations or the Company. Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and managementoftheunderlyingassets,repaymentofsuchloansmaybeinfluencedtoagreatextentbyconditionsinthemarketortheeconomy.Increasesin commercial and consumer delinquency levels or declines in real estate market values would require increased net charge-offs and increases in the allowanceforloanandleaselosses,whichcouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperationsandprospects.
The allowance for credit losses may prove inadequate or be negatively affected by credit risk exposures. The Company’s business depends on the creditworthiness of its customers. Management periodically reviews the allowance for loan and lease losses for adequacy considering economic conditions and trends, collateral values, and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. There is no certainty that the allowance for credit losses will be adequate over time to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries, or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for credit losses is not adequate, the Company’s business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.
The Company depends on the accuracy and completeness of information furnished by and on behalf of our customers and counterparties. In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. The Company may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause the Company to enter into unfavorable transactions, which could have a material adverse effect on financial condition and results of operations.
Interest Rate and Liquidity Risks
Changes in interest rates may negatively affect our earnings. Changes in market interest rates and prices may adversely affect the Company’s financial condition or results of operations. The Company’s net interest income, its largest source of revenue, is highly dependent on achieving a positive spread between the interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in interest rates could negatively impact the Company’s ability to attract deposits, make loans, and achieve a positive spread resulting in compression of the net interest margin.
Declines in the value of securities held in the investment portfolio may negatively affect the Company’s earnings and capital. The value of an investment in the portfolio could decrease due to changes in market factors. The market value of certain investment securities is volatile and future declines or other-than-temporary impairments could materially adversely affect the Company’s future earnings and capital. Continued volatility in the market value of certain of the investment securities, whether caused by changes in market perceptions of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities. This could have a material adverse impact on the Company’s accumulated other comprehensive loss and shareholders’ equity depending upon the direction of the fluctuations.
Furthermore, future downgrades or defaults in these securities could result in future classifications as other-than-temporarily impaired. The Company has invested in trust preferred securities issued by financial institutions and insurance companies, corporate securities of financial institutions, and stock in the Federal Home Loan Bank of Chicago and Federal Reserve Bank of Chicago. Deterioration of the financial stability of the underlying financial institutions for these investments could result in other-than-temporary impairment charges to the Company and could have a material impact on future earnings. For further discussion of the Company’s investments, see Note 4 – “Investment Securities.”
The Company may not have sufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs and for other corporate purposes. This type of liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. The Company’s liquidity can be affected by a variety of factors, including general economic conditions, market disruption, operational problems affecting third parties or the Company, unfavorable pricing, competition, the Company’s credit rating and regulatory restrictions. (See “Liquidity” herein for management’s actions to mitigate this risk.)
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If the Company were unable to borrow funds through access to capital markets, it may not be able to meet the cash flow requirements of its depositors, creditors, and borrowers, or the operating cash needed to fund corporate expansion and other corporate activities. As seen starting in the middle of 2007, significant turmoil and volatility in worldwide financial markets can result in a disruption in the liquidity of financial markets and could directly impact the Company to the extent it needs to access capital markets to raise funds to support its business and overall liquidity position. These types of situations could affect the cost of such funds or the Company’s ability to raise such funds. If the Company were unable to access any of these funding sources when needed, it might be unable to meet customers’ needs, which could adversely impact its financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. For further discussion, see the “Liquidity” section.
Operational Risks
A failure in or breach of the Company's operational or security systems, or those of its third-party service providers, including as a result of cyber-attacks, could disrupt the Company's business, result in unintentional disclosure or misuse of confidential or proprietary information, damage the Company's reputation, increase our costs, and cause losses. As a financial institution, the company's operations rely heavily on the secure processing, storage, and transmission of confidential and other information on its computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in the company's online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of these systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity, or attempted theft of financial assets. Management cannot assert that any such failures, interruption or security breaches will not occur, or if they do occur that they will be adequately addressed. While certain protective policies and procedures are in place, the nature and sophistication of the threats continue to evolve. The Company may be required to expend significant additional resources in the future to modify and enhance these protective measures.
Additionally, the Company faces the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate its business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, its operational systems. Any failures, interruptions or security breaches in the Company's information systems could damage its reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.
If the Company’s stock price declines from levels at December 31, 2021, management will evaluate the goodwill balance for impairment, and if the values of the business has declined, the Company could recognize an impairment charge for its goodwill. Management performed its annual goodwill impairment assessment as of September 30, 2021. Based on these analyses, management concluded that the fair value of the Company’s reporting units exceeded the fair value of its assets and liabilities and, therefore, goodwill was not considered impaired. It is possible that management’s assumptions and conclusions regarding the valuation of the Company’s lines of business could change adversely, which could result in the recognition of impairment for goodwill, which could have a material effect on the Company’s financial position and future results of operations.
Human error, inadequate or failed internal processes and systems, and external events may have adverse effects on the Company. Operational risk includes compliance or legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards. Operational risk also encompasses transaction risk, which includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Losses resulting from operational risk could take the form of explicit charges, increased operational costs, harm to the Company’s reputation or forgone opportunities. Any of these could potentially have a material adverse effect on the Company’s reputation, financial condition, and results of operations.
The Company is exposed to various business risks that could have a negative effect on the financial performance of the Company. These risks include changes in customer behavior, changes in competition, new litigation or changes to existing litigation, claims and assessments, environmental liabilities, real or threatened acts of war or terrorist activity, adverse weather, changes in accounting standards, legislative or regulatory changes, taxing authority interpretations, and an inability on the Company’s part to retain and attract skilled employees.
In addition to these risks identified by the Company, investments in the Company’s common stock involve risk. The market price of the Company’s common stock may fluctuate significantly in response to a number of factors including volatility of stock market prices and volumes, rumors or erroneous information, changes in market valuations of similar companies, changes in securities analysts’ estimates of financial performance, and variations in quarterly or annual operating results.
Economic and Market Conditions Risks
Difficult economic conditions and market disruption have adversely impacted the banking industry and financial markets generally and may againsignificantlyaffectthebusiness,financialcondition,orresultsofoperationsoftheCompany.TheCompany’ssuccessdepends,toacertain 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, itsearnings.
TheCompany’sprofitabilitydependssignificantlyoneconomicconditionsinthegeographicregioninwhichitoperates.Alargepercentageofthe Company’sloansaretoindividualsandbusinessesinIllinois,consequently,anydeclineintheeconomyofthismarketareacouldhaveamateriallyadverse effect on the Company’s financial condition and results ofoperations.
Decline in the strength and stability of other financial institutions may adversely affect the Company’s business. The actions and commercial soundness of other financial institutions could affect the Company’s ability to engage in routine funding transactions. Financial services institutions are interrelated as a result of clearing, counterparty or other relationships. The Company has exposure to different counterparties and executes transactions with various counterparties in the financial industry. Recent defaults by financial services institutions, and even rumors or questions about one or more financial services institutions or the financial services industry in general, led to market-wide liquidity problems in recent years and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. Any such losses could materially and adversely affect the Company’s results of operations.
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The Company is subject to Environmental, Social and Governance (“ESG”) risks that could adversely affect its reputation and the market price of its securities. The Company is subject to a variety of risks arising from ESG matters. ESG matters include climate risk, hiring practices, the diversity of the work force, and racial and social justice issues involving the Company’s personnel, customers and third parties with whom it otherwise does business. Risks arising from ESG matters may adversely affect, among other things, reputation and the market price of the Company’s securities. Further, the Company may be exposed to negative publicity based on the identity and activities of those to whom it lends and with which it otherwise does business and the public’s view of the approach and performance of its customers and business partners with respect to ESG matters. Any such negative publicity could arise from adverse news coverage in traditional media and could also spread through the use of social media platforms. The Company’s relationships and reputation with its existing and prospective customers and third parties with which it does business could be damaged if it were to become the subject of any such negative publicity. This, in turn, could have an adverse effect on the Company’s ability to attract and retain customers and employees and could have a negative impact on the market price for securities. Investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations to address ESG matters when making investment and operational decisions. Certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to the risks posed by climate change and other ESG matters into their investment theses. These shifts in investing priorities may result in adverse effects on the market price of the Company’s securities to the extent that investors determine that the Company has not made sufficient progress on ESG matters.
The Company’s business could suffer if it fails to attract and retain skilled people. The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best employees in most of the activities the Company engages in can be intense. The Company may not be able to hire the best people for key roles or retain them. In addition, the transition to increased work-from-home arrangements, which is likely to survive the COVID-19 pandemic for many companies, may exacerbate the challenges of attracting and retaining talented and diverse employees as job markets may be less constrained by physical geography. Our current or future approach to in-office and work-from-home arrangements may not meet the needs or expectations of current or prospective employees or may not be perceived as favorable compared to the arrangements offered by competitors, which could adversely affect the Company’s ability to attract and retain employees. The loss of any key personnel or an inability to continue to attract, retain, and motivate key personnel could adversely affect the Company’s business.
Climate change could have a material negative impact on the Company and customers. The Company’s business, as well as the operations and activities of its customers, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to the Company and its customers, and these risks are expected to increase over time. Climate change presents multi-faceted risks, including: operational risk from the physical effects of climate events on the Company and its customers’ facilities and other assets; credit risk from borrowers with significant exposure to climate risk; transition risks associated with the transition to a less carbon-dependent economy; and reputational risk from stakeholder concerns about the Company’s practices related to climate change, the Company’s carbon footprint, and the Company’s business relationships with clients who operate in carbon-intensive industries. Federal and state banking regulators and supervisory authorities, investors, and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, and reputational risks and costs. The risks associated with climate change are changing and evolving in an escalating fashion, making them difficult to assess due to limited data and other uncertainties. The Company could experience increased expenses resulting from strategic planning, litigation, and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny, and reduced investor and stakeholder confidence due to the Company’s response to climate change and its climate change strategy, which, in turn, could have a material negative impact on business, results of operations, and financial condition.
Changes in the method pursuant to which the LIBOR and other benchmark rates are determined could adversely impact the Company’s business and results of operations. Our floating-rate funding, certain hedging transactions and certain of the products that we offer, such as floating-rate loans and mortgages, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as LIBOR, or to an index, currency, basket, or other financial metric. LIBOR and certain other benchmark rates are the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief Executive of the Financial Conduct Authority (“FCA”) announced that the FCA intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. However, the administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings until June 30, 2023 and will cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies have issued guidance strongly encouraging banking organizations to cease using the U.S. Dollar LIBOR as a reference rate in “new” contracts as soon as practicable and in any event by December 31, 2021. It is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, which rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-linked financial instruments. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, the Alternative Reference Rates Committee, a steering committee comprised of U.S. financial market participants, selected by the Federal Reserve Bank of New York, started in May 2018 to publish the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR. SOFR is a broad measure of the cost of overnight borrowings collateralized by Treasury securities that was selected by the Alternative Reference Rate Committee due to the depth and robustness of the Treasury repurchase market. At this time, it is impossible to predict whether SOFR will become a accepted alternative to LIBOR. The discontinuation of LIBOR, changes in LIBOR, or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes to our risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of floating-rate funding and, therefore, our exposure to fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that we own or have issued. In addition, such uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and operational costs and risks associated with client disclosures, discretionary actions taken or negotiation of fallback provisions, systems disruption, business continuity, and model disruption.
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Other Business Risks
The ongoing COVID-19 pandemic and the measures intended to prevent its spread have had and may continue to have an adverse effect on the Company's operations, results of operations and financial condition, and the severity of these adverse effects depend on future developments which are highly uncertain and difficult to predict. The global health concerns related to COVID-19 and government actions implemented to reduce the spread of the virus have had an adverse impact on the macroeconomic environment. COVID-19 has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. These measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there is no assurance that these steps will be effective or achieve the desired positive economic results in a timely fashion. COVID-19 has impacted, and is likely to further adversely impact, the workforce and operations of the Company, and the operations of our borrowers, customers, and business partners. In particular, we may experience financial losses due to various operational factors impacting us or our borrowers, customers, or business partners, including but not limited to:
• declines in collateral values;
These factors may remain prevalent for a significant period and may continue to adversely affect the Company, results of operations and financial condition even after the COVID-19 outbreak has subsided. The extent to which the coronavirus outbreak impacts the Company’s operations, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have,and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. The full extent of the impacts on the Company’s operations or the global economy as a whole is not yet known. However, the effects could have a material impact on the Company’s results of operations and heighten other of our known risks.
The Company may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing stockholders. To maintain capital at desired or regulatory-required levels, to replace existing capital, or to complete acquisitions the Company may be required to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. The Company may sell these shares at prices below the current market price of shares, and the sale of these shares may significantly dilute stockholder ownership. The Company could also issue additional shares in connection with acquisitions of other financial institutions.
If the Company is unable to make favorable acquisitions or successfully integrate our acquisitions, the Company’s growth could be impacted. In the past several years, the Company has completed acquisitions of banks, bank branches and other businesses. We may continue to make such acquisitions in the future. When the Company evaluates acquisition opportunities, the Company evaluates whether the target institution has a culture similar to the Company, experienced management, and the potential to improve the financial performance of the Company. If the Company fails to successfully identify, complete, and integrate favorable acquisitions, the Company could experience slower growth. Acquiring other banks, bank branches or businesses involves various risks commonly associated with acquisitions, including, among other things: potential exposure to unknown or contingent liabilities or asset quality issues of the target institution, difficulty and expense of integrating the operations and personnel of the target institution, potential disruption to the Company(includingdiversionofmanagement’stimeandattention),difficultyinestimatingthevalueofthetargetinstitution,andpotentialchangesinbanking or tax laws or regulations that may affect the targetinstitution.
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 reachcompliance. In addition, any enforcement matters could impact supervisory and CRA ratings, which may restrict or limit the Company’s activities.
The Company operates in a highly competitive industry and market area. The Company faces substantial competition in all areas of its operations from a variety of different competitors, both within and beyond its principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and internet banks within the various markets in which the Company operates. The Company also faces competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company's headquarters is located at 1421 Charleston Avenue, Mattoon Illinois. This location is also used by the loan and deposit operations departments of First Mid Bank. In addition, the Company owns facilities located at 1500 Wabash Avenue, Mattoon, Illinois, 1420 Wabash Avenue, Mattoon, Illinois, and 1100 Broadway Avenue, Mattoon, Illinois which are used by branch support operations, and a facility located at 1321 Charleston Avenue, Mattoon, Illinois which is used by First Mid Wealth Management Company.
The main office of First Mid Bank is located at 1515 Charleston Avenue, Mattoon, Illinois and is owned by First Mid Bank. First Mid Bank also owns a building located at 1520 Charleston Avenue, which is used by First Mid Insurance, and by First Mid Bank for back room operations. First Mid Bank also conducts business through numerous facilities, owned and leased, located in thirty-one counties throughout Illinois, seven throughout Missouri, and one county in Texas. Of the sixty-six other banking offices operated by First Mid Bank, forty-nine are owned and seventeen are leased from non-affiliated third parties. First Mid Bank also has a loan production office and an agency finance office in metro Indianapolis.
Jefferson Bank conducts business through various facilities, owned and leased, located in two counties throughout Missouri. Of the five banking offices operated by Jefferson Bank, four are owned and one is leased from a third party.
None of the properties owned by the Company are subject to any major encumbrances. The Company believes these facilities are suitable and adequate to operate its banking and related business. The net investment of the Company and subsidiaries in real estate and equipment at December 31, 2021 was $81.5 million.
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.
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PART II
The Company’s common stock is included for quotation on the NASDAQ Stock Market, LLC under the trading symbol "FMBH".
The Company’s shareholders are entitled to receive dividends as are declared by the Board of Directors, which considered quarterly payment of dividends during 2021. The ability of the Company to pay dividends, as well as fund its operations, is dependent upon receipt of dividends from First Mid Bank. Regulatory authorities limit the amount of dividends that can be paid by First Mid Bank without prior approval from such authorities. For further discussion of the Bank’s dividend restrictions, see Item1 – “Business” – “First Mid Bank” – “Dividends” and Note 16 – “Dividend Restrictions” herein.
The following table summarizes share repurchase activity for the fourth quarter of 2021:
ISSUER PURCHASES OF EQUITY SECURITIES
All of the repurchase activity that occurred during the fourth quarter of 2021 resulted from shares withheld to cover taxes on employee stock vesting. There were no other shares repurchased during 2021. Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock.
ITEM 6. [Reserved]
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The following discussion and analysis are intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries years ended December 31, 2021, 2020, and 2019. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report.
Forward-Looking Statements
This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses, and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1955. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are identified by use of the words “believe,” ”expect,””intend,””anticipate,””estimate,””project,”orsimilarexpressions.Actualresultscoulddiffermateriallyfromtheresultsindicatedbythesestatements 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 thoseintheCompany’smarketarea,legislative/regulatorychanges,monetaryandfiscalpoliciesoftheU.S.Government,includingpoliciesoftheU.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 orotherwise.
COVID-19 Impact
The COVID-19 outbreak is an unprecedented event that provided significant economic uncertainty for a broad spectrum of industries. The spread of this outbreak caused significant disruptions in the U.S. economy and some of these impacts have been and will be long lasting. As it continues to evolve it is not clear when or how the pandemic-driven contraction will recover. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the CoronavirusAid,ReliefandEconomicSecurity (“CARES”)Act.ThegoaloftheCARESActistopreventasevereeconomicdownturnthroughvariousmeasures,including directfinancialaidtoAmericanfamiliesandeconomicstimulustosignificantlyimpactedindustrysectors.ManyoftheCARES Act provisions, as well as other recent legislative and regulatory efforts, are expected to have a material impact on financial institutions.TheCompany'sstrongtrackrecordandrevenuediversificationprovideasolidfoundationforearningsandcapital. The Company is focused on supporting its customers, communities, and employees during this unique operating environment. Following is a description of the impact COVID-19 is having, actions taken as a result of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19situation.
Lendingoperationsandaccommodationstocustomers.Beginning in March2020,FirstMidBankoffereda90-daycommercialdeferral program,primarilytohotelandrestaurantborrowers.Subsequently, additional deferrals were still offered on an individual case basis and a broader program was offered to residential and consumer customers. AsofDecember 31, 2021,atotalof $6.8 millionwasdeferred through these programs. InaccordancewithinteragencyguidanceissuedinMarch2020,theseshort-termdeferralsarenot considered troubled debtrestructurings.
Beginning April 3, 2020,withthepassageoftheinitialPaycheckProtectionProgram(“PPP”),administeredbytheSmallBusiness Administration (“SBA”), the Company actively participated in assisting existing and new customers with applications for resourcesthroughtheprogram.The initialPPPloanshadatwo-yearterm, while those originated after June 5, 2020 had a five-year term. All PPP loansearnedinterestat1%.As of December 31, 2021, the Companyhasapproved and outstanding with the SBAseventy-onePPPloanstotaling $16.0 million.The Company expects that most of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Under the program, the SBA will forgive all or a portion of the loan if, during a certain period, loans are used for qualifying expenses. If all or a portion of the loan is not forgiven, the borrower is responsible for repayment.
Employees.TheCompanyhasabusinesscontinuityplaninplacethatwasexecutedinMarch2020.Approximatelyhalfofthe Company'sworkforcehavetheabilitytoworkremotelywithsecureconnections.Inaddition,variouspreventativeandpersonal hygienemeasures,in accordance with CDC guidelines have been implemented.
Assetimpairment.TheCompanydoesnotbelievethatanyimpairmentexistsduetoCOVID-19togoodwillandotherintangible assets, long-lived assets, mortgage servicing rights ("MSRs"), right of use assets, or available-for-sale investment securities at thistime.WhilecertainvaluationassumptionsandjudgementschangedtoaccountforCOVID-19relatedcircumstances,the Company did not have significant changes in methodology used to determine the fair value of assets in accordance with GAAP. It is uncertain whether any prolonged effects of COVID-19 will result in future impairment charges related to any of these assets.
Capital and liquidity. The Company's and First Mid Bank's capital levels are higher today than during the Great Recession of 2008. The Company’s current allowance for credit losses could absorb net charge offs greater than the total of all net charge offs over the last 20 years. The Company’s aggregate net charge offs over the last 20 years through December 31, 2021, were $37.0 million. Current capital levels also support the Company's loan stress testing of the most vulnerable industry sectors impacted by COVID-19. The Company also maintains access to multiple sources of liquidity. As of December 31, 2021, the Company's total liquidity sources could provide $1.7 billion of total available capacity.
Management's outlook. The Company's current financial position is strong and the fundamental earning capabilities of its currently existing operations is solid. Due to the uncertain economic outlook related to the COVID-19 crisis and the potential forloanlossesandotherassetimpairments,itisanticipatedthatreservelevelswillremainelevatedcomparedtorecenthistorical trends.Allprocesses,proceduresandinternalcontrolsareexpectedtocontinueasoutlinedinexistingapplicablepoliciesdespite remoteworkingstatusofmanyemployees.WhiletheCompanydoesnotcurrentlyanticipateanymaterialchangesordeficiencies to its capital or liquidity sources, uncertainties about duration and overall effects on the economy could result in more adverse effects thanexpected.
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For the Years Ended December 31, 2021, 2020, and 2019 Overview
This overview of management’s discussion and analysis highlights selected information in this document and may not contain all the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, you should carefully read this entire document. These have an impact on the Company’s consolidated financial condition and results of consolidated operations.
Net income was $51.5 million, $45.3 million, and $47.9 million and diluted earnings per share were $2.87, $2.70, and $2.87 for the years ended December 31, 2021, 2020, and 2019, respectively. The following table shows the Company’s annualized performance ratios for the years ended December 31, 2021, 2020, and 2019:
Return on average common equity 8.38 % 8.24 % 9.49 %
Average common equity to average assets 10.72 % 12.76 % 13.17 %
Total assets at December 31, 2021, 2020, and 2019 were $5.99 billion, $4.73 billion, and $3.84 billion, respectively. Net loan balances increased to $3.94 billion at December 31, 2021, from $3.10 billion at December 31, 2020, and from $2.67 billion at December 31, 2019. The increase in 2021 was primarily due to approximately $829 million of loans acquired from Providence Bank and $208 million of loans purchased from Stifel Bank. Of the increase in 2020, approximately $183 million was loans purchased from Stifel Bank and $168 million was PPP loans.
Total deposit balances increased to $4.96 billion at December 31, 2021 from $3.69 billion at December 31, 2020 and from $2.92 billion at December 31, 2019. The increase in 2021 was primarily due to $990 million of deposits acquired from Providence Bank and $219 million of deposits acquired in association with loans purchased from Stifel Bank. The increase in 2020 was primarily due to approximately $62 million of deposits acquired from Stifel Bank for customer accounts in connection with loans acquired, increases in customers deposits for stimulus payments and PPP loan proceeds.
Netinterestmargin(taxeffected),definedasnetinterestincomedividedbyaverageinterest-earningassets,was 3.21%for2021,3.27%for2020and3.64% for 2019. In 2021 and 2020 the decrease was primarily due to less accretion income and a decline in interest rates.
Net interest income increased to $167.8 million in 2021 from $127.4 million in 2020 and $125.7 million in 2019. During 2021, the increase in net interest income resulted from growth in earning assets, primarily through acquisitions offset by growth in interest bearing liabilities with lower interest rates. During 2020, the increase in net interest income was primarily due to growth in earning assets offset by a decline in interest rates.
Non-interest income increased to $69.8 million in 2021 compared to $59.5 million in 2020 and $56.0 million in 2019. The increase in 2021 was primarily due to the acquisition of Providence Bank. The increase in 2020 was primarily due to increases in wealth management revenues, insurance commissions and mortgage banking income.
Non-interest expenses increased to $155.6 million in 2021 compared to $111.1 million in 2020, and $112.0 million in 2019. The increase in 2021 was primarily due to the acquisition of Providence Bank. The decrease in 2020 was primarily declines in occupancy and equipment, amortization of intangibles, ATM/debit card expense and acquisition costs offset by increases in salary and benefits and FDIC insurance assessment expense.
Following is a summary of the factors that contributed to the changes in net income (in thousands):
Provision for loan losses 952 (9,670 )
Other income, including securities transactions 10,247 3,503
Increase (decrease) in net income $ 6,220 $ (2,673 )
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $22.0 million at December 31, 2021 compared to $28.1 million at December 31, 2020, and $27.8 million at December 31, 2019. Repossessed Assets balances totaled $5.0 million at December 31, 2021 compared to $2.5 million at December 31, 2020, and $3.7 million at December 31, 2019. The Company’s provision for loan losses was $15.2 million for 2021, compared to $16.1 million for 2020, and $6.4 million for 2019. The decrease of provision expense in 2021 is primarily due to a decrease in classified loans and improved economic outlook. The increase in provision in 2020 was due to the adoption of ASU 2016-13 and impacts of COVID-19 on the operations and earnings of borrowers.
TheCompany’scapitalpositionremainsstrongandtheCompanyhasconsistentlymaintainedregulatorycapitalratiosabovethe“well-capitalized”standards. The Company’s Tier 1 capital ratio to risk weighted assets ratio at December 31, 2021, 2020, and 2019 was 12.51%, 14.63%, and 14.79%, respectively. The Company’stotalcapitaltoriskweightedassetsratioatDecember 31, 2021, 2020, and 2019was 15.79%,18.82% and15.74%,respectively.The decrease in these ratios during 2021 was primarily due to the increase in assets following the acquisition of Providence Bank.Theincreasesin these ratios in 2020 were primarily due to subordinated debt that qualified as Tier 2 capital and net income added to retainedearnings.
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.
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The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. The total outstanding commitments at December 31, 2021, 2020, and 2019 were $1.0 billion, $615.5 million, and $585.3 million, respectively. See Note 17 – “Commitments and Contingent Liabilities” herein for further information.
Critical Accounting Policies and Use of Significant Estimates
The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Company’s financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
Investment in Debt and Equity Securities. The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale. Securities classified as held-to-maturity are recorded at amortized cost. Available-for-sale and equity securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of the Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income.
Allowance for Credit Losses - Held-to-Maturity Securities. Currently all the Company's held-to-maturity securities are government agency-backed securities for which the risk of loss is minimal. Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities.
Loans. Loans are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase discounts and premiums, fair value hedge accounting adjustments and deferred loan fees and costs. Accrued interest is reported separately and is included in interest receivable in the consolidated balance sheets.
Allowance for Credit Losses - Loans. The Company believes the allowance for credit losses for loans is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. The allowance for credit losses for loans represents the best estimate of losses inherent in the existing loan portfolio. An estimate of potential losses inherent in the loan portfolio are determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, the Company uses relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.
The allowance for credit losses is measured on a collective (pool) basis for non-impaired loans with similar risk characteristics. Historical credit loss experience provides the basis for the estimate of expected credit losses. Adjustments to historical loss information are made for relevant factors to each pool including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. The Company estimates the appropriate level of allowance for credit losses for impaired loans by evaluating them separately. A specific allowance is assigned to an impaired loan when expected cash flows or collateral are less than the carrying amount of the loan.
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period that the Company is exposed to credit risk via a contractual obligation to extend credit unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is included in other liabilities in the consolidated balance sheets.
Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.
Mortgage Servicing Rights. The Company has elected to measure mortgage servicing rights under the amortization method. Using this method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation reserve, to the extent that fair value is less than the carrying amount of servicing assets. Fair value in excess of the carrying amount of servicing assets is not recognized.
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Deferred Income Tax Assets/Liabilities. The Company’s net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If the Company were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.
Additionally, the Company reviews its uncertain tax positions annually. 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 than50%likelytoberecognizedonexamination.Fortaxpositionsnotmeetingthe"morelikelythannot"test,notaxbenefitisrecorded.Asignificantamount 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 taxexpense.
Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the Company’s consolidated balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment during 2019 as part of the goodwill impairment test and no impairment was deemed necessary.
AsaresultoftheCompany’sacquisitionactivity,goodwill,anintangibleassetwithanindefinitelife,isreflectedonthebalancesheets.Goodwillisevaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently thanannually.
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:
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.”
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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 necessarytosupportearningassetsvarieswiththevolumeandmixofinterest-bearingliabilitiesandtheratespaidtoattractandretainsuchfunds.
Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is presented on a full tax equivalent (TE) basis in the table that follows. The federal statutory rate in effect of 21% was used for all years. The TE analysis portrays the income tax benefits associated with the tax-exempt assets. The year-to-date net yield on interest-earning assets excluding the TE adjustments of $2,624,000, $2,223,000, and $2,152,000 for 2021, 2020, and 2019, respectively, were 3.17%, 3.20%, and 3.58% at December 31, 2021, 2020, and 2019, respectively. The Company’s average balances, fully tax equivalent interest income and interest expense, and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands):
Year Ended Year Ended Year Ended
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets
Investment securities
Liabilities and stockholders' equity
Deposits:
Impact of non-interest-bearing funds 0.09 % 0.12 % 0.17 %
TE net yield on interest-earning assets 3.21 % 3.27 % 3.64 %
(1) Tax-exempt income is shown on a fully tax equivalent basis.
(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:
Federal funds sold (3 ) — (3 ) (11 ) 4 (15 )
Certificates of deposit investments (28 ) (24 ) (4 ) (53 ) (55 ) 2
Investment securities:
Interest-bearing liabilities:
Deposits:
Federal funds purchased (10 ) (5 ) (5 ) (5 ) (2 ) (3 )
Net interest income on a tax-effected basis increased $40.7 million or 31.4% in 2021 compared to an increase of $1.8 million or 1.4% in 2020. Net interest income on a tax-effected basis increased primarily due to the growth in average earnings assets including loans and interest-bearing deposits. The tax-effected net interest margin decreased primarily due to lower yields on interest earning assets.
In 2021, average earning assets increased by $1.3 billion, or 33.9%, and average interest-bearing liabilities increased by $967.5 million or 33.1%. These increases were primarily due to assets and liabilities acquired from Providence Bank and loans and deposits purchased from Stifel Bank. In 2020, average earning assets increased by $464.3 million or 13.4% and average interest-bearing liabilities increased $247.0 million or 9.2% compared with 2019. Changes in average balances are shown below:
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Provision for Loan Losses
The provision for loan losses in 2021 was $15,151,000 compared to $16,103,000 in 2020 and $6,433,000 in 2019. Nonperforming loans decreased to $22,036,000 at December 31, 2021 from $28,123,000 at December 31, 2020 and $27,818,000 at December 31, 2019. The decrease in provision expense in 2021 was primarily due to a decrease in classified loans and improved economic outlook. The increase in provision expense in 2020 was primarily due to the adoption of ASU 2016-13 and additional provision due to impacts of COVID-19 on borrower operations and earnings. Net charge-offs were $4,480,000 during 2021, $2,776,000 during 2020 and $5,711,000 during 2019. For information on loan loss experience and nonperforming loans, see “Nonperforming Loans and Repossessed Assets” and “Loan Quality and Allowance for credit losses” herein.
Other Income
An important source of the Company’s revenue is derived from other income. The following table sets forth the major components of other income for the last three years (in thousands):
Change From Prior Year
Total non-interest income increased to $69.8 million in 2021 compared to $59.5 million in 2020 and $56.0 million in 2019. The primary reasons for the more significant year-to-year changes in other income components are as follows:
First Mid Bank generally releases the servicing rights on loans sold into the secondary market.
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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 $155.6 million in 2021 from $111.1 million in 2020 and $112.0 million in 2019. The primary reasons for the more significant year-to-year changes in other expense components are as follows:
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Income Taxes
Income tax expense amounted to $15,298,000 in 2021 compared to $14,472,000 in 2020, and $15,323,000 in 2019. Effective tax rates were 22.9% for 2021, 24.2% for 2020, and 24.2% for 2019. The Company files U.S. federal and state of Illinois, Indiana, and Missouri income tax returns. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2018.
Analysis of Balance Sheets
Securities
The Company’s overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the available-for-sale and held-to-maturity securities for the last three years (dollars in thousands):
December 31,
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
At December 31, 2021, the amortized cost of the Company’s investment portfolio increased by $569.4 million from December 31, 2020 primarily due to securities obtained in the acquisition of Providence Bank. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed.
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The table below presents the credit ratings as of December 31, 2021 for certain investment securities (in thousands):
Average Credit Rating of Fair Value at December 31, 2021 (1)
Amortized Estimated Not
Cost Fair Value AAA AA +/- A +/- BBB +/- < BBB - Rated
Available-for-sale:
Held-to-maturity:
Equity securities:
Federal Agricultural Mtg Corp $ 84 $ 397 $ — $ — $ — $ — $ — $ 397
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 $857.1 million or 27.3% from December 31, 2020 to December 31, 2021 of which approximately $829 million were loans acquired from Providence Bank and $208 million were loans purchases from Stifel Bank. Loan balances increased by $443.1 million or 16.4% from December 31, 2019 to December 31, 2020 of which approximately $183 million were loans purchased from Stifel Bank and $168.3 million were PPP loans. The balances of loans sold into the secondary market were $149.0 million in 2021 compared to $196.4 million in 2020. The balance of real estate loans held for sale, included in the balances shown above, amounted to $2.7 million and $1.9 million as of December 31, 2021 and 2020, respectively.
Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. The Company does not have any sub-prime mortgages or credit card loans outstanding which are also generally considered to be higher credit risk.
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First Mid Bank does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage of total risk-based capital for the periods shown above. At December 31, 2021 and 2020, First Mid Bank did have industry loan concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):
Principal % Outstanding Principal % Outstanding
balance Loans balance Loans
The concentration of other gambling industries was less than 25% of total risk-based capital as of December 31, 2021 however is shown for comparative purposes. The Company had no further industry loan concentrations in excess of 25% of total risk-based capital.
The following table presents the balance of loans outstanding as of December 31, 2021, by contractual maturities (in thousands):
Maturity (1)
One year or less(2) Over 1 through 5 years Over 5 years Total
(1) Based upon remaining contractual maturity.
(2) Includes demand loans, past due loans and overdrafts.
As of December 31, 2021, loans with maturities over one year consisted of approximately $2.2 billion in fixed rate loans and approximately $1.1 billion in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding renewals and borrower requests, which are handled on a case-by-case basis.
Nonperforming Loans and Nonperforming Other Assets
Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and (c) loans not included in (a) and (b) above which are defined as “troubled debt restructurings”. Repossessed assets include primarily repossessed real estate and automobiles.
The Company’s policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due. The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal.
Troubled debt restructurings are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven. Repossessed assets represent property acquired as the result of borrower defaults on loans. These assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure or repossession. Write-downs occurring at foreclosure are charged against the allowance for credit losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs for subsequent declines in value are recorded in non-interest expense in other real estate owned along with other expenses related to maintaining the properties.
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Thefollowingtablepresentsinformationconcerningtheaggregateamountofnonperformingloansandrepossessedassets(inthousands):
December 31,
The $5.6 million decrease in nonaccrual loans during 2021 resulted from the net of $4.6 million of loans put on nonaccrual status, offset by $0.2 million of loanstransferredtootherrealestateowned, $3.8 millionofloanschargedoffand $6.2 million ofloansbecomingcurrentorpaid-off.
Thefollowingtablesummarizesthecompositionofnonaccrualloans(dollars inthousands):
Balance % of Total Balance % of Total
Construction and land development $ 25 0.1 % $ 162 0.7 %
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $308,000, $575,000 and $906,000 for the years ended December 31, 2021, 2020, and 2019, respectively.
The $2.5 million increase in repossessed assets during 2021 resulted from the net of $10.9 million of loans added through the acquisition of Providence Bank, $4.3 million of additional assets repossessed, $8.9 million of repossessed assets sold and a $3.1 million of net adjustments to discounts and premiums recorded at acquisition. The following table summarizes the composition of repossessed assets (dollars in thousands):
Balance % of Total Balance % of Total
1-4 family residential properties 12 0.2 % 71 2.8 %
Consumer loans 35 0.7 % 4 — %
Repossessed assets sold during 2021 resulted in total net losses of $511,000, of which $512,000 of net losses were related to real estate asset sales and $766 of net gains was related to other repossessed assets sales. In addition, $3.1 million of write downs were recorded based on current property appraisals and $2.1 million of deferred fair value marks from previous acquisitions were recognized.
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Loan Quality and Allowance for Credit Losses
The allowance for credit losses represents management’s estimate of the reserve necessary to adequately account for probable losses existing in the current portfolio. The provision for credit losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for credit losses. Management considers collateral values and guarantees in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and renegotiated loans, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates.
Management reviews economic factors including the potential for reduced cash flow for commercial operating loans from reduction in sales or increased operating costs, decreased occupancy rates for commercial buildings, reduced levels of home sales for commercial land developments, the uncertainty regarding grain prices, increased operating costs for farmers, and increased levels of unemployment and bankruptcy impacting consumers’ ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. Management considers the allowance for credit losses a critical accounting policy.
Management recognizes there are risk factors that are inherent in the Company’s loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company’s operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company’s success. At December 31, 2021, the Company’s loan portfolio included $430.8 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $297.4 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $39.1 million from $391.7 million at December 31, 2020 while loans concentrated in other grain farming increased $10.8 million from $308.2 million at December 31, 2020. While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio. In addition, the Company has $159.4 million of loans to motels and hotels. The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region. While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses. The Company also has $696.7 million of loans to lessors of non-residential buildings, $468.4 million of loans to lessors of residential buildings and dwellings, $57.5 million of loans to other gambling industries and $122.6 million of loans to nursing care facilities.
The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the Board of Directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed. Most of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.
The Company minimizes credit risk by adhering to sound underwriting and credit review policies. Management and the Board of Directors of the Company review these policies at least annually. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor, and address asset quality problems in an accurate and timely manner. On a quarterly basis, the Board of Directors and management review the status of problem loans and determine a best estimate of the allowance. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for credit losses.
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Analysisoftheallowanceforcreditlossesforthepastfiveyearsandofchangesintheallowancefortheseperiodsissummarizedasfollows(dollarsin thousands):
Adjustment for adoption of ASU 2016-13 — 1,672 — — —
Initial allowance on loans purchased with credit deterioration 2,074 — — — —
Charge-offs:
Agricultural real estate — — — — —
Recoveries:
Construction and land development — — — — 33
Agricultural real estate — — — — 2
Agricultural loans 1 — — — —
The ratio of the allowance for credit losses to nonperforming loans was 248.0% as of December 31, 2021 compared to 149.0% as of December 31, 2020. The increase in this ratio is primarily due to a decline in nonperforming loans. Management believes that the overall estimate of the allowance for credit losses appropriately accounts for probable losses attributable to current exposures.
During 2021, the Company had net charge-offs of $4,480,000 compared to $2,776,000 in 2020. During 2021, there were significant charge-offs of two commercial real estate loans to two borrowers of $661,000 and significant charge-offs of five commercial operating loans to three borrowers of $2.9 million. During 2020, there were significant charge-offs of eight commercial real estate loans to five borrowers of $760,000 and significant charge-offs of eleven commercial operating loans to five borrowers of $1.7 million.
At December 31, 2021, the allowance for credit losses amounted to $54.7 million or 1.37% of total loans. At December 31, 2020, the allowance for credit losses amounted to $41.9 million or 1.34% of total loans. Excluding the fully guaranteed PPP loans, the ratio of allowance for credit losses to loans outstanding was 1.41%. The allowance is allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based on historical losses and other factors.
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The allowance for credit losses, in management's judgment, was allocated as follows to cover probable loan losses (dollars in thousands):
% of loans to % of loans to % of loans to % of loans to
Unallocated — NA — NA — NA — NA
% of loans to
Allowance for credit losses total loans
Residential real estate $ 886 16.2 %
Commercial / commercial real estate 16,546 70.8 %
Agricultural / agricultural real estate 1,742 11.0 %
Unallocated — NA
Deposits
Funding of the Company’s earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates for the years ended December 31, 2021, 2020, and 2019 (dollars in thousands):
Demand deposits:
The following table sets forth the high and low month-end balances for the years ended December 31, 2021, 2020, and 2019 (in thousands):
In 2021, the average balance of deposits increased by $1.3 billion from 2020. The increase in 2021 was primarily due to approximately $990 million of deposits acquired from Providence Bank and $219 million of deposits acquired in association with loans purchased from Stifel Bank. Average non-interest bearing deposits increased $387.4 million, interest-bearing deposits increased by $660.0 million, savings accounts increased by $142.1 million, and time deposits increased $139.2 million. In 2020, the average balance of deposits increased by $356.0 million from 2019. The increase was primarily the result of deposit balances acquired from Stifel Bank and increases in customer balances due to stimulus payments and PPP loan funds received. Average non-interest bearing deposits increased $169.3 million, interest-bearing deposits increased by $253.5 million, savings accounts increased by $31.7 million, and time deposits decreased $98.5 million.
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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 increased $19.4 million from December 31, 2020 to December 31, 2021. The increase was primarily due to time deposits acquired from Providence Bank. The balance of time deposits of $100,000 or more decreased $57.6 million from December 31, 2019 to December 31, 2020. The decrease in 2020 was primarily due to time deposits that matured and were not renewed or replaced.
In 2021 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of $291.4 million and $227.6 million in various checking accounts and time deposits as of December 31, 2021 and 2020, respectively. These balances are subject to change depending upon the cash flow needs of the public entity.
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. These obligations are collateralized with certain government securities that are direct obligations of the United States or one of its agencies. These retail repurchase agreements are a cash management service to its corporate customers. Other borrowings consist of Federal Home Loan Bank (“FHLB”) advances, federal funds purchased, loans (short-term or long-term debt) that the Company has outstanding, subordinated debt and junior subordinated debentures.
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Information relating to securities sold under agreements to repurchase and other borrowings as December 31, 2021, 2020, and 2019 is presented below (dollars in thousands):
Federal funds purchased — — 5,000
Federal Home Loan Bank advances:
Other debt
Due in one year or less — — —
Due after one year — — —
Average interest rate at end of period 1.78 % 0.81 % 1.08 %
Maximum outstanding at any month-end:
Federal Home Loan Bank advances:
Debt:
Debt due in one year or less — 5,000 —
Debt due after one year — — 6,549
Averages for the period (YTD):
Federal funds purchased — 525 616
Federal Home Loan Bank advances:
Debt:
Loans due in one year or less — 656 —
Loans due after one year — — 1,825
Average interest rate during the period 1.58 % 1.07 % 1.66 %
Securities sold under agreements to repurchase decreased $60.7 million during 2021 primarily due to the seasonal demands in balances and change in cash flow needs of various customers. FHLB advances represent borrowings by the First Mid Bank to economically fund loan demand. At December 31, 2021 FHLB advances totaled $86 million with a weighted-average interest rate of 1.66% and maturities from March 2022 to December 2029. At December 31, 2020 FHLB advances totaled $94 million with a weighted-average interest rate of 1.57% and maturities from February 2021 to December 2029.
The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $15 million. The balance on this line of credit was $0 as of December 31, 2021. This loan was renewed on April 9, 2021 for one year as a revolving credit agreement with a maximum available balance of $15 million. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of First Mid Bank. The Company and its subsidiary banks were in compliance with the existing covenants at December 31, 2021 and 2020.
On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the Company and the Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes are unsecured, subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding October 15, 2025, the Notes will bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 383 basis points,
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or such other rate as determined pursuant to the Supplemental Indenture, provided that in no event shall the applicable floating interest rate be less than zero per annum.
The Company may, beginning with the interest payment date of October 15, 2025, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the Notes at any time, including prior to October 15, 2025, at the Company’s option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding the redemption date. At December 31, 2021, the recorded balance of the subordinated notes was $94,400,000.
On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through First Mid-Illinois Statutory Trust II (“Trust II”), a statutory business trust and wholly owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common equity of Trust II, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points) after June 15, 2011 (1.80% and 1.82% at December 31, 2021 and 2020, respectively). The net proceeds to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield Bancorp, Inc. in 2006.
On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First Clover Financial. The $4,000,000 of trust preferred securities and an additional $124,000 additional investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (2.05% and 2.07% at December 31, 2021 and 2020, respectively) and resets quarterly.
On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First BancTrust Corporation. The $6,000,000 of trust preferred securities and an additional $186,000 additional investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (1.90% and 1.92% at December 31, 2021 and 2020, respectively) and resets quarterly.
The trust preferred securities issued by Trust II, CLST I, and FBTCST I are included as Tier 1 capital of the Company for regulatory capital purposes. On March1,2005,theFederalReserveBoardadoptedafinalrulethatallowsthecontinuedlimitedinclusionoftrustpreferredsecuritiesinthecalculationofTier 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 regulatorycapital.
In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This rule is generally referred to as the “Volcker Rule.” On December 10, 2013, the federal banking agencies issued final rules to implement the prohibitions required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry regarding the adverse impact the final rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies approved a final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities. Under the final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets if (1) the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the offering proceeds received by the collateralized debt obligation were invested primarily in qualifying trust preferred collateral, and (3) the banking entity’s interests in the collateralized debt obligation was acquired on or prior to December 10, 2013. Although the Volcker Rule impacts many large banking entities, the Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company, First Mid Bank or Jefferson Bank.
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Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of interest-bearing assets differ significantly from the maturity or repricing characteristics of interest-bearing liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company’s asset liability management committee (ALCO) oversees the interest rate sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as “static GAP” analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet.
The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at December 31, 2021 (dollars in thousands):
Rate Sensitive Within
1 year 1-2 years 2-3 years 3-4 years 4-5 years Thereafter Total Fair Value
Interest-earning assets:
Interest-bearing liabilities:
The static GAP analysis shows that at December 31, 2021, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis. The Company’s ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank’s historical experience and with known industry trends. ALCO meets at least monthly to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities.
Capital Resources
At December 31, 2021, the Company’s stockholders' equity had increased $66 million, or 11.6%, to $633,894,000 from $568,228,000 as of December 31, 2020. During 2021, net income contributed $51,490,000 to equity before the payment of dividends to stockholders of $15.1 million. The change in market value of available-for-sale investment securities decreased stockholders' equity by $17.9 million, net of tax.
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Stock Plans
Deferred Compensation Plan. The Company follows the provisions of the Emerging Issues Task Force Issue No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested” (“EITF 97-14”), which was codified into ASC 710-10, for purposes of the First Mid Bancshares, Inc. Amended and Restated Deferred Compensation Plan (“DCP”). At December 31, 2021, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $4,295,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $4,295,000 as an equity instrument (deferred compensation).
The DCP was effective as of June 1984. The purpose of the DCP is to enable directors, advisory directors, and key employees the opportunity to defer a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. The Company invests all participants’ deferrals in shares of common stock. Dividends paid on the shares are credited to participants’ DCP accounts and invested in additional shares. The Company issued, pursuant to DCP:
First Retirement and Savings Plan. The First Retirement Savings Plan ("401(k) plan") was effective beginning in 1985. Employees are eligible to participate in the 401(k) plan after three months of service with the Company. The Company offers common stock as an investment option for participants of the 401(k) plan. Beginning in 2016, shares for the 401(k) plan were purchased in the open market instead of being issued by the Company.
Dividend Reinvestment Plan. The Dividend Reinvestment Plan (“DRIP”) was effective as of October 1994. The purpose of the DRIP is to provide participating stockholders with a simple and convenient method of investing cash dividends paid by the Company on its common and preferred shares into newly issued common shares of the Company. All holders of record of the Company’s common or preferred stock are eligible to voluntarily participate in the DRIP. The DRIP is administered by Computershare Investor Services, LLC and offers a way to increase one’s investment in the Company. Of the $15,054,000 in common stock dividends paid during 2021, $333,000 or 2.2% was reinvested into shares of common stock of the Company through the DRIP. Approximately $333,000, $680,000 and $805,000 of common stock was purchased through reinvestment of dividends during 2021, 2020, and 2019, respectively.
Stock Incentive Plan. At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to succeed the Company’s 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.
A maximum of 149,983 shares of common stock may be issued under the SI Plan. During 2021, 2020, and 2019, the Company awarded 48,575 and 25,950, and 26,700 shares as stock and stock unit awards, respectively. This SI Plan is more fully described in Note 13 - Stock Incentive Plan.
Stock Repurchase Program. Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock.
During 2021, the Company repurchased 7,752 shares (0.05% of common shares) at a total price of approximately $326,000. All of these shares were a result of shares withheld for taxes on vested employee stock incentives. During 2020, the Company repurchased 6,288 (0.04% of common shares) at a total price of approximately $213,000. As of December 31, 2021, approximately $4.4 million remains available for purchase under the repurchase programs. Treasury stock is further affected by activity in the DCP.
Employee Stock Purchase Plan. AttheAnnualMeetingofStockholdersheldApril25,2018,thestockholdersapprovedtheFirstMidBancshares,Inc.EmployeeStockPurchasePlan(“ESPP”). TheESPPprovideseligibleemployeeswiththeopportunitytopurchasesharesofcommonstockoftheCompanyata5%discountthroughpayrolldeductions. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 600,000 shares of common stock may be issued under the ESPP. As of December 31, 2021 and 2020, 11,748 and 11,037 shares, respectively were issued pursuant toESPP.
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Capital Ratios
For 2021, the minimum regulatory ratios required for minimum capital adequacy purposes plus the capital buffer are 10.5% for the Total Risk-based capital ratio, 8.5% for the Tier 1 Risk-based capital ratio, 7.0% for the Common Equity Tier 1 capital ratio, and 4.0% for the Tier 1 Leverage ratio. The Company and First Mid Bank have capital ratios above the minimum regulatory capital requirements and, as of December 31, 2021, the Company and First Mid Bank had capital ratios above the levels required for categorization as well-capitalized under the capital adequacy guidelines established by the bank regulatory agencies. A tabulation of the Company and First Mid Bank's capital ratios as of December 31, 2021 follows:
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:
Management continues to monitor its expected liquidity requirements carefully, focusing primarily on cash flows from:
• deposit activities, including seasonal demand of private and public funds;
The following table summarizes significant contractual obligations and other commitments at December 31, 2021 (in thousands):
Total Less than 1 year 1-3 years 3-5 years More than 5 years
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For the year ended December 31, 2021, net cash of $69.6 million was provided from operating activities, $482.5 million was used in investing activities, and$164.2 million wasprovided by financing activities. In total cash and cash equivalents decreased by $248.7 million from year-end2020.
For the year ended December 31, 2020, net cash of $63.5 million was provided from operating activities, $562.4 million was used in investing activities, and $831.1 million was provided by financing activities. In total cash and cash equivalents increased by $332.2 million from year-end 2019.
For the year ended December 31, 2019, net cash of $62.8 million was provided from operating activities, $32.1 million was used in investing activities, and $87.1 million was used in financing activities. In total cash and cash equivalents decreased by $56.3 million from year-end 2018.
For the years ended December 31, 2021 and 2020, the Company also had $10 million of floating rate trust preferred securities outstanding through Trust II, and in September 2016, the Company acquired $4 million of floating rate trust preferred securities from First Clover Leaf under Clover Leaf Statutory Trust I and on May 1, 2018, the Company acquired $6 million of floating rate trust preferred securities from First BancTrust Corporation. See Note 9 – “Borrowings” for a more detailed description.
Effects of Inflation
Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are affected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company’s assets and liabilities that are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s market risk arises primarily from interest rate risk inherent in its lending, investing and deposit taking activities, which are restricted to First Mid Bank. For a discussion of how management of the Company addresses and evaluates interest rate risk see also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity.”
Based on the financial analysis performed as of December 31, 2021, which considers how the specific interest rate scenario would be expected to impacteachinterest-earningassetandeachinterest-bearingliability,theCompanyestimatesthatchangesintheprimeinterestratewouldimpactFirstMid Bank's performance, on a consolidated basis, asfollows:
Increase (Decrease) In
December 31, 2021 Net Interest Income Return On Average Equity
Prime rate is 3.25%
Prime rate increase of:
Prime rate decrease of:
The following table shows the same analysis for First Mid Bank performance as of December 31, 2020:
Increase (Decrease) In
December 31, 2020 Net Interest Income Return On Average Equity
Prime rate is 3.25%
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.
The following table presents the Company's projected change in EVE, on a consolidated basis, for the various rate shock levels at December 31, 2021 and 2020 (in thousands). All market risk sensitive instruments presented in the tables are held-to-maturity or available-for-sale. The Bank has no trading securities.
Changes In
Economic Value of Equity
Interest Rates (basis points) Amount of Change ($000) Percent of Change (%)
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As indicated above, at December 31, 2021, in the event of a sudden and sustained increase in prevailing market interest rates, the EVE would be expected to increase if rates increased 100 or 200 basis points. In the event of a sudden and sustained decrease in prevailing market interest rates, The Company's EVE would be expected to decrease. At December 31, 2021, the estimated changes in EVE were outside the Company’s policy guidelines that normally allow for a change in capital of +/-10% from the base case scenario under a 100 basis point shock and within the guidelines of +/- 20% from the base case scenario under a 200 basis point shock. The general level of interest rates are at historically low levels and the bank is monitoring its position and the likelihood of further rate changes.
Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and declines in deposit balances, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the computation of EVE. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in First Mid Bank's portfolio change in future periods as market rates change. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets 45
Consolidated Statements of Income 46
Consolidated Statements of Comprehensive Income 47
Consolidated Statements of Changes in Stockholders’ Equity 48
Consolidated Statements of Cash Flows 51
Notes to Consolidated Financial Statements 53
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Consolidated Balance Sheets
December 31, 2021 and 2020
(In thousands, except share data) 2021 2020
Assets
Cash and due from banks:
Certificates of deposit investments 2,450 2,695
Investment securities:
Equity securities, at fair value 397 218
Less allowance for credit losses (54,655 ) (41,910 )
Liabilities and stockholders’ equity
Deposits:
Stockholders’ equity:
Accumulated other comprehensive income (loss) (831 ) 17,095
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Income
For the years ended December 31, 2021, 2020, and 2019
Interest income:
Interest on investment securities
Interest on certificates of deposit investments 56 84 137
Interest on federal funds sold — 3 14
Interest on deposits with other financial institutions 357 274 1,702
Interest expense:
Interest on securities sold under agreements to repurchase 231 488 911
Interest on other borrowings — 26 15
Interest on junior subordinated debentures 541 682 1,476
Interest on subordinated debt 3,939 931 —
Other income:
Other expense:
Net other real estate owned expense 3,866 42 443
Per share data:
Basic net income per common share $ 2.88 $ 2.71 $ 2.88
Diluted net income per common share 2.87 2.70 2.87
Cash dividends declared per common share 0.85 0.81 0.76
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Comprehensive Income
For the years ended December 31, 2021, 2020, and 2019
Other comprehensive income (loss)
See accompanying notes to consolidated financial statements.
46
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2021, 2020, and 2019
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
Other comprehensive loss, net of tax — — — — (17,926 ) — (17,926 )
Dividends on common stock ($.850 per share) — — (15,054 ) — — — (15,054 )
Purchase of 7,752 treasury shares — — — — — (326 ) (326 )
Deferred compensation — — — 54 — (54 ) —
Vested restricted shares/units compensation expense — 185 — (517 ) — — (332 )
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2021, 2020, and 2019
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income Stock Total
Other comprehensive income, net of tax — — — — 8,735 — 8,735
Dividends on common stock ($.810 per share) — — (13,494 ) — — — (13,494 )
Purchase of 6,288 treasury shares — — — — — (213 ) (213 )
Deferred compensation — — — 360 — (360 ) —
Tax benefit related to deferred compensation distributions — 22 — — — — 22
Vested restricted shares/units compensation expense — (59 ) — (140 ) — — (199 )
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2021, 2020, and 2019
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
Other comprehensive income, net of tax — — — — 14,833 — 14,833
Dividends on common stock ($.76 per share) — — (12,668 ) — — — (12,668 )
Deferred compensation — — — 333 — (333 ) —
Tax benefit related to deferred compensation distributions — 56 — — — — 56
Vested restricted shares/units compensation expense — (631 ) — (334 ) — — (965 )
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
For the years ended December 31, 2021, 2020, and 2019
Cash flows from operating activities:
Gains on investment securities, net (124 ) (1,106 ) (802 )
Losses on sales of other real property owned, net 5,725 195 4
(Gain) loss on write down of premises and equipment — (5 ) 90
Gain on sale of other assets (126 ) — —
Gains on sale of loans held for sale, net (4,256 ) (5,248 ) (1,504 )
Decrease (increase) in accrued interest receivable 2,384 (3,710 ) 1,304
Increase (decrease) in accrued interest payable (1,812 ) 327 821
Gains on equity securities (499 ) (133 ) —
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments 490 2,910 2,944
Purchase of certificates of deposit investments (245 ) (980 ) —
Proceeds from sales of securities available-for-sale 611 9,061 60,900
Proceeds from maturities of securities held-to-maturity — 55,000 —
Purchases of premises and equipment (3,702 ) (2,463 ) (4,103 )
Proceeds from sales of other real property owned 9,503 2,054 2,425
Investment in Bank Owned Life Insurance (30,000 ) — —
Net cash provided by acquisition 27,061 — —
Cash flows from financing activities:
Increase (decrease) in federal funds purchased — (5,000 ) 5,000
Proceeds from short-term debt — 5,000 —
Proceeds from long-term debit — 94,253 —
Repayment of short-term debt — (5,000 ) —
Repayment of long-term debt — — (7,724 )
Repayment of junior subordinated debentures — — (10,310 )
Proceeds from issuance of common stock 1,937 610 655
Direct expenses related to capital transactions (206 ) — —
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Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2021, 2020, and 2019
Supplemental disclosures of cash flow information
Cash paid during the period for:
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned $ 249 $ 783 $ 3,570
Fixed assets transferred to other real estate 3,971 — —
Dividends reinvested in common stock 333 680 805
Initial recognition of right-of-use assets — — 14,116
Initial recognition of lease liabilities — — 14,116
Net tax benefit related to option and deferred compensation plans — 22 56
Supplemental disclosure of purchase of capital stock of LINCO Bancshares, Inc.
Fair value of assets acquired $ 1,170,699
Consideration paid:
Common stock issued 44,191
Total consideration paid 147,691
Fair value of liabilities assumed $ 1,023,008
See accompanying notes to consolidated financial statements.
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First Mid Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
Note 1 – Basis of Accounting and Consolidation
The accompanying consolidated financial statements include the accounts of First Mid Bancshares, Inc. (“Company”) and its wholly owned subsidiaries: First Mid Bank & Trust, N.A. (“First Mid Bank”), First Mid Wealth Management Company, First Mid Insurance Group, Inc. (“First Mid Insurance”) and First Mid Captive, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the 2021 presentation and there was no impact on net income or stockholders’ equity from these reclassifications. The Company operates as a single segment entity for financial reporting purposes. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America.
COVID-19
The COVID-19 outbreak was an unprecedented event that continues to provide significant economic uncertainty for a broad spectrum of industries. The Company is focused on supporting its customers, communities, and employees during this unique operating environment. Throughout this document, the Company describes the impact COVID-19 is having, actions taken as a result of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation.
Acquisitions
Delta Bancshares Company. On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Delta Merger Sub”), entered into an Agreement and Plan of Merger (the “Delta Merger Agreement”) with Delta Bancshares Company, a Missouri corporation (“Delta”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a business combination whereby Delta will merge with and into Merger Sub, whereupon the separate corporate existence of Delta will cease and Merger Sub will continue as the surviving company and a wholly-owned subsidiary of First Mid (the “Delta Merger”). The Delta Merger was completed on February 14, 2022.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Delta Merger, each share of common stock, par value $10.00 per share, of Delta issued and outstanding immediately prior to the effective time of the Delta Merger (other than shares held in treasury by Delta) converted into and became the right to receive cash and shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the Delta Merger to Delta’s shareholders and option holders was approximately $15.2 million in cash and 2,292,270 shares of Company common stock. Delta’s outstanding stock options vested upon consummation of the Delta Merger, and all outstanding Delta options that were unexercised prior to the effective time of the Delta Merger were cashed out.
It is anticipated that Delta’s wholly owned bank subsidiary, Jefferson Bank, will be merged with and into First Mid Bank during the second quarter of 2022. At the time of the bank merger, Jefferson Bank’s banking offices will become branches of First Mid Bank. As of December 31, 2021, Jefferson Bank had total consolidated assets of approximately $718 million, loans of approximately $424 million and total deposits of approximately $560 million.
LINCO Bancshares, Inc. On September 25, 2020, the Company and Eval Sub Inc., a wholly owned subsidiary of the Company ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with LINCO Bancshares, Inc., the former parent of Providence Bank ("LINCO"), and the sellers as defined therein, pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business combination whereby Merger Sub merged with and into LINCO, whereupon the separate corporate existence of Merger Sub ceased and LINCO continued as the surviving company and a wholly owned subsidiary of the Company (the "LINCO Merger").
Subject to the terms and conditions of the Merger Agreement, at the effective time of the LINCO Merger, each share of common stock, par value $1.00 per share, of LINCO issued and outstanding immediately prior to the effective time of the LINCO Merger (other than shares held in treasury by LINCO) was converted into and become the right to receive, cash or shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration payable by the Company at the closing of the Merger was $103.5 million in cash and 1,262,246 shares of the Company’s common stock, provided that the shareholders of LINCO collectively elected pursuant to the Merger Agreement to receive varying amounts of cash or shares of common stock of the Company as consideration in the Merger. In addition, immediately prior to the closing of the proposed merger, LINCO paid a special dividend to its shareholders in the aggregate amount of $13 million.
The LINCO Merger closed on February 22, 2021, and Providence Bank merged into First Mid Bank on May 15, 2021.
Website
The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission (“SEC”) can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC.
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General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.
2020 Loan Purchase
During2020, First Mid Bank completed an acquisition of loans in the St. Louis metro market totaling $183 million. There were no loans purchased with deteriorated credit.
2021 Loan Purchase
During 2021, First Mid Bank completed an acquisition of loans in the St. Louis Metro market totaling $208 million. There were no loans purchased with deteriorated credit. First Mid Bank also assumed $219 million of related customer deposits and recorded a core deposit intangible asset of approximately $4.9 million that is being amortized on an accelerated basis over ten years.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company uses estimates and employs the judgments of management in determining the amount of its allowance for credit losses and income tax accruals and deferrals, in its fair value measurements of investment securities, and in the evaluation of impairment of loans, goodwill, investment securities, and premises and equipment. As with any estimate, actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses. In connection with the determination of the allowance for credit losses, management obtains independent appraisals for significant properties.
Fair Value Measurements
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 11 – “Disclosures of Fair Values of Financial Instruments.”
Cash and Cash Equivalents
For purposes of reporting cash flows, cash equivalents include non-interest bearing and interest-bearing cash and due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.
Certificates of Deposit Investments
Certificates of deposit investments have original maturities of three to five years and are carried at cost.
Investment Securities
The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale in accordance with ASC 320. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimatedamounts,therebyaffectingthefinancialposition,resultsofoperationsandcashflowsoftheCompany.Iftheestimatedvalueofinvestmentsisless than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effectonthefairvalueoftheinvestment.IfsuchaneventorchangehasoccurredandtheCompanydeterminesthattheimpairmentisother-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 isexpensedintheperiodinwhichtheeventorchangeoccurred.Theremainderoftheimpairmentisrecordedinothercomprehensiveincome.
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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 thepreparationofitsconsolidatedfinancialstatements.Anestimateofpotentiallossesinherentintheloanportfolioisdeterminedandanallowanceforthose losses is established by considering factors including historical loss rates, expected cash flows, and estimated collateral values. In assessing these factors, the Company uses organizational history and experience with credit decisions and related outcomes. The allowance for credit losses represents the best estimate of losses inherent in the existing loan portfolio. The allowance for credit losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The Company evaluates the allowance for credit losses at least quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for credit losses isadjusted.
The Company estimates the appropriate level of allowance for credit losses by separately evaluating impaired and nonimpaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a nonimpaired loan is more subjective. Generally, the allowance assigned to nonimpaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including the volume and severity of identified classified loans, changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for credit losses would be required.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are charged to expense and determined principally by the straight-line method over the estimated useful lives of the assets. The estimated useful lives for each major depreciable classification of premises and equipment are as follows:
Buildings and improvements 20 years to 40 years
Leasehold improvements 5 years to 15 years
Furniture and equipment 3 years to 7 years
Goodwill and Intangible Assets
The Company has goodwill from business combinations, identifiable intangible assets assigned to core deposit relationships and customer lists acquired, and intangible assets arising from the rights to service mortgage loans for others.
Identifiable intangible assets generally arise from branches acquired that the Company accounted for as purchases. Such assets consist of the excess of thepurchasepriceoverthefairvalueofnetassetsacquired,withspecificamountsassignedtocoredepositrelationshipsandcustomerlistsprimarilyrelated to insurance agency. Intangible assets are amortized by the straight-line method over various periods up to fifteen years. Management reviews intangible assetsforpossibleimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverable.
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” codified into ASC 350, the Company obtained an independent evaluation of its goodwill as of June 30, 2020 and also performed its annual testing of goodwill for impairment as of September 30, 2020 and each time determined that, as of that date, goodwill was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets.
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Other Real Estate Owned
Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.
Bank Owned Life Insurance
First Mid Bank has purchased life insurance policies on certain senior management. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts that are probable at settlement.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula.
IncomeTaxes
TheCompanyanditssubsidiariesfileconsolidatedfederalandstateincometaxreturnswitheachorganizationcomputingitstaxesonaseparatecompany basis. Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under taxlaws.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences existing between the financial statement carrying amounts of assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry forwards. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an increase or decrease in income tax expense in the period in which such change is enacted.
Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes,” codified within ASC 740. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater than50%likelytoberecognizedonexamination.Fortaxpositionsnotmeetingthe"morelikelythannot"test,notaxbenefitisrecorded.Asignificantamount 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 taxexpense.
Captive Insurance Company
First Mid Captive, Inc. ("the Captive"), a wholly owned subsidiary of the Company which was formed and began operations in December 2019, is a Nevada- based captive insurance company. The Captive insures against certain risks unique to the operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today's insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,400,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company's consolidated financial statements and its federal income return.
Wealth Management Assets
Assets held in fiduciary or agency capacities by First Mid Wealth Management Company are not included in the consolidated balance sheets since such items are not assets of the Company or its subsidiaries. Fees from trust activities are recorded on a cash basis over the period in which the service is provided. Fees are a function of the market value of assets managed and administered, the volume of transactions, and fees for other services rendered, as set forth in the underlying client agreement with the First Mid Wealth Management Company. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on asset valuations and transaction volumes. Any out-of-pocket expenses or services not typically covered by the fee schedule for trust activities are charged directly to the trust account on a gross basis as trust revenue is incurred. First Mid Wealth Management Company managed assets totaling $5.1 billion and $4.5 billion at December 31, 2021 and 2020, respectively.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
Stock Incentive Awards
AttheAnnualMeetingofStockholdersheldApril26,2017,thestockholdersapprovedthe2017StockIncentivePlan("SIPlan").TheSIPlanwasimplemented 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
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the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selectedemployees,consultantsandadvisorsmaybeprovidedtheopportunitytoacquiresharesofCommonStockoftheCompanyonthetermsandconditions established in the SIPlan.
A maximum of 149,983 shares of common stock may be issued under the SI Plan. The Company awarded 48,575, 25,950 and 26,700 shares during 2021, 2020, and 2019, respectively as stock and stock unit awards.
Employee Stock Purchase Plan
AttheAnnualMeetingofStockholdersheldApril25,2018,thestockholdersapprovedtheFirstMidBancshares,Inc.EmployeeStockPurchasePlan(“ESPP”). The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of theCompanyata5% discountthroughpayrolldeductions.TheESPPisalsointendedtoqualifyasanemployeestockpurchaseplanunderSection423ofthe InternalRevenueCode.Amaximumof600,000sharesofcommonstockmaybeissuedundertheESPP.Asof December 31, 2021, 2020, and 2019, 11,748, 11,037and 8,899 shares, respectivelywereissued pursuant to the ESPP.
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2021 substantially all the Company's leases are operatingleasesforrealestatepropertyforbankbranches,ATM locations,andofficespace.ForleasesineffectJanuary1,2019andforleasescommencing thereafter,theCompanyrecognizesaleaseliabilityandaright-of-useasset,basedonthepresentvalueofleasepaymentsovertheleaseterm.Thediscount rate used in determining present value was the Company's incremental borrowing rate which is the FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the commencement date for leases subsequently enteredinto.
Revenue Recognition
AccountingStandardsCodification606,RevenuefromContractswithCustomers(“ASC606”),establishesarevenuerecognitionmodelforreportinginformation aboutthenature,amount,timinganduncertaintyofrevenueandcashflowsarisingfromtheentity'scontractstoprovidegoodsorservicestocustomers.Most of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans and investment securities, and revenue related to mortgage servicing activities, which are subject to other accounting standards. A description of the revenue- generating activities that are within the scope of ASC 606, and included in other income in the Company’s condensed consolidated statements of income are as follows:
Trust revenues. The Company generates fee income from providing fiduciary services through its trust department. Fees are billed in arrears based upon the preceding period account balance. Revenue from the farm management department is recorded when service is complete, for example when crops are sold.
Brokerage commissions. The primary brokerage revenue is recorded at the beginning of each quarter through billing to customers based on the account asset size on the last day of the previous quarter. If a withdrawal of funds takes place, a prorated refund may occur; this is reflected within the same quarter as the original billing occurred. All performance obligations are met within the same quarter that the revenue is recorded.
Insurance commissions. The Company’s insurance agency subsidiary, First Mid Insurance, receives commissions on premiums of new and renewed business policies. First Mid Insurance records commission revenue on direct bill policies as the cash is received. For agency bill policies, First Mid Insurance retains its commission portion of the customer premium payment and remits the balance to the carrier. In both cases, the entire performance obligation is held by the carriers.
Service charges on deposits. The Company generates revenue from fees charged for deposit account maintenance, overdrafts, wire transfers, and check fees. The revenue related to deposit fees is recognized at the time the performance obligation is satisfied.
ATM/debit card revenue. The Company generates revenue through service charges on the use of its ATM machines and interchange income from the use of Company issued credit and debit cards. The revenue is recognized at the time the service is used and the performance obligation is satisfied.
Other income. Treasury management fees and lock box fees are received and recorded after the service performance obligation is completed. Merchant bank card fees are received from various vendors; however, the performance obligation is with the vendors. The Company records gains on the sale of loans and the sale of OREO properties after the transactions are complete and transfer of ownership has occurred.
As each of the Company’s facilities are located in markets with similar economies, no disaggregation of revenue is necessary.
Adoption of New Accounting Guidance
Accounting Standards Update 2017-04, Intangibles-Goodwill and Other (Topic 350: Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). In January 2017, FASB issued ASU 2017-04. The amendments in this update simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public companies for the reporting periods beginning after December 15, 2019. The current accounting policies and procedures of the Company did not change, except for the elimination of Step 2 analysis.
Accounting Standards Update 2016-02, Leases (Topic 842)("ASU 2016-02"). On February 25, 2016, FASB issued ASU 2016-02 which creates Topic 842, Leases and supersedes Topic 840, Leases. ASU 2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among organizations. Under the new guidance, a lessee is required to record all leases with lease terms of more than 12 months on their balance sheet as lease liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new guidance is effective for public companies for fiscal years
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beginning on or after December 15, 2018, and for private companies for fiscal years beginning on or after December 15, 2019. The Company adopted the guidance effective January 1, 2019 and recorded a right of use asset of $14.1 million and a lease liability of $14.1 million.
Accounting Standards Update 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). In August 2018, FASB issued ASU 2018-13. This ASU eliminates, adds, and modifies certain disclosure requirements for fair value measurements. Among the changes, an entity will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. As ASU 2018-13 only revised disclosure requirements, it did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”). In June 2016, FASB issued ASU 2016-13. The provisions of ASU 2016-13 require an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for- sale debt securities. ASU 2016-13 was effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.