UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
Or
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-13368
FIRST MID BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
1421 Charleston Avenue, Mattoon, Illinois
(Address of principal executive offices)
37-1103704
(I.R.S. employer identification no.)
61938
(Zip code)
(217) 234-7454
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Securities registered pursuant to Section 12(g) of the Act:
Trading Symbol(s)
FMBH
Name of each exchange on which registered
NASDAQ Global Market
NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer”, "smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☒
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.D.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the outstanding common stock, other than shares held by persons who may be deemed affiliates of the Registrant, as of the last business day of the Registrant’s
most recently completed second fiscal quarter was approximately $399,766,582. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this
requirement and the Registrant is not bound by this determination for any other purpose.
As of March 8, 2021, 18,039,242 shares of the Registrant’s common stock, $4.00 par value, were outstanding.
Document
Portions of the Proxy Statement for 2021 Annual Meeting of Shareholders to be held on April 28,2021
Into Form 10-K Part:
III
DOCUMENTS INCORPORATED BY REFERENCE
First Mid Bancshares, Inc.
Form 10-K Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Part II
Item 5
Item 6
Item 7
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A
Item 9B
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibit and Financial Statement Schedules
Form 10-K Summary
Item 16
Exhibit Index
Signatures
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ITEM 1.BUSINESS
Company and Subsidiaries
PART I
First Mid Bancshares, Inc. (the “Company”), formerly known as First Mid-Illinois Bancshares, Inc., is a financial holding company. The Company is engaged in the business of
banking through its wholly owned subsidiaries, First Mid Bank & Trust, N.A. (“First Mid Bank”) and Providence Bank (“Providence Bank”). The Company provides data
processing services to affiliates through another wholly owned subsidiary, Mid-Illinois Data Services, Inc. (“MIDS”). The Company offers insurance products and services to
customers through its wholly owned subsidiary, First Mid Insurance Group, Inc. (“First Mid Insurance”). The Company offers trust, farm services, investment services, and
retirement planning through its wholly owned subsidiary, First Mid Wealth Management Company. The Company also wholly owns a captive insurance company, First Mid
Captive, Inc. In addition, the Company also wholly owns three statutory business trusts, First Mid-Illinois Statutory Trust II (“First Mid Trust II”), Clover Leaf Statutory Trust I
("CLST Trust"), and FBTC Statutory Trust I ("FBTCST I"), all of which are unconsolidated subsidiaries of the Company. Providence Bank was acquired by the Company on
February 22, 2021, and it is anticipated that Providence Bank will be merged with and into First Mid Bank in the second quarter of 2021.
The Company, a Delaware corporation, was incorporated on September 8, 1981, and pursuant to the approval of the Board of Governors of the Federal Reserve System (the
“Federal Reserve Board”) became the holding company owning all of the outstanding stock of First National Bank, Mattoon (“First National”) on June 1, 1982. First National
changed its name to First Mid-Illinois Bank & Trust, N.A. in 1992, and subsequently changed its name to First Mid Bank & Trust, N.A. in 2019. The Company has also acquired
all the outstanding stock of a number of community banks or thrift institutions, and subsequently combined their operations with those of the Company and First Mid Bank.
Human Capital Resources
One of the Company’s strategic priorities is to be an empowering employer. This means striving to be a respected employer with a culture of ownership through engaged and
empowered employees. The Company completes periodic engagement surveys with its employees to ensure employees are engaged and identify and focus on any areas needing
improvement. The Company is committed to provide employees with fair compensation and benefits, which in turn, helps to attract and retain talent. The Company places a
high priority on staff development, which involves extensive training. All new employees go through a new hire orientation where they get acclimated to the Company’s vision,
values and strategic priorities. The Company provides an internal job shadowing program for all employees to better understand other roles within the Company that can
produce advancement opportunities. In addition, the Company provides extensive leadership training to managers administered through a third party. As part of this training,
development action plans are put in place focused on an engaged workforce, specific employee advancements and succession.
None of the employees are covered by a collective bargaining agreement with the Company. The Company offers a variety of employee benefits. During 2020, the Company
made an investment in readjusting job grades and pay ranges to better align positions with current market rates, making them more attractive and competitive. In addition, the
Company enhanced its benefits for paid time off with changes to vacation and sick time schedules.
The Company has a strong outreach program where it partners with diverse job boards and community organizations to assist in connecting to diverse candidates. The Company
diversifies its recruiting efforts through community outreach, job fairs and job boards focused on minorities to be able to reach qualified underrepresented groups. There is a
talent acquisition strategy to promote the employer brand to continue to increase the talent pool and there is respect for the uniqueness of individuals and experience that
diversity provides to the Company. This is demonstrated in the Company’s diversity and inclusion policy which is proudly shared with employees and candidates. Annual
training on diversity and inclusion is also provided to all employees so Company values are clearly demonstrated.
As of December 31, 2020, the Company and its subsidiaries employed 824 people on a full-time equivalent basis. The demographics of the Company’s employee base include
approximately 75% female, 5.3% minority and 1.2% veterans. The Company also tracks and develops strategic initiatives on voluntary turnover for full-time employees. The
annual voluntary turnover for 2020 was 14%.
Business Strategies
Vision Statement. The Company’s vision statement is to be a nimble, independent, community-focused financial organization committed to quality, growth and earned
independence for the benefit of all stakeholders.
Growth Strategy. The Company believes that growth of revenues and its customer base is vital to the goal of increasing the value of its shareholders’ investment. The Company
strives to create shareholder value by maintaining a strong balance sheet and increasing profits.
Management attempts to grow in two primary ways:
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by organic growth through adding new customers and selling more products and services to existing customers; and
by strategic acquisitions.
Virtually all of the Company’s customer-contact personnel, in each of its business lines, are engaged in organic growth efforts to one degree or another. These personnel attempt
to match products and services with the particular financial needs of individual customers and prospective customers. Many senior officers of the organization are required to
attend monthly meetings where they report on their business development efforts and results. Executive management uses these meetings as an educational and risk management
opportunity as well. Cross-selling opportunities are encouraged and measured between the business lines.
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Within the community banking line, the Company has focused on growing business operating and real estate loans. Total commercial real estate loans have increased from $630
million at December 31, 2016 to $1,174 million at December 31, 2020. Of this increase, approximately $156 million was the result of the acquisition of First Clover Leaf in the
third quarter of 2016, $55 million was the result of the acquisition of First Bank during the second quarter of 2018, $50 million was the result of the acquisition of Soy Capital
Bank (“SCB”) during the fourth quarter of 2018 and $95 million was the result of loans acquired from Stifel Bank during the second quarter of 2020. Approximately 65% of the
Company’s total revenues were derived from lending activities in the fiscal year ended December 31, 2020. The Company has also focused on growing its commercial and retail
deposit base through growth in checking, money markets and customer repurchase agreement balances. The wealth management line has focused its growth efforts on estate
planning and investment services for individuals and employee benefit services for businesses as well as, farm management and brokerage services. The insurance brokerage line
has focused on increasing property and casualty, senior insurance products and group medical insurance for businesses and personal lines insurance to individuals.
Growth through acquisitions has been an integral part of the Company’s strategy for an extended period of time. When reviewing acquisition possibilities, the Company focuses
on those organizations where there is a cultural fit with its existing operations and where there is a strong likelihood of building shareholder value.
Customer Strategy. The Company uses its market and customer knowledge to build relationships that provide high-value customer experiences that continually improve
customer satisfaction and loyalty.
Employee Strategy. The Company strives for employee engagement at all levels of the organization. The judgments, experiences and capabilities of these employees are used to
create an environment where meeting the needs of our customer, communities and stockholders is always a priority.
Strategy for Operations & Infrastructure. Operationally, the Company centralizes most administrative and operational tasks within its home office in Mattoon, Illinois. This
allows branches to maintain customer focus, helps assure compliance with banking regulations, keeps fixed administrative costs at as low a level as practicable, and allows for
better management of risk inherent in the business. The Company also utilizes technology where practicable in daily banking activities to reduce the potential for human error.
While the Company does not employ every new technology that is introduced, it attempts to be competitive with other banking organizations with respect to operational and
customer technology.
Shareholder Strategy. The Company strives to provide a competitive dividend as well as the opportunity for stock price appreciation.
Risk Management Strategy. The Company maintains a comprehensive risk management framework. The Company has initiated an Enterprise Risk Management (“ERM”)
process whereby management assesses the relevant risks inherent in the business, determines internal controls and procedures are in place to address the various risks, develops a
structure for monitoring and reporting risk indicators and trends over time, and incorporates action plans to manage risk positions. The ERM process was not undertaken as a
result of any weaknesses or deficiencies identified during the Company’s control assessments but rather is part of the Company’s effort to continually assess and improve by
taking a more holistic approach to risk management. The Company's Chief Risk Management Officer is responsible for facilitating the ERM process. The Company utilizes a
comprehensive set of operational policies and procedures that have been developed over time. These policies are continually reviewed by management, the Chief Risk
Management Officer, and the Board of Directors. The Company’s internal audit function completes procedures to ensure compliance with these policies. While there are several
risks that pertain to the business of banking, three risks that are inherent with most banking companies are credit risk, interest rate risk, and liquidity risk.
In the business of banking, credit risk is an important risk as losses from uncollectible loans can diminish capital, earnings and shareholder value. In order to address this risk, the
lending function of First Mid Bank and Providence Bank receive significant oversight from executive management and the Board of Directors. An important element of credit
risk management is the quality, experience and training of the loan officers. The Company has invested, and will continue to invest, significant resources to ensure the quality,
experience and training of our loan officers in order to keep credit losses at a minimum. In addition to the human element of credit risk management, the Company’s loan
policies address the additional aspects of credit risk. Most lending personnel have signature authority that allows them to lend up to a certain amount based on their own
judgment as to the creditworthiness of a borrower. The amount of the signature authority is based on the lending officers’ experience and training. The Senior Loan Committee,
consisting of the most experienced lenders within the organization, must approve all underwriting decisions in excess of $4 million and up to $15 million. The Board of
Directors must approve all underwriting decisions in excess of $15 million. The legal lending limit for First Mid Bank was $66.9 million at December 31, 2020. While the
underlying nature of lending will result in some amount of loan losses, First Mid's loan loss experience has been good with average net charge offs amounting to $3.2 million
(0.14% of total loans) over the past five years. Nonperforming loans were $28.1 million (0.90% of total loans) at December 31, 2020. These percentages have historically
compared well with peer financial institutions and continue to do so today.
Interest rate and liquidity risk are two other forms of risk embedded in the banking business. The Company’s Asset Liability Management Committee, consisting of experienced
individuals, from various departments, who monitor all aspects of interest rates and maturities of interest earning assets and interest paying liabilities, manages these risks. The
underlying objectives of interest rate and liquidity risk management are to shelter the Company’s net interest margin from changes in interest rates while maintaining adequate
liquidity reserves to meet unanticipated funding demands. The Company uses financial modeling technology as a tool for evaluating these risks. Despite the tools and methods
used to monitor this risk, a sustained unfavorable interest rate environment will lead to some amount of compression in the net interest margin. During 2020, the Company’s net
interest margin on a tax-effected basis decreased to 3.27% from 3.64% in 2019 primarily due to less accretion income and lower interest rates in a more competitive and
challenging interest rate environment.
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Markets and Competition
The Company has active competition in all areas in which First Mid Bank and Providence Bank do business. The bank competes for commercial and individual deposits and
loans with many east central Illinois, Missouri and Texas banks, savings and loan associations, and credit unions. The principal methods of competition in the banking and
financial services industry are quality of services to customers, ease of access to facilities, on-line services and pricing of services, including interest rates paid on deposits,
interest rates charged on loans, and fees charged for fiduciary and other banking services.
During 2020, First Mid Bank operated branches in the Illinois counties of Adams, Champaign, Christian, Clark, Coles, Cumberland, Dewitt, Douglas, Edgar, Effingham,
Jackson, Jefferson, Kankakee, Knox, Lawrence, Macon, Madison, Moultrie, McClean, Peoria, Piatt, Saline, St Clair, Wabash, White and Williamson and in Missouri, St. Louis
county. Each branch primarily serves the community in which it is located. First Mid Bank served forty-one different communities with sixty-two separate locations in Illinois, 1
location in Missouri, and a loan production office in Indiana.
Providence Bank, which was acquired February 22, 2021 currently operates branches in the Illinois county of Saint Clair, the Missouri counties of Boone, Lincoln, Cole,
Camden, Saint Charles and Saint Louis, and the Texas county of Tarrant.
Website
The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and
Exchange Commission (“SEC”) can be accessed, free of charge, through this website and at www.sec.gov as soon as reasonably practicable after these materials are filed with
the SEC.
COVID-19
The COVID-19 outbreak is an unprecedented event that provides significant economic uncertainty for a broad spectrum of industries. The Company is focused on supporting its
customers, communities and employees during this unique operating environment. Throughout this document, we describe the impact COVID-19 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.
Loan Acquisition
On April 21, 2020, First Mid Bank completed an acquisition of loans in the St. Louis metro market totaling $183 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
"Merger").
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $1.00 per share, of LINCO issued and
outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by LINCO) was converted into and became the right to receive, cash or
shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain
potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the Merger was $103.5 million in cash and 1,262,246 shares of the
Company’s common stock, provided that the shareholders of LINCO have collectively elected pursuant to the Merger Agreement to receive varying amounts of cash or shares of
common stock of the Company as consideration in the Merger. In addition, immediately prior to the closing of the proposed merger, LINCO paid a special dividend to its
shareholders in the aggregate amount of $13 million.
The Merger closed on February 22, 2021. It is anticipated that Providence Bank will be merged with and into First Mid Bank in the second quarter of 2021. At the time of the
bank merger, Providence Bank's banking offices will become branches of First Mid Bank.
Subordinated Debt Offering
On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the
“Notes”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National Association, as
trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the Company and the
Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes are unsecured,
subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding October 15, 2025, the Notes will
bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a
floating rate equal to three-month Term SOFR plus a spread of 383 basis points, or such other rate as determined pursuant to the Supplemental Indenture, provided that in no
event shall the applicable floating interest rate be less than zero per annum.
Supervision and Regulation General
Financial institutions, financial services companies, and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal
statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the Office of the
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Comptroller of the Currency (the “OCC”), the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”), the Missouri Division of Finance (“MDOF”),
the Internal Revenue Service and state taxing authorities. Any change in applicable laws, regulations or regulatory policies may have material effects on the business, operations
and prospects of the Company, First Mid Bank and Providence Bank. The Company is unable to predict the nature or extent of the effects that fiscal or monetary policies,
economic controls or new federal or state legislation may have on its business and earnings in the future.
Federal and state laws and regulations generally applicable to financial institutions and financial services companies, such as the Company and its subsidiaries, regulate, among
other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of
branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive
framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance fund and the depositors, rather than the stockholders, of
financial institutions.
The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and do not purport to be complete and are
qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company
and its subsidiaries.
Financial Modernization Legislation
The 1999 Gramm-Leach-Bliley Act (the “GLB Act”) significantly changed financial services regulation by expanding permissible non-banking activities of bank holding
companies and removing certain barriers to affiliations among banks, insurance companies, securities firms and other financial services entities. These activities and affiliations
can be structured through a holding company structure or, in the case of many of the activities, through a financial subsidiary of a bank. The GLB Act also established a system
of federal and state regulation based on functional regulation, meaning that primary regulatory oversight for a particular activity generally resides with the federal or state
regulator having the greatest expertise in the area. Banking is supervised by banking regulators, insurance by state insurance regulators and securities activities by the SEC and
state securities regulators. The GLB Act also requires the disclosure of agreements reached with community groups that relate to the Community Reinvestment Act, and contains
various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry.
The GLB Act repealed the anti-affiliation provisions of the Glass-Steagall Act and revised the Bank Holding Company Act of 1956 (the “BHCA”) to permit qualifying holding
companies, called “financial holding companies,” to engage in, or to affiliate with companies engaged in, a full range of financial activities, including banking, insurance
activities (including insurance portfolio investing), securities activities, merchant banking and additional activities that are “financial in nature,” incidental to financial activities
or, in certain circumstances, complementary to financial activities. A bank holding company’s subsidiary banks must be “well-capitalized” and “well-managed” and have at least
a “satisfactory” Community Reinvestment Act rating for the bank holding company to elect and maintain its status as a financial holding company.
A significant component of the GLB Act’s focus on functional regulation relates to the application of federal securities laws and SEC oversight of some bank securities activities
previously exempt from broker-dealer registration. Among other things, the GLB Act amended the definitions of “broker” and “dealer” under the Securities Exchange Act of
1934, as amended, to remove the blanket exemption for banks. Under the GLB Act, banks may conduct securities activities without broker-dealer registration only if the
activities fall within a set of activity-based exemptions designed to allow banks to conduct only those activities traditionally considered to be primarily banking or trust activities.
Securities activities outside these exemptions, as a practical matter, need to be conducted by a registered broker-dealer affiliate. The GLB Act also amended the Investment
Advisers Act of 1940 to require the registration of banks that act as investment advisers for mutual funds. The Company believes that it has taken the necessary actions to
comply with these requirements of the GLB Act and the regulations adopted under them.
Anti-Terrorism Legislation
The USA PATRIOT Act of 2001 included the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “IMLAFA”). The IMLAFA contains
anti-money laundering measures affecting insured depository institutions, broker-dealers, and certain other financial institutions. The IMLAFA requires U.S. financial
institutions to adopt policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose
requirements and restrictions on financial institutions’ operations. The Company has established policies and procedures for compliance with the IMLAFA and the related
regulations. The Company has designated an officer solely responsible for ensuring compliance with existing regulations and monitoring changes to the regulations as they
occur.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law on July 21, 2010. Generally, the Act is effective the day
after it was signed into law, but different effective dates apply to specific sections of the law. The Act, among other things:
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Resulted in the Federal Reserve issuing rules limiting debit-card interchange fees.
After a three-year phase-in period which began January 1, 2013, existing trust preferred securities for holding companies with consolidated assets greater than $15
billion and all new issuances of trust preferred securities are removed as a permitted component of a holding company’s Tier 1 capital. Trust preferred securities
outstanding as of May 19, 2010 that were issued by bank holding companies with total consolidated assets of less than $15 billion, such as the Company, will
continue to count as Tier 1 capital.
Provides for new disclosure and other requirements relating to executive compensation and corporate governance.
Changes standards for Federal preemption of state laws related to federally chartered institutions and their subsidiaries.
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Provides mortgage reform provisions including (i) a customer’s ability to repay, (ii) restricting variable-rate lending by requiring the ability to repay to be determined
for variable-rate loans by requiring lenders to evaluate using the maximum rate that will apply during the first five years of a variable-rate loan term, and (iii) making
more loans subject to provisions for higher cost loans and new disclosures.
Creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management
and other requirements as companies grow in size and complexity.
Permanently increases the deposit insurance coverage to $250 thousand and allows depository institutions to pay interest on checking accounts.
Requires publicly-traded bank holding companies with assets of $10 billion or more to establish a risk committee responsible for enterprise-wide risk management
practices.
Limits and regulates, under the provisions of the Act know as the Volker Rule, a financial institution's ability to engage in proprietary trading or to own or invest in
certain private equity and hedge funds.
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Basel III
In September 2010, the Basel Committee on Banking Supervision proposed higher global minimum capital standards, including a minimum Tier 1 common capital ratio and
additional capital and liquidity requirements. On July 2, 2013, the Federal Reserve Board approved a final rule to implement these reforms and changes required by the Dodd-
Frank Act. This final rule was subsequently adopted by the OCC and the FDIC.
The final rule included new risk-based capital and leverage ratios, which were phased in from 2015 to 2019, and refined the definition of what constitutes “capital” for purposes
of calculating those ratios. The new minimum capital level requirements applicable to the Company and First Mid Bank beginning in 2015 were: (i) a new common equity Tier 1
capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The rule also established a “capital conservation
buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and will result in the following minimum
ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement
was phased in beginning in January 2016 at 0.625% of risk weighted assets and increased by that amount each year until fully implemented in January 2019. An institution is
subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount.
The final rule also made three changes to the proposed rule of June 2012 that impacted the Company. First, the proposed rule required banking organizations to include
accumulated other comprehensive income (“AOCI”) in common equity tier 1 capital. AOCI includes accumulated unrealized gains and losses on certain assets and liabilities that
have not been included in net income. Under existing general risk-based capital rules, most components of AOCI are not included in a banking organization's regulatory capital
calculations. The final rule allowed community banking organizations to make a one-time election not to include these additional components of AOCI in regulatory capital and
instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The Company made this election.
Second, the proposed rule modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage
exposure into two categories in order to determine the applicable risk weight. The final rule, however, retained the existing treatment for residential mortgage exposures under
the general risk-based capital rules.
Third, the proposed rule required banking organizations with total consolidated assets of less than $15 billion as of December 31, 2009, such as the Company, to phase out over
ten years any trust preferred securities and cumulative perpetual preferred securities from its Tier 1 capital regulatory capital. The final rule, however, permanently grandfathered
into Tier 1 capital of depository institution holding companies with total consolidated assets of less than $15 billion as of December 31, 2009, any trust preferred securities or
cumulative perpetual preferred stock issued before May 19, 2010.
The Company
General. As a registered financial holding company under the BHCA that has elected to become a financial holding company under the GLB Act, the Company is subject to
regulation by the Federal Reserve Board. In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to First Mid Bank
and to commit resources to support First Mid Bank in circumstances where the Company might not do so absent such policy. The Company is subject to inspection, examination,
and supervision by the Federal Reserve Board.
Activities. As a financial holding company, the Company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or
incidental or complementary to activities that are financial in nature. A bank holding company that is not also a financial holding company is limited to engaging in banking and
such other activities as determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
No Federal Reserve Board approval is required for the Company to acquire a company (other than a bank holding company, bank, or savings association) engaged in activities
that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. However, the Company generally must give the
Federal Reserve Board after-the-fact notice of these activities. Prior Federal Reserve Board approval is required before the Company may acquire beneficial ownership or control
of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank, or savings association.
7
If any subsidiary bank of the Company ceases to be “well-capitalized” or “well-managed” under applicable regulatory standards, the Federal Reserve Board may, among other
actions, order the Company to divest its depository institution. Alternatively, the Company may elect to conform its activities to those permissible for a bank holding company
that is not also a financial holding company.
If any subsidiary bank of the Company receives a rating under the Community Reinvestment Act of less than “satisfactory”, the Company will be prohibited, until the rating is
raised to “satisfactory” or better, from engaging in new activities or acquiring companies other than bank holding companies, banks, or savings associations.
Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve Board capital adequacy guidelines. The
Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies for 2019, which include the full phase
in of the capital conservation buffer: a total capital to total risk-based capital ratio of not less than 10.50%, a Tier 1 risk-based ratio of not less than 8.50%, a common equity Tier
1 capital ratio of not less than 7.00%, and a Tier 1 leverage ratio of not less than 4.00%. For purposes of these capital standards, Tier 1 capital consists primarily of permanent
stockholders’ equity, less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships), and total capital means Tier 1 capital plus
certain other debt and equity instruments which do not qualify as Tier 1 capital, limited amounts of unrealized gains on equity securities and a portion of the Company’s
allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk
profiles of individual banking organizations. For example, the Federal Reserve Board’s capital guidelines contemplate that additional capital may be required to take adequate
account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all
intangible assets), well above the minimum levels.
As of December 31, 2020, the Company had regulatory capital, calculated on a consolidated basis, in excess of the Federal Reserve Board’s minimum requirements, and its
capital ratios exceeded those required for categorization as well-capitalized under the capital adequacy guidelines established by bank regulatory agencies with a total risk-based
capital ratio of 18.82%, a Tier 1 risk-based ratio of 14.63%, a common equity Tier 1 capital ratio of 14.03% and a leverage ratio of 10.22%.
Control Acquisitions. The Change in Bank Control Act prohibits a person or group of person from acquiring “control” of a bank holding company unless the Federal Reserve
Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a
class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, such as the Company,
would, under the circumstances set forth in the presumption, constitute acquisition of control of the Company. In addition, any company is required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding common of the
Company, or otherwise obtaining control of a “controlling influence” over the Company or First Mid Bank.
Interstate Banking and Branching. The Dodd-Frank Act expands the authority of banks to engage in interstate branching. The Dodd-Frank Act allows a state or national bank
to open a de novo branch in another state if the law of the state where the branch is to be located would permit a state bank chartered by that state to open the branch.
Privacy and Security. The GLB Act establishes a minimum federal standard of financial privacy by, among other provisions, requiring banks to adopt and disclose privacy
policies with respect to consumer information and setting forth certain rules with respect to the disclosure to third parties of consumer information. The Company has adopted
and disseminated its privacy policies pursuant to the GLB Act. Regulations adopted under the GLB Act set standards for protecting the security, confidentiality and integrity of
customer information, and require notice to regulators, and in some cases, to customers, in the event of security breaches. A number of states have adopted their own statutes
requiring notification of security breaches. In addition, the GLB Act requires the disclosure of agreements reached with community groups that relate to the CRA, and contains
various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry.
First Mid Bank and Providence Bank
General. First Mid Bank is a national bank, chartered under the National Bank Act. Providence Bank is a Missouri chartered depository trust company.The FDIC insures the
deposit accounts of the Banks. The Banks are members of the Federal Reserve System and are subject to the examination, supervision, reporting and enforcement requirements
of the OCC, as the primary federal regulator of national banks, the MDOF, as the primary regulator of Missouri chartered banks, and the FDIC, as administrator of the deposit
insurance fund.
Deposit Insurance. As an FDIC-insured institution, banks are required to pay deposit insurance premium assessments to the FDIC. A number of requirements with respect to the
FDIC insurance system have affected results, including insurance assessment rates.
On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent. Because the reserve ratio exceeded 1.35 percent, two deposit insurance assessment
changes occurred under the FDIC regulations:
•
•
Surcharges on large banks (total consolidated assets of $10 billion or more) ended; the last surcharge on large banks was collected on December 28, 2018.
Small banks (total consolidated assets of less than $10 billion) were awarded assessment credits for the portion of their assessments that contributed to the growth in
the reserve ratio from 1.15 percent to 1.35 percent, to be applied when the reserve ratio is at least 1.38 percent.
On August 20, 2019, the FDIC Board approved a Notice of Proposed Rulemaking which amended the Small Bank Credits regulation to permit credit usage when the reserve
ratio is at least 1.35 percent (rather than 1.38%). Additionally, after eight quarters of credit usage, the FDIC would remit the remaining full nominal value to each bank. Eligible
banks were notified in January 24, 2019 with a preliminary estimate of their share of small bank assessment credits. First Mid Bank’s Small Bank Credit was $931,853.
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The Deposit Insurance Fund Reserve Ratio as of June 30, 2019 was 1.40 percent and therefore, Small Bank Assessment Credits were applied to second quarter assessment
invoices (paid in September 2019). As a result, First Mid Bank received a credit of $256,944. The Deposit Insurance Fund Reserve Ratio as of September 30, 2019 was 1.41
percent and therefore, Small Bank Assessment Credits were also applied to third quarter assessment invoices (paid in December 2019). As a result, First Mid Bank received a
credit of $254,705. These amounts were reversed from previously accrued expense. First Mid Bank had a remaining Small Bank Assessment Credit of $420,204 as of December
31, 2019. This remainder was applied to the fourth quarter assessment (paid in March 2020).
The Company expensed $1,309,000, $206,000 and $967,000 for its insurance assessment during 2020, 2019 and 2018 respectively. In addition to its insurance assessment,
through March 29, 2019, each insured bank was subject to quarterly debt service assessments in connection with bonds issued by a government corporation that financed the
federal savings and loan bailout. The Company expensed $12,000 and $92,000 for this assessment during 2019 and 2018, respectively.
OCC Assessments. All national banks are required to pay supervisory fees to the OCC to fund the operations of the OCC. The amount of such supervisory fees is based upon
each institution’s total assets, including consolidated subsidiaries, as reported to the OCC. During the year ended December 31, 2020, 2019, and 2018 the Company expensed
supervisory fees totaling $572,000, $620,000, and $596,000, respectively. Changes in total expense are due to changes in assessment rates and increases in total assets of the
bank.
Capital Requirements. The banking regulators has established the following minimum capital standards for banks as of 2019, which include the full phase in of the capital
conservation buffer in a total capital to total risk-based capital ratio of not less than 10.50%, a Tier 1 risk-based ratio of not less than 8.50%, a common equity Tier 1 capital ratio
of not less than 7.00%, and a Tier 1 leverage ratio of not less than 4.00%. For purposes of these capital standards, Tier 1 capital and total capital consists of substantially the
same components as Tier 1 capital and total capital under the Federal Reserve Board’s capital guidelines for bank holding companies (See “The Company—Capital
Requirements”).
The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of
individual institutions. For example, the banking regulators provide that additional capital may be required to take adequate account of, among other things, interest rate risk or
the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
During the year ended December 31, 2020, First Mid Bank was not required to increase capital to an amount in excess of the minimum regulatory requirements, and capital
ratios exceeded those required for categorization as well-capitalized under the capital adequacy guidelines established by bank regulatory agencies. First Mid Bank's total risk-
based capital ratio was 14.30%, Tier 1 risk-based ratio was 13.12%, common equity Tier 1 ratio was 13.12% and leverage ratio was 9.18%.
Prompt Corrective Action. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators’ powers depends on whether the institution in question is “well-capitalized,” “adequately- capitalized,” “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.” Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers
include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital
stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new
election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent
banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and in the most severe cases, appointing a
conservator or receiver for the institution.
Dividends. The National Bank Act impose limitations on the amount of dividends that may be paid by a bank. Generally, a bank may pay dividends out of its undivided profits,
in such amounts and at such times as the bank’s board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar
year which, in the aggregate, exceed the bank’s year-to-date net income plus the bank’s adjusted retained net income for the two preceding years.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.
As described above, First Mid Bank exceeded minimum capital requirements under applicable guidelines as of December 31, 2020. As of December 31, 2020, approximately
$46.2 million was available to be paid as dividends to the Company by First Mid Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit
the payment of any dividends if the OCC, as applicable, determines that such payment would constitute an unsafe or unsound practice.
Affiliate and Insider Transactions. First Mid Bank and Providence Bank are subject to certain restrictions under federal law, including Regulation W of the Federal Reserve
Board, on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the
stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by First
Mid Bank or Providence Bank to their directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to
“related interests” of such directors, officers and principal stockholders.
First Mid Bank and Providence Bank are is subject to restrictions under federal law that limits certain transactions with the Company, including loans, other extensions of credit,
investments or asset purchases. Such transactions by a banking subsidiary with any one affiliate are limited in amount to 10% of the bank’s capital and surplus and, with all
affiliates together, to an aggregate of 20% of the bank’s capital and surplus. Furthermore, such loans and extensions of credit, as well as certain other transactions, are required to
be secured in specified amounts. These and certain other transactions, including any payment of money to the Company, must be on terms and conditions that are or in good
faith would be offered to nonaffiliated companies.
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In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal
stockholder of the Company may obtain credit from banks with which First Mid Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness
of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.
If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for
achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one
or more of the guidelines are of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a
plan that has been accepted by the appropriate federal regulator, would constitute grounds for further enforcement action.
Community Reinvestment Act. First Mid Bank and Providence Bank are subject to the Community Reinvestment Act (CRA). The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their service areas, including low and moderate income neighborhoods, consistent with the safe and sound
operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to
establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA
performance record of its bank subsidiaries is reviewed by federal banking agencies in connection with the filing of an application to acquire ownership or control of shares or
assets of a bank or thrift or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. First Mid Bank and
Providence Bank received satisfactory CRA ratings from their regulator in their most recent CRA examination.
Consumer Laws and Regulations. In addition to the laws and regulations discussed above, First Mid Bank and Providence Bank are also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in
Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act and
the Real Estate Settlement Procedures Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits, making loans to or marketing to or engaging in other types of transactions with such customers. Failure to comply
with these laws and regulations could lead to substantial penalties, operating restrictions and reputational damage to the financial institution.
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Supplemental Item – Executive Officers of the Registrant
The executive officers of the Company are elected annually by the Company’s Board of Directors and are identified below.
Name (Age)
Joseph R. Dively (61)
Michael L. Taylor (52)
Matthew K. Smith (46)
Eric S. McRae (55)
Bradley L. Beesley (49)
Laurel G. Allenbaugh (60)
Clay M. Dean (46)
Amanda D. Lewis (41)
David Hiden (58)
Christopher L. Slabach (58)
Rhonda Gatons (49)
Jason Crowder (50)
Position With Company
Chairman of the Board of Directors, President and Chief Executive Officer
Senior Executive Vice President and Chief Operating Officer
Executive Vice President and Chief Financial Officer
Executive Vice President
Executive Vice President
Executive Vice President
Executive Vice President
Executive Vice President
Senior Vice President
Senior Vice President
Senior Vice President
Senior Vice President
Joseph R. Dively, age 61, is the Chairman of the Board of Directors, President and Chief Executive Officer of the Company since January 1, 2014 and the President of First Mid
Bank since May 2011. Prior to assuming these positions in the Company, he was the Senior Executive Vice President of the Company beginning in May 2011. He was with
Consolidated Communications Holdings, Inc. in Mattoon, Illinois from 2003 to May 2011.
Michael L. Taylor, age 52, has been Senior Executive Vice President since 2014 and Chief Operating Officer since July 2017. He served as Chief Financial Officer of the
Company from 2000 to 2017. He served as Executive Vice President from 2007 to 2014 and as Vice President from 2000 to 2007. He was with AMCORE Bank in Rockford,
Illinois from 1996 to 2000.
Matthew K. Smith, age 46, has been Executive Vice President of the Company since November 2016 and Chief Financial Officer since July 2017. He served as Director of
Finance from November 2016 to July 2017. He was Treasurer and Vice President of Finance and Investor Relations with Consolidated Communications, Inc from 1997 to 2016.
Eric S. McRae, age 55, has been Executive Vice President of the Company and Executive Vice President, Chief Credit Officer of First Mid Bank since January 2017. He served
as Senior Lender of First Mid Bank from December 2008 to December 2016 and he served as President of the Decatur region from 2001 to December 2008.
Bradley L. Beesley, age 49, has been Executive Vice President of the Company and Chief Trust & Wealth Management Officer of First Mid Bank since March 2015 and First
Mid Wealth Management Company since July 2018. He served as Senior Vice President from May 2007 to March 2015.
Laurel G. Allenbaugh, age 60, has been Executive Vice President of the Company and Executive Vice President, Chief Operations Officer of First Mid Bank since April 2008.
She served as Vice President of Operations from February 2000 to April 2008. She served as Controller of the Company and First Mid Bank from 1990 to February 2000 and
has been President of MIDS since 1998.
Clay M. Dean, age 46, has been Executive Vice President of the Company since January 2019 and Senior Vice President of the Company since 2010 and Senior Vice President
and Chief Insurance Services Officer of the First Mid Bank and Chief Executive Officer of First Mid Insurance since September 2014. He served as Senior Vice President, Chief
Deposit Services Officer of First Mid Bank from November 2012 to September 2014 and as Senior Vice President, Director of Treasury Management of First Mid Bank from
2010 to 2012.
Amanda D. Lewis, age 41, has been Executive Vice President of the Company since January 2019 and Senior Vice President of the Company and Senior Vice President, Retail
Banking Officer of First Mid Bank since September 2014. She served as Vice President, Director of Marketing from 2001 until September 2014.
David Hiden, age 58, has been Senior Vice President, Chief Information Officer of the Company since July 2018.
Christopher L. Slabach, age 58, has been Senior Vice President of the Company since 2007 and Senior Vice President, Chief Risk Officer of First Mid Bank since 2008. He
served as Vice President, Audit of the Company from 1998 to 2007.
Rhonda Gatons, age 49, has been Senior Vice President of the Company and Director of Human Resources since March 2016. Prior to joining the Company, she was the
Director of Human Resources at Midland States Bank.
Jason Crowder, age 50. has been Senior Vice President and General Counsel of the Company since August 2019. Prior to joining the Company, he was the Corporate Counsel of
Petersen Health Care, Inc., from 2008 to July 2019.
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ITEM 1A.RISK FACTORS
Various risks and uncertainties, some of which are difficult to predict and beyond the Company’s control, could negatively impact the Company. As a financial institution, the
Company is exposed to credit risk, interest rate and liquidity risk, operational risk, risks from economic and market conditions, and general business risks among others. Adverse
experience with these or other risks could have a material impact on the Company’s financial condition and results of operations, as well as the value of its common stock.
Credit Risks
Loan customers or other counter-parties 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 $2.1 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, 2020. A listing of these industries is contained
in under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Loans” herein. A significant change in one of these industries such
as a significant decline in agricultural crop prices, could adversely impact the Company’s credit losses.
Deterioration in the real estate market could lead to losses, which could have a material adverse effect on the business, financial condition and results of operations or the
Company. Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured
by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced
to a great extent by conditions in the market or the economy. Increases in commercial and consumer delinquency levels or declines in real estate market values would require
increased net charge-offs and increases in the allowance for loan and lease losses, which could have a material adverse effect on our business, financial condition and results of
operations and prospects.
The allowance for credit losses may prove inadequate or be negatively affected by credit risk exposures. The Company’s business depends on the creditworthiness of its
customers. Management periodically reviews the allowance for loan and lease losses for adequacy considering economic conditions and trends, collateral values and credit
quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. There is no certainty that the allowance for credit losses will be
adequate over time to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific
customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially,
or if the allowance for credit losses is not adequate, the Company’s business, financial condition, liquidity, capital, and results of operations could be materially adversely
affected.
Interest Rate and Liquidity Risks
Changes in interest rates may negatively affect our earnings. Changes in market interest rates and prices may adversely affect the Company’s financial condition or results of
operations. The Company’s net interest income, its largest source of revenue, is highly dependent on achieving a positive spread between the interest earned on loans and
investments and the interest paid on deposits and borrowings. Changes in interest rates could negatively impact the Company’s ability to attract deposits, make loans, and
achieve a positive spread resulting in compression of the net interest margin.
Declines in the value of securities held in the investment portfolio may negatively affect the Company’s earnings and capital. The value of an investment in the portfolio
could decrease due to changes in market factors. The market value of certain investment securities is volatile and future declines or other-than-temporary impairments could
materially adversely affect the Company’s future earnings and capital. Continued volatility in the market value of certain of the investment securities, whether caused by changes
in market perceptions of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value
of the securities. This could have a material adverse impact on the Company’s accumulated other comprehensive loss and shareholders’ equity depending upon the direction of
the fluctuations.
Furthermore, future downgrades or defaults in these securities could result in future classifications as other-than-temporarily impaired. The Company has invested in trust
preferred securities issued by financial institutions and insurance companies, corporate securities of financial institutions, and stock in the Federal Home Loan Bank of Chicago
and Federal Reserve Bank of Chicago. Deterioration of the financial stability of the underlying financial institutions for these investments could result in other-than-temporary
impairment charges to the Company and could have a material impact on future earnings. For further discussion of the Company’s investments, see Note 4 – “Investment
Securities.”
The Company may not have sufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals,
funding operating costs and for other corporate purposes. This type of liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities
differ. The Company’s liquidity can be affected by a variety of factors, including general economic conditions, market disruption, operational problems affecting third parties or
the Company, unfavorable pricing, competition, the Company’s credit rating and regulatory restrictions. (See “Liquidity” herein for management’s actions to mitigate this risk.)
If the Company were unable to borrow funds through access to capital markets, it may not be able to meet the cash flow requirements of its depositors, creditors, and
borrowers, or the operating cash needed to fund corporate expansion and other corporate activities. As seen starting in the middle of 2007, significant turmoil and volatility in
worldwide financial markets can result in a disruption in the liquidity of financial markets and could directly impact the Company to the extent it needs to access capital markets
to raise funds to support its business and overall liquidity position. These types of situations could affect the cost of such funds or the Company’s ability to raise such funds. If
the Company were unable to access any of these funding sources when needed, it might be unable to meet customers’ needs, which could adversely impact its financial
condition, results of operations, cash flows, and level of regulatory-qualifying capital. For further discussion, see the “Liquidity” section.
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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, 2020, management will evaluate the goodwill balances for impairment, and if the values of the businesses
have declined, the Company could recognize an impairment charge for its goodwill. Management obtained an independent goodwill valuation as of June 30, 2020 and
performed its annual goodwill impairment assessment as of September 30, 2020. Based on these analyses, management concluded that the fair value of the Company’s reporting
units exceeded the fair value of its assets and liabilities and, therefore, goodwill was not considered impaired. It is possible that management’s assumptions and conclusions
regarding the valuation of the Company’s lines of business could change adversely, which could result in the recognition of impairment for goodwill, which could have a
material effect on the Company’s financial position and future results of operations.
Human error, inadequate or failed internal processes and systems, and external events may have adverse effects on the Company. Operational risk includes compliance or
legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards. Operational risk also
encompasses transaction risk, which includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Losses resulting from
operational risk could take the form of explicit charges, increased operational costs, harm to the Company’s reputation or forgone opportunities. Any of these could potentially
have a material adverse effect on the Company’s reputation, financial condition and results of operations.
The Company is exposed to various business risks that could have a negative effect on the financial performance of the Company. These risks include: changes in customer
behavior, changes in competition, new litigation or changes to existing litigation, claims and assessments, environmental liabilities, real or threatened acts of war or terrorist
activity, adverse weather, changes in accounting standards, legislative or regulatory changes, taxing authority interpretations, and an inability on the Company’s part to retain
and attract skilled employees.
In addition to these risks identified by the Company, investments in the Company’s common stock involve risk. The market price of the Company’s common stock may
fluctuate significantly in response to a number of factors including: volatility of stock market prices and volumes, rumors or erroneous information, changes in market valuations
of similar companies, changes in securities analysts’ estimates of financial performance, and variations in quarterly or annual operating results.
Economic and Market Conditions Risks
Difficult economic conditions and market disruption have adversely impacted the banking industry and financial markets generally and may again significantly affect the
business, financial condition, or results of operations of the Company. The Company’s success depends, to a certain extent, upon economic and political conditions, local and
national, as well as governmental monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, money supply and other factors beyond the
Company’s control may adversely affect its asset quality, deposit levels and loan demand and, therefore, its earnings.
The Company’s profitability depends significantly on economic conditions in the geographic region in which it operates. A large percentage of the Company’s loans are to
individuals and businesses in Illinois, consequently, any decline in the economy of this market area could have a materially adverse effect on the Company’s financial condition
and results of operations.
Decline in the strength and stability of other financial institutions may adversely affect the Company’s business. The actions and commercial soundness of other financial
institutions could affect the Company’s ability to engage in routine funding transactions. Financial services institutions are interrelated as a result of clearing, counterparty or
other relationships. The Company has exposure to different counterparties and executes transactions with various counterparties in the financial industry. Recent defaults by
financial services institutions, and even rumors or questions about one or more financial services institutions or the financial services industry in general, led to market-wide
liquidity problems in recent years and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in
the event of default of its counterparty or client. Any such losses could materially and adversely affect the Company’s results of operations.
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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 a an adverse effect on the Company's operations,
results of operations and financial condition, and the severity of these adverse effects depend on future developments which are highly uncertain and difficult to predict. The
global health concerns related to COVID-19 and government actions implemented to reduce the spread of the virus have had an adverse impact on the macroeconomic
environment. COVID-19 has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous
measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. These
measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to
mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there is no assurance that these steps will be effective or
achieve the desired positive economic results in a timely fashion. COVID-19 has impacted, and is likely to further adversely impact, the workforce and operations of the
Company, and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to various operational factors impacting us
or our borrowers, customers or business partners, including but not limited to:
•
•
•
•
•
credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the
hospitality, energy, retail and restaurant industries, but across other industries as well;
declines in collateral values;
third party disruptions, including outages at network providers and other suppliers;
increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
These factors may remain prevalent for a significant period and may continue to adversely affect the Company, results of operations and financial condition even after the
COVID-19 outbreak has subsided. The extent to which the coronavirus outbreak impacts the Company’s operations, results of operations and financial condition will depend on
future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to
contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided,
we may continue to experience adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our
liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as
a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. The full extent of the impacts on the Company’s
operations or the global economy as a whole is not yet known. However, the effects could have a material impact on the Company’s results of operations and heighten other of
our known risks.
The Company may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing stockholders. To maintain
capital at desired or regulatory-required levels, to replace existing capital, or to complete acquisitions the Company may be required to issue additional shares of common stock,
or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. The Company may sell these shares at prices below the current market
price of shares, and the sale of these shares may significantly dilute stockholder ownership. The Company could also issue additional shares in connection with acquisitions of
other financial institutions.
If the Company is unable to make favorable acquisitions or successfully integrate our acquisitions, the Company’s growth could be impacted. In the past several years, the
Company has completed acquisitions of banks, bank branches and other businesses. We may continue to make such acquisitions in the future. When the Company evaluates
acquisition opportunities, the Company evaluates whether the target institution has a culture similar to the Company, experienced management and the potential to improve the
financial performance of the Company. If the Company fails to successfully identify, complete and integrate favorable acquisitions, the Company could experience slower
growth. Acquiring other banks, bank branches or businesses involves various risks commonly associated with acquisitions, including, among other things: potential exposure to
unknown or contingent liabilities or asset quality issues of the target institution, difficulty and expense of integrating the operations and personnel of the target institution,
potential disruption to the Company (including diversion of management’s time and attention), difficulty in estimating the value of the target institution, and potential changes in
banking or tax laws or regulations that may affect the target institution.
The Company and the banking industry are subject to government regulation, legislation and policy. Government regulation, legislation and policy affect the Company and
the banking industry as a whole, including the Company’s business and results of operations. The Company’s results of operations could be adversely affected by changes in
how existing regulations are interpreted or applied by government agencies, or by the adoption of new government regulation, legislation and policy. These changes may require
the Company to invest significant funds and management attention and resources in order to reach compliance.
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, and 1420 Wabash 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.
14
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, MIDS for its data processing and by First Mid Bank for back room operations. First Mid Bank also conducts business
through numerous facilities, owned and leased, located in twenty-six counties throughout Illinois and one Missouri county. Of the sixty-three other banking offices operated by
First Mid Bank, forty-three are owned and eighteen are leased from non-affiliated third parties. First Mid Bank also has a loan production office in metro Indianapolis.
Providence Bank conducts business through various facilities, owned and leased, located in six counties throughout Missouri, one Illinois county and one Texas county. Of the
fourteen banking offices operated by Providence Bank, twelve are owned and two are leased from third parties. Providence also has loan production offices in Missouri, Texas
and Indiana.
None of the properties owned by the Corporation 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, 2019 was $58.2 million.
ITEM 3.LEGAL PROCEEDINGS
From time to time the Company and its subsidiaries may be involved in litigation that the Company believes is a type common to our industry. None of any such existing claims
are believed to be individually material at this time to the Company, although the outcome of any such existing claims cannot be predicted with certainty.
ITEM 4.MINE SAFETY DISCLOSURES
Not Applicable.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER OF PURCHASES OF EQUITY
SECURITIES
The Company’s common stock was held by approximately 953 shareholders of record as of December 31, 2020 and 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 payment of dividends semi-annually during 2020. 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 2020:
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
(d) Approximate
Dollar Value
of Shares
that May
Yet Be
Purchased
Under the
Plans or
Programs at
End of Period
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
per Share
— $
—
6,288
6,288 $
—
—
33.92
33.92
— $
—
6,288
6,288 $
4,945,000
5,108,000
4,732,000
4,732,000
Period
October 1, 2020 – October 31, 2020
November 1, 2020 – November 30, 2020
December 1, 2020 – December 31, 2020
Total
All of the repurchase activity that occurred during the fourth quarter of 2020 resulted from shares withheld to cover taxes on employee stock vesting. There were no other shares
repurchased during 2020. 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.
16
ITEM 6.SELECTED FINANCIAL DATA
The following sets forth a five-year comparison of selected financial data (dollars in thousands, except per share data).
2020
2019
2018
2017
2016
Summary of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Other income
Other expense
Income before income taxes
Income tax expense
Net income
Dividends on preferred shares
Net income available to common stockholders
Per Common Share Data
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Book value per common share
Tangible Book Value per common share
Capital Ratios
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Common equity tier 1 ratio
Tier 1 capital to average assets
Financial Ratios
Net interest margin (TE)
Return on average assets
Return on average common equity
Dividend on common shares payout ratio
Average equity to average assets
Allowance for credit losses as a percent of total loans
Year End Balances
Total assets
Net loans, including loans held for sale
Total deposits
Total equity
Average Balances
Total assets
Net loans, including loans held for sale
Total deposits
Total equity
$
$
$
$
$
$
$
$
144,141
16,729
127,412
16,103
59,520
111,087
59,742
14,472
45,270
—
45,270
2.71
2.70
0.81
33.94
26.29
18.82%
14.63%
14.03%
10.22%
3.27%
1.05%
8.24%
29.89%
12.76%
1.34%
$
$
4,726,348
3,096,509
3,692,784
568,228
4,301,960
3,009,471
3,335,809
549,127
17
$
$
$
149,721
24,047
125,674
6,433
56,017
111,992
63,266
15,323
47,943
—
47,943
2.88
2.87
0.76
31.58
23.59
15.74%
14.79%
14.12%
11.20%
3.64%
1.25%
9.49%
26.39%
13.17%
1.00%
$
$
$
124,565
12,827
111,738
8,667
35,414
89,980
48,505
11,905
36,600
—
36,600
2.53
2.52
0.70
28.57
20.22
13.63%
12.76%
11.81%
11.15%
3.79%
1.13%
9.59%
27.67%
11.77%
0.99%
$
$
$
99,555
6,482
93,073
7,462
30,336
74,221
41,726
15,042
26,684
—
26,684
2.13
2.13
0.66
24.32
18.73
12.70%
11.83%
10.78%
9.91%
3.70%
0.94%
8.92%
30.99%
10.59%
1.03%
75,496
4,292
71,204
2,826
26,912
61,510
33,780
11,940
21,840
825
21,015
2.07
2.05
0.62
22.51
16.84
12.79%
11.99%
10.86%
9.19%
3.39%
0.94%
9.30%
29.95%
10.12%
0.92%
$
$
3,839,426
2,668,436
2,917,366
526,609
3,837,357
2,571,722
2,979,838
505,279
$
$
3,839,734
2,618,330
2,988,686
475,864
3,241,574
2,253,469
2,569,033
381,646
$
$
2,841,539
1,919,524
2,274,639
307,964
2,825,702
1,818,317
2,273,949
299,389
2,884,535
1,809,239
2,329,887
280,673
2,333,866
1,439,192
1,893,203
236,254
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its
subsidiaries years ended December 31, 2020, 2019 and 2018. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes
and selected financial data appearing elsewhere in this report.
Forward-Looking Statements
This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business
results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1955. Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are identified by use of the words “believe,” ”expect,” ”intend,” ”anticipate,” ”estimate,” ”project,” or similar
expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties,
including those described in Item 1A. “Risk Factors” and other sections of the Company’s Annual Report on Form 10-K and the Company’s other filings with the SEC, and
changes in interest rates, general economic conditions and those in the Company’s market area, legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios and the valuation of the
investment portfolio, the Company’s success in raising capital, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market
area and accounting principles, policies and guidelines. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal
securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new
information, future events or otherwise.
COVID-19 Impact
The COVID-19 outbreak is an unprecedented event that provides significant economic uncertainty for a broad spectrum of industries. The spread of this outbreak has caused
significant disruptions in the U.S. economy and some of these impacts will be long lasting. As it continues to evolve it is not clear when or how the pandemic-driven contraction
will recover. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief
and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe
economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Many of the
CARES Act provisions, as well as other recent legislative and regulatory efforts, are expected to have a material impact on financial institutions. The Company's strong track
record and revenue diversification provide a solid foundation for earnings and capital. The Company is focused on supporting its customers, communities and employees during
this unique operating environment. Following is a description of the impact COVID-19 is having, actions taken as a result of COVID-19, and certain risks to the Company that
COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation.
Lending operations and accommodations to customers. Beginning in March 2020, First Mid Bank offered a 90-day commercial deferral program, primarily to hotel and
restaurant borrowers. Subsequently, additional deferrals were offered on an individual case basis and a broader program was offered to residential and consumer customers. As
of December 31, 2020, a total of $57.4 million was deferred through these programs. In accordance with interagency guidance issued in March 2020, these short-term deferrals
are not considered troubled debt restructurings.
Beginning April 3, 2020, with the passage of the initial Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company actively
participated in assisting existing and new customers with applications for resources through the program. The initial PPP loans had a two-year term, while those originated after
June 5, 2020 had a five-year term. All PPP loans earned interest at 1%. As of December 31, 2020, the Company has approved and outstanding with the SBA 1,846 PPP loans
totaling $168.3 million. The Company believes that most of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Under the program,
the SBA will forgive all or a portion of the loan if, during a certain period, loans are used for qualifying expenses. If all or a portion of the loan is not forgiven, the borrower is
responsible for repayment.
Employees. The Company has a business continuity plan in place that was executed in March 2020. Approximately half of the Company's workforce have the ability to work
remotely with secure connections. In addition, various preventative and personal hygiene measures, in accordance with CDC guidelines have been implemented. To protect and
ensure the safety of employees, as well as customers, all branch locations were transitioned to drive-thru use only. Most branch lobbies were re-opened in mid-June and then
transitioned back to drive-thru in November 2020 as COVID-19 case were rising. The Company increased the number of available sick days to every employee impacted in
anyway by COVID-19 and offered financial assistance for any employee with need.
Asset impairment. The Company does not believe that any impairment exists due to COVID-19 to goodwill and other intangible assets, long-lived assets, mortgage servicing
rights ("MSRs"), right of use assets, or available-for-sale investment securities at this time. While certain valuation assumptions and judgements will change to account for
COVID-19 related circumstances, the Company does not expect significant changes in methodology used to determine the fair value of assets in accordance with GAAP. It is
uncertain whether 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, 2020, were $32.9 million. Current capital levels also support the Company's recent loan stress testing of the most vulnerable industry sectors impacted by COVID-
19. The Company maintains access to multiple sources of liquidity. As of December 31, 2020, the Company's total liquidity sources could provide $1.7 billion of total available
capacity.
Management's outlook. The Company's current financial position is strong and the fundamental earning capabilities of its currently existing operations is solid. Due to the
uncertain economic outlook related to the COVID-19 crisis and the potential for loan losses and other asset impairments, it is anticipated that reserve levels will remain elevated
compared to recent historical trends. All processes, procedures and internal controls are expected to continue as outlined in existing applicable policies despite remote working
status of many employees. While the Company does not currently anticipate any material changes or deficiencies to its capital or liquidity sources, uncertainties about duration and
overall effects on the economy could result in more adverse effects than expected.
18
For the Years Ended December 31, 2020, 2019 and 2018 Overview
This overview of management’s discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For
a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, 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 $45.3 million, $47.9 million, and $36.6 million and diluted earnings per share were $2.70, $2.87, and $2.52 for the years ended December 31, 2020, 2019 and
2018, respectively. The following table shows the Company’s annualized performance ratios for the years ended December 31, 2020, 2019 and 2018:
Return on average assets
Return on average common equity
Average common equity to average assets
2020
2019
2018
1.05%
8.24%
12.76%
1.25%
9.49%
13.17%
1.13%
9.59%
11.77%
Total assets at December 31, 2020, 2019 and 2018 were $4.73 billion, $3.84 billion, and $3.84 billion, respectively. Net loan balances increased to $3.10 billion at December 31,
2020, from $2.67 billion at December 31, 2019, from $2.62 billion at December 31, 2018. Of the increase in 2020, approximately $183 million was loans purchased from Stifel
Bank and $168 million was PPP loans. The increase in 2019 was primarily due to increases in commercial real estate and construction and land development.
Total deposit balances increased to $3.69 billion at December 31, 2020 from $2.92 billion at December 31, 2019 and increased from $2.99 billion at December 31, 2018. 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. The decrease in 2019 was primarily due to decreases in money market accounts and interest-bearing deposits.
Net interest margin (tax effected), defined as net interest income divided by average interest-earning assets, was 3.27% for 2020, 3.64% for 2019 and 3.79% for 2018. In 2020
the decrease was primarily due to less accretion income and a decline in interest rates. In 2019 the decrease was primarily due to less accretion income and higher funding costs.
Net interest income increased to $127.4 million in 2020 from $125.7 million in 2019 and $111.7 million in 2018. During 2020, the increase in net interest income was primarily
due to growth in earning assets offset by a decline in interest rates. During 2019, the increase in net interest income was primarily due to growth in earning assets as a result of
loans and investment securities acquired from First Bank & SCB partially offset by an increase in cost of deposits and borrowings.
Non-interest income increased to $59.5 million in 2020 compared to $56.0 million in 2019 and $35.4 million in 2018. The increase in 2020 was primarily due to increases in
wealth management revenues, insurance commissions and mortgage banking income. The increase in 2019 was due to the addition of First Bank during the second quarter of
2018 and the addition of SCB during the fourth quarter of 2018.
Non-interest expenses decreased $905,000, to $111.1 million in 2020 compared to $112.0 million in 2019, and $90.0 million in 2018. 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. The increase in 2019 was primarily due to the acquisitions of First Bank and SCB.
Following is a summary of the factors that contributed to the changes in net income (in thousands):
Net interest income
Provision for loan losses
Other income, including securities transactions
Other expenses
Income taxes
Increase in net income
2020 vs 2019
2019 vs 2018
1,738 $
(9,670)
3,503
905
851
(2,673) $
13,936
2,234
20,603
(22,012)
(3,418)
11,343
$
$
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $28.1 million at December 31, 2020 compared to $27.8 million at December
31, 2019, and $29.7 million at December 31, 2018. Repossessed Assets balances totaled $2.5 million at December 31, 2020 compared to $3.7 million at December 31, 2019, and
$2.6 million at December 31, 2018. The Company’s provision for loan losses was $16.1 million for 2020, compared to $6.4 million for 2019, and $8.7 million for 2018. The
increase in provision in 2020 was due to the adoption of ASU 2016-13 and impacts of COVID-19 on the operations and earnings of borrowers. The decrease of provision
expense in 2019 is primarily due to a decrease in classified loans.
The Company’s capital position remains strong and the Company has consistently maintained regulatory capital ratios above the “well-capitalized” standards. The Company’s
Tier 1 capital ratio to risk weighted assets ratio at December 31, 2020, 2019 and 2018 was 14.63%, 14.79%, and 12.76%, respectively. The Company’s total capital to risk
weighted assets ratio at December 31, 2020, 2019 and 2018 was 18.82%, 15.74% and 13.63%, respectively. The increases in these ratios in 2020 were primarily due to
subordinated debt that qualified as Tier 2 capital and net income added to retained earnings. The increases in these ratios in 2019 were primarily due to net income added to
retained earnings.
The Company’s liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company maintains various
sources of liquidity to fund its cash needs. See “Liquidity” herein for a full listing of its sources and anticipated significant contractual obligations.
19
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, 2020, 2019 and 2018 were
$615.5 million, $585.3 million, and $564.1 million, respectively. See Note 17 – “Commitments and Contingent Liabilities” herein for further information.
Critical Accounting Policies and Use of Significant Estimates
The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Company’s
financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements. Certain accounting policies
involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such
accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these
judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
Investment in Debt and Equity Securities. The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale. Securities classified as held-
to-maturity are recorded at amortized cost. Available-for-sale and equity securities are carried at fair value. Fair value calculations are based on quoted market prices when such
prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices
of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation
process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and
cash flows of the Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has
occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment
is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit
loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income.
Allowance for Credit Losses - Held-to-Maturity Securities. Currently all the Company's held-to-maturity securities are government agency-backed securities for which the risk
of loss is minimal. Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities.
Loans. Loans are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase discounts and premiums, fair value hedge accounting
adjustments and deferred loan fees and costs. Accrued interest is reported separately and is included in interest receivable in the consolidated balance sheets.
Allowance for Credit Losses - Loans. The Company believes the allowance for credit losses for loans is the critical accounting policy that requires the most significant
judgments and assumptions used in the preparation of its consolidated financial statements. The allowance for credit losses for loans represents the best estimate of losses
inherent in the existing loan portfolio. An estimate of potential losses inherent in the loan portfolio are determined and an allowance for those losses is established by considering
factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, the Company uses relevant available information, from
internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.
The allowance for credit losses is measured on a collective (pool) basis for non-impaired loans with similar risk characteristics. Historical credit loss experience provides the
basis for the estimate of expected credit losses. Adjustments to historical loss information are made for relevant factors to each pool including merger & acquisition activity,
economic conditions, changes in policies, procedures & underwriting, and concentrations. The Company estimates the appropriate level of allowance for credit losses for
impaired loans by evaluating them separately. A specific allowance is assigned to an impaired loan when expected cash flows or collateral are less than the carrying amount of
the loan.
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period that the Company is exposed to
credit risk via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet
credit exposures is included in other liabilities in the consolidated balance sheets.
Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost
basis. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is
acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines
subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as
noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.
Mortgage Servicing Rights. The Company has elected to measure mortgage servicing rights under the amortization method. Using this method, servicing rights are amortized in
proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Impairment is
determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a
valuation reserve, to the extent that fair value is less than the carrying amount of servicing assets. Fair value in excess of the carrying amount of servicing assets is not
recognized.
Deferred Income Tax Assets/Liabilities. The Company’s net deferred income tax asset arises from differences in the dates that items of income and expense enter into our
reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are
reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the
20
reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If the Company were to experience net operating losses
for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.
Additionally, the Company reviews its uncertain tax positions annually. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax
position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than
50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount of judgment is applied
to determine both whether the tax position meets the "more likely than not" test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be
recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which
could adversely affect future income tax expense.
Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the Company’s balance
sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible
assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposit intangible
assets were tested for impairment during 2019 as part of the goodwill impairment test and no impairment was deemed necessary.
As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the balance sheets. Goodwill is evaluated for impairment
annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually.
Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial
instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other
observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do
not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model
assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss
recorded.
ASC 820 establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a
three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as
follows:
•
•
•
Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are
not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — inputs that are unobservable and significant to the fair value measurement.
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within
hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon
the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 11 –
“Disclosures of Fair Values of Financial Instruments.”
21
Results of Operations
Net Interest Income
The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning
assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning
assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of
interest-bearing liabilities and the rates paid to attract and retain such funds.
Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is presented
on a full tax equivalent (TE) basis in the table that follows. The federal statutory rate in effect of 21% was used for all years. The TE analysis portrays the income tax benefits
associated with the tax-exempt assets. The year-to-date net yield on interest-earning assets excluding the TE adjustments of $2,223,000, $2,152,000, and $2,025,000 for 2020,
2019, and 2018, respectively, were 3.20%, 3.58%, and 3.71% at December 31, 2020, 2019 and 2018, 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
December 31, 2020
Year Ended
December 31, 2019
Year Ended
December 31, 2018
Average
Balance
Average
Interest
Rate
Average
Balance
Average
Interest
Rate
Average
Balance
Average
Interest
Rate
$ 140,470 $
1,149
3,771
274
3
84
0.19% $
0.24%
2.23%
66,085 $
805
6,236
1,702
14
137
2.58% $
1.80%
2.20%
27,911 $
615
3,013
482
8
66
ASSETS
Interest-bearing deposits
Federal funds sold
Certificates of deposit investments
Investment securities
Taxable
Tax-exempt (Municipals)(TE)(1)
Loans (TE)(1)(2)(3)
Total earning assets
Cash and due from banks
Premises and equipment
Other assets
Allowance for credit losses
Total assets
545,525
200,128
11,376
7,075
3,046,814 127,552
3,937,857 146,364
87,194
59,068
255,184
(37,343)
$ 4,301,960
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits, interest-bearing
Savings deposits
Time deposits
$ 1,557,264
469,276
531,834
2,558,374
Total Interest-bearing deposits
Securities sold under agreements
to repurchase
FHLB advances
Federal funds purchased
Subordinated debt
Junior subordinated debentures
Other debt
Total borrowings
Total interest-bearing liabilities
Demand deposits
Other liabilities
Stockholders’ equity
Total liabilities & stockholders' equity
219,298
106,688
525
22,403
18,936
656
368,506
2,926,880
777,435
48,518
549,127
$ 4,301,960
3,732
426
8,593
12,751
488
1,851
10
931
682
16
3,978
16,729
15,662
6,811
127,547
151,873
6,483
590
11,866
18,939
911
2,706
15
1,476
—
—
5,108
24,047
616,234
2.09%
3.54%
185,472
4.19% 2,598,718
3.72% 3,473,550
82,197
59,590
249,016
(26,996)
$ 3,837,357
0.24% $ 1,303,814
437,549
0.09%
1.62%
630,369
0.50% 2,371,732
169,437
0.22%
109,630
1.73%
616
1.90%
26,649
4.16%
—
3.60%
1,825
2%
1.08%
308,157
0.57% 2,679,889
608,106
44,083
505,279
$ 3,837,357
13,070
6,540
106,424
126,590
3,293
579
4,699
8,571
330
2,071
97
1,409
—
349
4,256
12,827
514,220
2.54%
3.67%
173,151
4.91% 2,276,500
4.37% 2,995,410
48,948
45,780
174,467
(23,031)
$ 3,241,574
0.50% $ 1,194,089
395,028
0.13%
1.88%
473,043
0.80% 2,062,160
140,622
0.54%
97,701
2.47%
3,794
2.40%
27,391
5.54%
—
—
10,103
—%
1.67%
279,611
0.90% 2,341,771
506,873
11,284
381,646
$ 3,241,574
Net interest income
$ 129,635
$ 127,826
$ 113,763
Net interest spread
Impact of non-interest-bearing funds
TE net yield on interest-earning assets
3.15%
0.12%
3.27%
3.47%
0.17%
3.64%
(1) Tax-exempt income is shown on a fully tax equivalent basis.
(2) Nonaccrual loans have been included in the average balances. Balances are net of unaccreted discount related to loans acquired.
(3)
Includes loans held for sale
22
1.73%
1.32%
2.18%
2.54%
3.78%
4.67%
4.24%
0.28%
0.15%
0.99%
0.42%
0.23%
2.12%
2.55%
5.14%
—
3.45%
1.52%
0.55%
3.69%
0.10%
3.79%
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):
Earning Assets:
Interest-bearing deposits
Federal funds sold
Certificates of deposit investments
Investment securities:
Taxable
Tax-exempt
Loans (2)
Total interest income
Interest-Bearing Liabilities:
Deposits:
Demand deposits, interest-bearing
Savings deposits
Time deposits
Total interest-bearing deposits
Securities sold under agreements
to repurchase
FHLB advances
Federal funds purchased
Subordinated debt
Junior subordinated debentures
Other debt
Total borrowings
Total interest expense
Net interest income
2020 Compared to 2019
Increase (Decrease)
2019 Compared to 2018
Increase (Decrease)
Total
Change
Volume (1)
Rate (1)
Total
Change
Volume (1)
Rate (1)
$
(1,428) $
(11)
(53)
949 $
4
(55)
(2,377) $
(15)
2
1,220 $
6
71
898 $
3
70
(4,286)
264
5
(5,509)
(2,751)
(164)
(3,273)
(6,188)
(423)
(855)
(5)
931
(794)
16
(1,130)
(7,318)
1,809 $
(1,685)
524
20,226
19,963
1,096
35
(1,736)
(605)
219
(71)
(2)
931
(359)
—
718
113
19,850 $
(2,601)
(260)
(20,221)
(25,472)
(3,847)
(199)
(1,537)
(5,583)
(642)
(784)
(3)
—
(435)
16
(1,848)
(7,431)
(18,041) $
2,592
271
21,123
25,283
3,190
11
7,167
10,368
581
635
(82)
67
—
(349)
852
11,220
14,063 $
2,592
456
15,496
19,515
249
76
1,467
1,792
46
159
(92)
(51)
—
(157)
(95)
1,697
17,818 $
$
322
3
1
—
(185)
5,627
5,768
2,941
(65)
5,700
8,576
535
476
10
118
—
(192)
947
9,523
(3,755)
(1) Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate.
(2) Nonaccrual loans have been included in the average balances. Balances are net of unaccreted discount related to loans acquired.
Net interest income on a tax-effected basis increased $1.8 million or 1.4% in 2020 compared to an increase of $14.1 million or 12.4% in 2019. 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 loans and investments and less accretion income from acquisitions.
In 2020, average earning assets increased by $464.3 million, or 13.4%, and average interest-bearing liabilities increased by $247 million or 9.2%. In 2019, average earning assets
increased by $478.1 million or 16.0% and average interest-bearing liabilities increased $338.1 million or 14.4% compared with 2018. Changes in average balances are shown
below:
•
•
•
•
•
•
Average interest-bearing deposits held by the Company increased $74.4 million or 112.6% in 2020 compared to 2019. In 2019, average interest-bearing deposits held
by the Company increased $38.2 million or 136.8% compared to 2018.
Average federal funds sold increased $0.3 million or 42.7% in 2020 compared to 2019. In 2019, average federal funds sold increased $0.2 million or 30.9%
compared to 2018.
Average certificates of deposit investments decreased $2.5 million or 39.5% in 2020 compared to 2020. In 2019, average certificates of deposit investments increased
$3.2 million or 107% compared to 2018.
Average loans increased by $448.1 million or 17.2% in 2020 compared to 2019. In 2019, average loans increased by $322.2 million or 14.2% compared to 2018.
Average securities decreased by $56.1 million or 7% in 2020 compared to 2019. In 2019, average securities increased by $114.3 million or 16.6% compared to 2018.
Average interest-bearing deposit liabilities increased by $186.6 million or 7.9% in 2020 compared to 2019. In 2019, average deposits increased by $309.6 million or
15% compared to 2018.
23
•
•
•
Average securities sold under agreements to repurchase increased by $49.9 million or 29.4% in 2020 compared to 2019. In 2019, average securities sold under
agreements to repurchase increased by $28.8 million or 20.5% compared to 2018.
Average borrowings and other debt increased by $10.5 million or 7.6% in 2020 compared to 2019. In 2019, average borrowings and other debt decreased by $.3
million or 0.2% compared to 2018.
Net interest margin decreased to 3.27% compared to 3.64% in 2019 and 3.79% in 2018. Asset yields decreased by 65 basis points in 2020, and interest- bearing
liabilities decreased by 33 basis points.
Provision for Loan Losses
The provision for loan losses in 2020 was $16,103,000 compared to $6,433,000 in 2019 and $8,667,000 in 2018. Nonperforming loans increased to $28,123,000 at December
31, 2020 from $27,818,000 at December 31, 2019 and $29,749,000 at December 31, 2018. 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. The decrease in provision expense in 2019 was primarily due to the
decrease in nonperforming loans. Net charge-offs were $2,776,000 during 2020, $5,711,000 during 2019 and $2,455,000 during 2018. 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):
Wealth management revenues
Insurance commissions
Service charges
Securities gains
Mortgage banking
ATM / debit card revenue
Bank Owned Life Insurance
Other
Total other income
Change From Prior Year
2020
2019
2020
2019
2018
$
%
$
%
$
$
16,153 $
17,477
5,862
1,106
5,075
8,962
1,730
3,155
59,520 $
15,570 $
16,029
7,837
802
1,746
8,491
1,755
3,787
56,017 $
8,460 $
5,592
7,435
901
1,205
7,487
1,389
2,945
35,414 $
583
1,448
(1,975)
304
3,329
471
(25)
(632)
3,503
3.7% $
9.0%
-25.2%
37.9%
190.7%
5.5%
-1.4%
-16.7%
6.3% $
7,110
10,437
402
(99)
541
1,004
366
842
20,603
84.0%
186.6%
5.4%
-11.0%
44.9%
13.4%
26.3%
28.6%
58.2%
Total non-interest income increased to $59.5 million in 2020 compared to $56.0 million in 2019 and $35.4 million in 2018. The primary reasons for the more significant year-to-
year changes in other income components are as follows:
•
•
•
•
•
Wealth management revenues increased in 2020 due to an increase in farm real estate brokerage fees and investment brokerage commissions offset by declines in
market-based fees and farm management income. The increase in 2019 was due to increases in market value and revenue from defined contribution and other
retirement accounts, an increase in revenue from brokerage accounts from new business development efforts and farm management and brokerage services and
additional trust accounts added with the acquisition of Soy Capital. Total assets under management were $4.5 billion at December 31, 2020 compared to $4.3 billion
at December 31, 2019 and $3.9 billion at December 31, 2018.
Insurance commissions increased in 2020 primarily due to increases in contract bond revenue and contingency income. During 2019, the growth was primarily due to
an increase in insurance activities and revenues following the acquisition of SCB.
Fees from service charges decreased in 2020 due to a decline in overdraft fees primarily resulting from increased assistance related to COVID-19 such as stimulus
payments and increased unemployment benefits and less spending during the shelter-in-place period. The increase in 2019 was primarily due to additional income
from SCB transactions offset by a decrease in service charges based on the number of transactions.
Net securities gains in 2020 were $1,106,000 compared to $802,000 in 2019 and $901,000 in 2018. Sale of securities in 2020 resulted in greater net securities gains
compared to the same period last year due to an increase in called securities resulting from the decline in interest rates during the first quarter of 2020.
The increase in mortgage banking income during 2020 was due to an increase in mortgage refinancing activity and fees from loans sold in the secondary market.
Loans sold balances were as follows:
•
•
•
$196 million (representing 1,315 loans) in 2020
$101 million (representing 741 loans) in 2019
$62 million (representing 489 loans) in 2018
First Mid Bank generally releases the servicing rights on loans sold into the secondary market.
24
•
•
•
Revenue from ATMs and debit cards increased in 2020 and 2019 primarily due to an increase in electronic transactions.
Bank owned life insurance decreased during 2020 due to a slight decline in the change in cash surrender value compared to the same period last year. The increase
during 2019 was primarily due to $13.6 million in bank owned life insurance acquired in the SCB acquisition.
Other income decreased during 2020 compared to 2019 primarily due to an increase in waived fees and decreases in fees charged, and activity from First Mid
Captive that did not occur in the same period last year, offset by fee income received from derivative transactions. The increase in 2019 is primarily due to increases
in miscellaneous fees and revenues from the SCB and First Bank acquisitions.
Other Expense
The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day
operations. The following table sets forth the major components of other expense for the last three years (in thousands):
Salaries and benefits
Occupancy and equipment
Other real estate owned, net
FDIC insurance assessment expense
Amortization of other intangibles
Stationery and supplies
Legal and professional
Marketing and promotion
ATM / debit card expense
Other operating expenses
Total other expense
Change From Prior Year
2020
2019
2020
2019
2018
$
66,452 $
16,708
42
1,309
5,062
1,080
5,427
1,616
2,290
11,101
62,578 $
17,680
443
219
5,848
1,104
5,164
2,031
3,488
13,437
$ 111,087 $ 111,992 $
46,803 $
14,533
282
1,059
3,215
963
5,243
1,794
2,971
13,117
89,980 $
$
3,874
(972)
(401)
1,090
(786)
(24)
263
(415)
(1,198)
(2,336)
(905)
%
6.2% $
-5.5%
-90.5%
497.7%
-13.4%
-2.2%
5.1%
-20.4%
-34.3%
-17.4%
-0.8% $
$
15,775
3,147
161
(840)
2,633
141
(79)
237
517
320
22,012
%
33.7%
21.7%
57.1%
-79.3%
81.9%
14.6%
-1.5%
13.2%
17.4%
2.4%
24.5%
Total non-interest expense decreased to $111.1 million in 2020 from $112 million in 2019 and increased from $90 million in 2018. The primary reasons for the more significant
year-to-year changes in other expense components are as follows:
•
•
•
•
•
•
•
•
Salaries and employee benefits, the largest component of other expense, increased primarily due to an increase in incentive compensation and commissions, group
insurance expense, share-based compensation expense and increases for merit raises and applicable payroll taxes. The increase in 2019 is primarily due to additional
employees from the First Bank and SCB acquisitions for all of 2019 and merit increases in 2019 for continuing employees during the first quarter of 2019. There
were 824 full-time equivalent employees at December 31, 2020, compared to 827 at December 31, 2019, and 818 at December 31, 2018.
Occupancy and equipment expense decreased due to a decline in expenses for software and uncapitalized equipment. The increase in 2019 was primarily due to
increases in maintenance and repair expenses, rent expense, and building insurance related to the acquisition of First Bank and SCB.
Net other real estate owned expense decreased primarily due to more gains on properties sold during 2020 than properties sold during 2019 and a decrease in property
maintenance expense due to less properties currently owned. The increase in 2019 was primarily due to more losses on properties sold during 2019 than during 2018.
FDIC insurance expense increased due to less small business assessment credit applied during 2020 and an increase in assessment rates. The decrease in 2019 is
primarily due to small business assessment credits received for the June and September FDIC insurance assessments. These amounts were reversed from previously
accrued expense.
Amortization of other intangibles expense decreased during 2020 due to less amortization for core deposit intangibles. The increase in 2019 was due to amortization
of additional core deposit intangibles from the First Bank and SCB acquisitions, customer list intangibles from the SCB.
ATM and debit card expenses decreased primarily due to growth incentives received that reduced expense. The increase in 2019 was primarily due to an increase in
electronic transactions following the First Bank and SCB acquisitions that occurred in the second and fourth quarter of 2018.
Other operating expenses decreased during 2020 due to decreases in loan collection expense, business entertainment and seminar expenses and acquisition costs
offset by increases in data processing costs. The increase in 2019 is primarily due to an increase in loan collection expenses and costs associated with the merger of
SCB into First Mid Bank.
On a net basis, all other categories of operating expenses decreased during 2020 due to declines in marketing and promotion expenses offset by an increase in legal
and professional fees. The increase in 2019 was primarily due to an increase in legal and professional fees primarily associated with the acquisitions of First Bank
and SCB.
25
Income Taxes
Income tax expense amounted to $14,472,000 in 2020 compared to $15,323,000 in 2019, and $11,905,000 in 2018. Effective tax rates were 24.2% for 2020, 24.2% for 2019, and
24.5% for 2018. The Company files U.S. federal and state of Illinois, Indiana, and Missouri income tax returns. The Company is no longer subject to U.S. federal or state income
tax examinations by tax authorities for years before 2017.
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):
2020
Weighted
Average
Yield
Amortized
Cost
December 31,
2019
Weighted
Average
Yield
Amortized
Cost
2018
Weighted
Average
Yield
Amortized
Cost
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Other securities
Total securities
$
$
132,083
237,886
479,470
10,740
860,179
1.25% $
2.72%
1.92%
5.22%
2.08% $
175,970
172,460
391,307
4,028
743,765
2.39% $
2.98%
2.79%
3.44%
2.83% $
270,816
193,195
304,372
2,278
770,661
2.38%
2.94%
2.86%
3.58%
2.72%
At December 31, 2020, the amortized cost of the Company’s investment portfolio increased by $116.4 million from December 31, 2019. 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.
26
The table below presents the credit ratings as of December 31, 2020 for certain investment securities (in thousands):
Amortized
Cost
Estimated
Fair Value
Average Credit Rating of Fair Value at December 31, 2020 (1)
Not
AAA
AA +/-
A +/-
BBB +/-
< BBB -
Rated
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies
Obligations of state and political subdivisions
Mortgage-backed securities (2)
Other securities
Total available-for-sale
$
$
127,067
237,886
479,470
10,740
855,163
$
$
127,069
249,844
491,348
10,979
879,240
$
$
29,684 $
30,096
1,081
—
60,861 $
97,139 $
169,212
—
—
266,351 $
— $
49,194
—
—
49,194 $
— $
—
—
—
— $
245
— $
—
1,342
— 490,267
— 10,979
— $ 502,833
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies
Equity securities:
Federal Agricultural Mtg Corp
$
$
5,016
$
5,119
$
— $
5,119 $
— $
— $
— $
—
84
$
218
$
— $
— $
— $
— $
— $
218
(1) Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.
(2) Mortgage-backed securities include mortgage-backed securities (MBS) and collateralized mortgage obligation (CMO) issues from the following government
sponsored enterprises: FHLMC, FNMA, GNMA and FHLB. While MBS and CMOs are no longer explicitly rated by credit rating agencies, the industry
recognizes that they are backed by agencies which have an implied government guarantee.
Loans
The loan portfolio (net of unearned interest) is the largest category of the Company’s earning assets. The following table summarizes the composition of the loan portfolio,
including loans held for sale, for the last five years (in thousands):
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
2020
122,479
254,341
325,762
189,632
1,174,300
2,066,514
137,352
738,313
78,002
118,238
3,138,419
$
$
%
Outstanding
Loans
2019
2018
2017
2016
3.9% $
8.1%
10.4%
6.0%
37.4%
65.8%
4.4%
23.5%
2.5%
3.8%
100.0% $
94,142 $
240,241
336,427
153,948
995,702
1,820,460
136,124
528,973
83,183
126,607
2,695,347 $
50,619 $
231,700
373,518
184,051
906,850
1,746,738
135,877
557,011
91,516
113,377
2,644,519 $
107,594 $
127,183
293,667
61,798
681,757
1,271,999
86,631
444,263
29,749
106,859
1,939,501 $
49,104
126,108
326,415
83,200
630,135
1,214,962
86,685
409,033
38,028
77,284
1,825,992
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. Loan balances increased by $50.8 million or 1.9% from December 31, 2018 to December 31, 2019 primarily due to increases in
balances of commercial real estate and construction and land development. The balances of loans sold into the secondary market were $196.4 million in 2020 compared to
$101.4 million in 2019. The balance of real estate loans held for sale, included in the balances shown above, amounted to $1,924,000 and $1,820,000 as of December 31, 2020
and 2019, 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.
27
The following table summarizes the loan portfolio geographically by branch region as of December 31, 2020 and 2019 (dollars in thousands):
Central region
Sullivan region
Decatur region
Peoria region
St. Louis metro region
Southern region
Total all regions
December 31, 2020
December 31, 2019
Principal
balance
% Outstanding
Loans
Principal
balance
% Outstanding
Loans
$
$
604,343
367,040
713,964
498,688
820,246
134,138
3,138,419
19.3% $
11.7%
22.7%
15.9%
26.1%
4.3%
100.0% $
568,256
404,169
602,716
443,526
547,156
129,524
2,695,347
21.1%
15.0%
22.3%
16.5%
20.3%
4.8%
100.0%
Loans are geographically dispersed among these regions located in central and southwestern Illinois. While these regions have experienced some economic stress during 2020
and 2019, the Company does not consider these locations high risk areas since these regions have not experienced the significant volatility in real estate values seen in some
other areas in the United States.
The Company does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage
of total risk-based capital for the periods shown above. At December 31, 2020 and 2019, the Company did have industry loan concentrations in excess of 25% of total risk-based
capital in the following industries (dollars in thousands):
Other grain farming
Lessors of non-residential buildings
Lessors of residential buildings & dwellings
Other gambling industries
Hotels and motels
Nursing care facilities (skilled nursing)
December 31, 2020
December 31, 2019
Principal
balance
% Outstanding
Loans
Principal
balance
% Outstanding
Loans
$
308,202
420,175
313,268
119,549
124,755
114,937
9.82% $
13.39%
9.98%
3.81%
3.98%
3.66%
301,469
300,611
284,378
90,429
120,735
92,452
11.18%
11.15%
10.55%
3.36%
4.48%
3.43%
The concentration of nursing care facilities (skilled nursing) industries was less than 25% of total risk-based capital as of December 31, 2019 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, 2020, by contractual maturities (in thousands):
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
(1) Based upon remaining contractual maturity.
(2)
Includes demand loans, past due loans and overdrafts.
One year
or less(2)
Over 1 through
5 years
Over
5 years
Total
Maturity (1)
$
$
30,920 $
22,023
24,147
22,908
102,567
202,565
102,033
191,668
4,992
12,934
514,192 $
62,377 $
85,638
55,957
81,697
462,975
748,644
31,470
460,574
56,790
29,364
1,326,842 $
29,182 $
146,680
245,658
85,027
608,758
1,115,305
3,849
86,071
16,220
75,940
1,297,385 $
122,479
254,341
325,762
189,632
1,174,300
2,066,514
137,352
738,313
78,002
118,238
3,138,419
As of December 31, 2020, loans with maturities over one year consisted of approximately $2.1 billion in fixed rate loans and approximately $502.2 million in variable rate loans.
The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding renewals and borrower requests,
which are handled on a case-by-case basis.
28
Nonperforming Loans and Nonperforming Other Assets
Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments;
and (c) loans not included in (a) and (b) above which are defined as “troubled debt restructurings”. Repossessed assets include primarily repossessed real estate and automobiles.
The Company’s policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due. The accrual of interest is discontinued
earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but
uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded
only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower
indicates there is no longer any reasonable doubt as to the timely collection of interest or principal.
Troubled debt restructurings are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or
either principal or interest has been forgiven. Repossessed assets represent property acquired as the result of borrower defaults on loans. These assets are recorded at estimated
fair value, less estimated selling costs, at the time of foreclosure or repossession. Write-downs occurring at foreclosure are charged against the allowance for credit losses. On an
ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs for subsequent declines in value are recorded in non-interest
expense in other real estate owned along with other expenses related to maintaining the properties.
The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets (in thousands):
2020
2019
December 31,
2018
2017
2016
$
23,750
$
25,118
$
27,298
$
16,659
$
12,053
Nonaccrual loans
Troubled debt restructurings which are performing in accordance with
revised terms
Total nonperforming loans
Repossessed assets
Total nonperforming loans and repossessed assets
4,373
28,123
2,493
30,616
$
2,700
27,818
3,720
31,538
$
2,451
29,749
2,595
32,344
$
854
17,513
2,834
20,347
$
$
Nonperforming loans to loans, before allowance for credit losses
0.90%
1.03%
1.12%
0.90%
Nonperforming loans and repossessed assets to loans, before allowance
for credit losses
0.98%
1.17%
1.22%
1.05%
6,185
18,238
1,985
20,223
1.00%
1.11%
The $1.4 million decrease in nonaccrual loans during 2020 resulted from the net of $10.8 million of loans put on nonaccrual status, offset by $0.6 million of loans transferred to
other real estate owned, $2.3 million of loans charged off and $9.2 million of loans becoming current or paid-off. The amounts above do not include loans formerly identified as
TDRs by SCB.
The following table summarizes the composition of nonaccrual loans (in thousands):
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All Other loans
Total loans
December 31, 2020
December 31, 2019
Balance
% of Total
Balance
% of Total
$
$
162
359
6,930
2,181
8,760
18,392
659
4,372
327
—
23,750
0.7% $
1.5%
29.2%
9.2%
36.9%
77.4%
2.8%
18.4%
1.4%
—%
100.0% $
41
479
7,379
3,137
4,351
15,387
769
8,441
521
—
25,118
0.2%
1.9%
29.3%
12.5%
17.3%
61.2%
3.1%
33.6%
2.1%
—%
100.0%
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $575,000, $906,000 and $1,189,000 for the years ended
December 31, 2020, 20189 and 2018, respectively.
29
The $1,227,000 decrease in repossessed assets during 2020 resulted from the net of $835,000 of additional assets repossessed, $2,353,000 of repossessed assets sold and a
$291,000 adjustment to a discount recorded at acquisition. The following table summarizes the composition of repossessed assets (in thousands):
Construction and land development
Agricultural real estate
1-4 family residential properties
Multi-family residential properties
Commercial real estate
Total real estate
Agricultural Loans
Commercial & Industrial Loans
Consumer Loans
Total repossessed collateral
December 31, 2020
December 31, 2019
Balance
% of Total
Balance
% of Total
$
$
1,436
—
71
—
982
2,489
—
—
4
2,493
57.6% $
—%
2.8%
0.0%
39.4%
99.8%
—%
—%
0.2%
100.0% $
1,826
—
1,024
64
730
3,644
—
76
—
3,720
49.1%
—%
27.6%
1.7%
19.6%
98.0%
—%
2.0%
—%
100.0%
Repossessed assets sold during 2020 resulted in total net gains of $107,000, of which $127,000 of net gains was related to real estate asset sales and $20,000 of net losses was
related to other repossessed assets sales.
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, 2020, the Company’s
loan portfolio included $391.7 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $308.2 million was concentrated in other grain
farming. Total loans to borrowers whose businesses are directly related to agriculture increased $15.3 million from $376.4 million at December 31, 2019 while loans
concentrated in other grain farming increased $6.7 million from $301.5 million at December 31, 2019. 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 $124.8 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 $420.2 million of loans to lessors of non-residential
buildings, $313.3 million of loans to lessors of residential buildings and dwellings, $119.5 million of loans to other gambling industries and $114.9 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.
30
The Company minimizes credit risk by adhering to sound underwriting and credit review policies. Management and the Board of Directors of the Company review these policies
at least annually. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan
review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. On a quarterly basis, the Board of Directors
and management review the status of problem loans and determine a best estimate of the allowance. In addition to internal policies and controls, regulatory authorities
periodically review asset quality and the overall adequacy of the allowance for credit losses.
Analysis of the allowance for credit losses for the past five years and of changes in the allowance for these periods is summarized as follows (dollars in thousands):
Average loans outstanding, net of unearned income
Adjustment for Adoption of ASU 2016-13
Allowance-beginning of period
Charge-offs:
Construction & land development
Agricultural real estate
1-4 Family residential properties
Commercial real estate
Agricultural loans
Commercial and Industrial loans
Consumer loans
Total charge-offs
Recoveries:
Construction & land development
Agricultural real estate
1-4 Family residential properties
Commercial real estate
Agricultural loans
Commercial and Industrial loans
Consumer loans
Total recoveries
Net charge-offs
Provision for loan losses
Allowance-end of period
$
2020
3,003,488
1,672
28,583
$
2019
2,598,718
—
26,189
$
2018
2,276,500
—
19,977
$
2017
1,836,617
—
16,753
$
2016
1,454,591
—
14,576
13
—
393
830
—
1,991
617
3,844
—
—
299
169
—
179
421
1,068
2,776
16,103
41,910
$
—
—
1,477
1,743
24
1,828
1,254
6,326
—
—
91
12
—
155
357
615
5,711
6,433
26,911
$
10
—
1,111
170
93
832
777
2,993
—
—
102
0
—
145
291
538
2,455
8,667
26,189
$
341
—
705
371
662
2,604
512
5,195
33
2
209
236
—
219
258
957
4,238
7,462
19,977
$
$
—
—
368
44
30
710
523
1,675
34
2
227
5
7
263
208
1,026
649
2,826
16,753
0.05%
0.92%
92.0%
Ratio of annualized net charge-offs to average loans
0.09%
0.22%
0.11%
0.23%
Ratio of allowance for credit losses to loans outstanding (less unearned
interest at end of period)
Ratio of allowance for credit losses to nonperforming loans
1.34%
149.0%
1.00%
96.7%
0.99%
88.0%
1.03%
114.1%
The ratio of the allowance for credit losses to nonperforming loans was 149% as of December 31, 2020 compared to 96.7% as of December 31, 2019. The increase in this ratio is
primarily due to changes in methodology following adoption of ASU 2016-13 and allowance allocated for the increase in performing loan balances. The amounts above do not
include loans formerly identified as TDRs by Soy Capital Bank. Management believes that the overall estimate of the allowance for credit losses appropriately accounts for
probable losses attributable to current exposures.
During 2020, the Company had net charge-offs of $2,776,000 compared to $5,711,000 in 2019. 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. During 2019, there were significant
charge-offs of seven commercial real estate loans to five borrowers of $1.8 million and significant charge-offs of six commercial operating loans to five borrowers of $1.9
million.
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%. At December 31, 2019, the allowance for credit losses amounted to $26.9 million or 1.00% of total loans. The allowance is
allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based on historical losses and other factors. The
allowance for credit losses, in management's judgment, was allocated as follows to cover probable loan losses (dollars in thousands):
31
December 31, 2020
December 31, 2019
December 31, 2018
Allowance for
credit losses
% of loans to
total
loans
Allowance for
credit losses
% of loans to
total
loans
Allowance for
credit losses
% of loans to
total
loans
$
$
1,666
1,084
2,322
19,660
1,526
13,485
2,167
41,910
—
41,910
3.9% $
8.1%
10.4%
43.4%
4.4%
27.3%
2.5%
100.0%
NA
100.0% $
1,146
1,093
1,386
11,198
1,386
9,273
1,429
26,911
—
26,911
3.5% $
8.9%
12.5%
42.6%
5.1%
24.3%
3.1%
100.0%
NA
100.0% $
561
1,246
1,504
11,102
951
9,893
932
26,189
—
26,189
1.9%
8.8%
14.1%
41.3%
5.1%
25.3%
3.5%
100.0%
NA
100.0%
December 31, 2017
December 31, 2016
% of loans to
% of loans to
Allowance for
credit losses
total
loans
Allowance for
credit losses
total
loans
$
$
886
16,546
1,742
803
19,977
—
19,977
16.2% $
70.8%
11.0%
2.0%
100.0%
NA
100.0% $
874
12,901
2,249
693
16,717
36
16,753
20.1%
66.0%
11.6%
2.3%
100.0%
NA
100.0%
Construction & land development
Agriculture real estate
1-4 family residential
Commercial real estate
Agricultural
Commercial & industrial
Consumer
Total allocated
Unallocated
Allowance at end of year
Residential real estate
Commercial / Commercial real estate
Agricultural / Agricultural real estate
Consumer
Total allocated
Unallocated
Allowance at end of year
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, 2020, 2019 and 2018 (in thousands):
Demand deposits:
Non-interest-bearing
Interest-bearing
Savings
Time deposits
Total average deposits
2020
2019
2018
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
$
$
777,435
1,557,264
469,276
531,834
3,335,809
—% $
0.24%
0.09%
1.61%
0.38% $
608,106
1,303,814
437,549
630,369
2,979,838
—% $
0.50%
0.13%
1.88%
0.64% $
506,873
1,194,089
395,028
473,043
2,569,033
—%
0.28%
0.15%
0.99%
0.33%
The following table sets forth the high and low month-end balances for the years ended December 31, 2020, 2019 and 2018 (in thousands):
High month-end balances of total deposits
Low month-end balances of total deposits
2020
2019
2018
$
3,692,784 $
2,873,260
3,046,212 $
2,917,366
3,017,035
2,208,941
In 2020, the average balance of deposits increased by $356 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. In 2019, the average balance of deposits increased by $410.8 million
from 2018. The increase was primarily the result of deposit balances acquired in the acquisition of First Bank during the second quarter of 2018 and the acquisition of SCB
during the fourth quarter of 2018. Average non-interest bearing deposits increased $101.2 million, interest-bearing deposits increased by $109.7 million, savings accounts
increased by $42.5 million, and time deposits increased $157.3 million.
32
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):
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
2020
December 31,
2019
2018
$
$
72,945 $
49,710
88,682
72,070
283,407 $
81,910 $
55,495
95,725
107,861
340,991 $
44,898
49,476
78,567
155,071
328,012
The balance of time deposits of $100,000 or more decreased $57.6 million from December 31, 2019 to December 31, 2020. The decrease was primarily due to time deposits that
matured and were not renewed or replaced. The balance of time deposits of $100,000 or more increased $13 million from December 31, 2018 to December 31, 2019. The
increase in 2019 was primarily due to the deposits added through acquisitions.
In 2020 the Company maintained account relationships with various public entities throughout its market areas. Ninety-nine public entities had total balances of $227.6 million
in various checking accounts and time deposits as of December 31, 2020. 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.
33
Information relating to securities sold under agreements to repurchase and other borrowings as December 31, 2020, 2019 and 2018 is presented below (in thousands):
At December 31:
Securities sold under agreements to repurchase
Federal funds purchased
Federal Home Loan Bank advances:
Fixed term – due in one year or less
Fixed term – due after one year
Subordinated debt
Junior subordinated debentures
Other debt
Due in one year or less
Due after one year
Total
Average interest rate at end of period
Maximum outstanding at any month-end:
Securities sold under agreements to repurchase
Federal funds purchased
Federal Home Loan Bank advances:
FHLB-overnite
Fixed term – due in one year or less
Fixed term – due after one year
Subordinated debt
Junior subordinated debentures
Debt:
Debt due in one year or less
Debt due after one year
Averages for the period (YTD):
Securities sold under agreements to repurchase
Federal funds purchased
Federal Home Loan Bank advances:
FHLB-overnite
Fixed term – due in one year or less
Fixed term – due after one year
Subordinated debt
Junior subordinated debentures
Debt:
Loans due in one year or less
Loans due after one year
Total
Average interest rate during the period
2020
2019
2018
$
206,937
—
$
208,109
5,000
$
$
$
18,984
74,985
94,253
19,027
—
—
414,186
$
0.81%
39,000
74,895
—
18,858
—
—
345,862
$
1.08%
350,288
8,000
$
208,109
5,000
$
—
34,969
104,974
94,256
19,027
5,000
—
25,000
66,000
74,895
—
29,126
—
6,549
$
219,298
525
$
169,437
616
$
1,831
24,858
79,999
22,403
18,936
7,148
63,151
39,331
—
26,649
$
656
—
370,338
$
1.07%
—
1,825
308,157
$
1.66%
192,330
—
29,000
90,745
—
29,000
—
7,724
348,799
1.30%
192,330
22,000
30,000
29,000
101,745
—
30,221
—
10,313
140,622
3,794
9,434
16,510
71,757
—
27,391
548
9,555
279,611
1.52%
Securities sold under agreements to repurchase decreased $1.2 million during 2020 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, 2020 FHLB advances totaled $94 million with weighted-average interest rates of 1.57% and maturities from February 2021 to December 2029. At December
31, 2019 the advances totaling $114.0 million with weighted-average interest rates of 1.87% and maturities from January 2020 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, 2020. This loan was renewed on April 10,2020 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 (2.34% and 3.80% at December 31, 2020 and 2019, respectively). The loan is secured by all of the stock of First Mid Bank. The Company and
its subsidiary banks were in compliance with the then existing covenants at December 31, 2020 and 2019.
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,
34
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, 2020, the recorded balance of the subordinated notes was $94,253,000.
On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through First Mid-Illinois Statutory Trust I (“Trust
I”), a statutory business trust and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering. On October 7, 2019, these trust preferred securities were
redeemed, along with $310,000 in common securities issued by Trust I and held by the Company, as a result of the concurrent redemption of 100% of he Company's junior
subordinated debentures due 2034 and held by Trust I, which supported the trust preferred securities. The redemption price for the junior subordinated debentures was equal to
100% of the principal amount plus accrued interest, if any, up to, but not including, the redemption date of October 7, 2019. The proceeds from the redemption of the junior
subordinated debentures were simultaneously applied to redeem all of the outstanding common securities and the outstanding trust preferred securities at a price of 100% of the
aggregate liquidation amount of the trust preferred securities plus accumulated but unpaid distributions up to but not including the redemption date. The redemption was made
pursuant to the optional redemption provision of the underlying indenture.
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 1.82% and 3.49% at December 31, 2020 and 2019, 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 (2.07%
and 3.74% at December 31, 2020 and 2019, 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 (1.92% and 3.59% at December 31, 2020 and 2019, respectively) and resets quarterly.
The trust preferred securities issued by Trust II, CLST I, and FBTCST I are included as Tier 1 capital of the Company for regulatory capital purposes. On March 1, 2005, the
Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1 capital for regulatory purposes. The
final rule provided a five-year transition period, ending September 30, 2010, for application of the revised quantitative limits. On March 17, 2009, the Federal Reserve Board
adopted an additional final rule that delayed the effective date of the new limits on inclusion of trust preferred securities in the calculation of Tier 1 capital until March 31, 2012.
The application of the revised quantitative limits did not and is not expected to have a significant impact on its calculation of Tier 1 capital for regulatory purposes or its
classification as well-capitalized. The Dodd-Frank Act, signed into law July 21, 2010, removes trust preferred securities as a permitted component of a holding company’s Tier 1
capital after a three-year phase-in period beginning January 1, 2013 for larger holding companies. For holding companies with less than $15 billion in consolidated assets,
existing issues of trust preferred securities are grandfathered and not subject to this new restriction. New issuances of trust preferred securities, however would not count as Tier
1 regulatory capital.
In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt rules that prohibit banks and their affiliates from
engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This rule is
generally referred to as the “Volcker Rule.” On December 10, 2013, the federal banking agencies issued final rules to implement the prohibitions required by the Volcker Rule.
Following the publication of the final rule, and in reaction to concerns in the banking industry regarding the adverse impact the final rule’s treatment of certain collateralized
debt instruments has on community banks, the federal banking agencies approved a final rule to permit banking entities to retain interests in certain collateralized debt
obligations backed primarily by trust preferred securities. Under the final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking
entities under $15 billion in assets if (1) the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the
offering proceeds received by the collateralized debt obligation were invested primarily in qualifying trust preferred collateral, and (3) the banking entity’s interests in the
collateralized debt obligation was acquired on or prior to December 10, 2013. Although the Volcker Rule impacts many large banking entities, the Company does not currently
anticipate that the Volcker Rule will have a material effect on the operations of the Company, First Mid Bank or Providence Bank.
35
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, 2020 (dollars in thousands):
1 year
1-2 years
2-3 years
3-4 years
4-5 years
Thereafter
Total
Fair Value
Rate Sensitive Within
Interest-earning assets:
Federal funds sold and other interest-
bearing deposits
Certificates of deposit investments
Taxable investment securities
Nontaxable investment securities
Loans
Total
Interest-bearing liabilities:
Savings and NOW accounts
Money market accounts
Other time deposits
Short-term borrowings/debt
Long-term borrowings/debt
Total
Rate sensitive assets – rate sensitive
liabilities
Cumulative GAP
Cumulative amounts as % of total Rate
sensitive assets
Cumulative Ratio
$
342,129
490
263,632
42,086
1,216,257
$ 1,864,594
$
390,409
552,101
349,506
206,937
38,011
$ 1,536,964
$
$
$
$
—
1,470
120,514
19,249
622,503
763,736
134,446
26,066
70,312
—
4,985
235,809
$
$
$
$
—
735
57,909
11,506
382,729
452,879
134,446
26,066
26,498
—
15,000
202,010
$
$
$
$
—
—
37,297
12,201
358,709
408,207
134,446
26,066
18,555
—
10,000
189,067
$
$
$
$
—
—
28,085
21,088
385,034
434,207
134,446
26,066
12,100
—
99,253
271,865
$
$
$
$
—
—
131,652
139,255
173,187
444,094
602,417
91,814
98
—
40,000
734,329
$
342,129 $
2,695
639,089
245,385
3,138,419
342,129
2,695
639,192
245,385
3,100,178
$ 4,367,717 $ 4,329,579
$ 1,530,610 $ 1,530,610
748,179
481,390
206,945
205,526
$ 3,170,044 $ 3,172,650
748,179
477,069
206,937
207,249
$
$
327,630
327,630
$
$
527,927
855,557
$
250,869
$ 1,106,426
$
219,140
$ 1,325,566
$
162,342
$ 1,487,908
$ (290,235)
$ 1,197,673
$ 1,197,673
7.5%
7.5%
12.1%
19.6%
5.7%
25.3%
5.0%
30.3%
3.7%
34.1%
(6.6)%
27.4%
The static GAP analysis shows that at December 31, 2020, the Company was asset sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that
future decreases 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, 2020, the Company’s stockholders' equity had increased $41.6 million, or 7.9%, to $568,228,000 from $526,609,000 as of December 31, 2019. During 2020,
net income contributed $45,270,000 to equity before the payment of dividends to stockholders of $13.5 million. The change in market value of available-for-sale investment
securities increased stockholders' equity by $8.7 million, net of tax.
36
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-Illinois Bancshares, Inc.
Deferred Compensation Plan (“DCP”). At December 31, 2020, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of
approximately $4,241,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $4,241,000 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:
•
•
•
12,921 common shares during 2020
11,072 common shares during 2019, and
9,043 common shares during 2018
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 $13,494,000 in common stock dividends paid during 2020, $680,000 or 5% was reinvested
into shares of common stock of the Company through the DRIP. Approximately $680,000, $805,000 and $1,099,000 of common stock was purchased through reinvestment of
dividends during 2020, 2019 and 2018, 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 2020, 2019, and 2018, the Company awarded 25,950 and 26,700, and 28,700 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 2020, the Company repurchased 6,288 shares (0.04% of common shares) at a total price of approximately $213,000. All of these shares were a result of shares withheld
for taxes on vested employee stock incentives. During 2019, the Company repurchased 3,900 (0.02% of common shares) at a total price of approximately $138,000. As of
December 31, 2020, approximately $4.7 million remains available for purchase under the repurchase programs. Treasury stock is further affected by activity in the DCP.
Employee Stock Purchase Plan. At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid Bancshares, Inc. Employee Stock
Purchase Plan (“ESPP”). The ESPP provides eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount through payroll
deductions. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 600,000 shares of common
stock may be issued under the ESPP. As of December 31, 2020 and 2019, 11,037 and 8,899 shares, respectively were issued pursuant to ESPP.
37
Capital Ratios
For 2020, the minimum regulatory ratios required for minimum capital adequacy purposes plus the capital buffer are 10.50% for the Total Risk-based capital ratio, 8.50% for the
Tier 1 Risk-based capital ratio, 7.0% for the Common Equity Tier 1 capital ratio, and 4% 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, 2020, 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, 2020 follows:
First Mid Bancshares, Inc. (Consolidated)
First Mid Bank
18.82%
14.30%
14.63%
13.12%
14.03%
13.12%
10.22%
9.18%
Total Risk-
based
Capital Ratio
Tier One
Risk-based
Capital Ratio
Common Equity
Tier 1 Capital
Ratio
Tier One Leverage
Ratio (Capital to
Average Assets)
Liquidity
Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of the business. Financial
obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing. The Company’s liquidity management focuses on the ability to
obtain funds economically through assets that may be converted into cash at minimal costs or through other sources. The Company’s other sources of cash include overnight
federal fund lines, Federal Home Loan Bank advances, the ability to borrow at the Federal Reserve Bank of Chicago, and the Company’s operating line of credit with The
Northern Trust Company. Details for these sources include:
•
•
•
•
First Mid Bank has $100 million available in overnight federal fund lines, including $30 million from First Horizon Bank, $20 million from U.S. Bank, N.A., $10
million from Wells Fargo Bank, N.A., $15 million from The Northern Trust Company and $25 million from Zions Bank. Availability of the funds is subject to First
Mid Bank meeting minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total average assets. As of December 31,
2020, First Mid Bank met these regulatory requirements.
First Mid Bank can borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the Federal
Home Loan Bank. Collateral that can be pledged includes one-to-four family residential real estate loans and securities. At December 31, 2020, the excess collateral
at the FHLB would support approximately $651.1 million of additional advances for First Mid Bank.
First Mid Bank is a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged.
In addition, as of December 31, 2020, the Company had a revolving credit agreement in the amount of $15 million with The Northern Trust Company with an
outstanding balance of $0 million and $15 million in available funds. This loan was renewed on April 10, 2020 for one year as a revolving credit agreement. The
interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of First Mid Bank and includes requirements for operating and
capital ratios. The Company and its subsidiary banks were in compliance with the existing covenants at December 31, 2020 and 2019.
Management continues to monitor its expected liquidity requirements carefully, focusing primarily on cash flows from:
•
•
•
•
lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions;
deposit activities, including seasonal demand of private and public funds;
investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Treasury and government agency securities; and
operating activities, including scheduled debt repayments and dividends to stockholders.
The following table summarizes significant contractual obligations and other commitments at December 31, 2020 (in thousands):
Time deposits
Debt
Other borrowings
Operating leases
Supplemental retirement
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
$
$
477,069 $
113,280
300,906
19,885
441
911,581 $
349,506 $
—
225,910
2,670
50
578,136 $
96,810 $
—
19,996
4,641
100
121,547 $
30,655 $
—
15,000
3,394
100
49,149 $
98
113,280
40,000
9,180
191
162,749
38
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
used in 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, $32.0 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 year ended December 31, 2018, net cash of $42.2 million was provided from operating activities, $21.3 million was provided from financing activities, and $11.0 million
was used in investing activities. In total cash and cash equivalents increased by $52.5 million from year-end 2017.
For the years ended December 31, 2020 and 2019, 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 $6.1 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.
39
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, 2020, which considers how the specific interest rate scenario would be expected to impact each interest-earning
asset and each interest-bearing liability, the Company estimates that changes in the prime interest rate would impact First Mid Bank's performance, on a consolidated basis, as
follows:
December 31, 2020
Prime rate is 3.25%
Prime rate increase of:
200 basis points to 5.25%
100 basis points to 4.25%
Prime rate decrease of:
100 basis points to 2.25%
200 basis points to 1.25%
Increase (Decrease) In
Net Interest Income
($000)
(%)
Return On
Average Equity
2020=8.24%
$
584
446
1,446
348
0.6%
0.4%
1.4%
0.3%
0.10%
0.07%
0.24%
0.06%
The following table shows the same analysis for First Mid Bank performance as of December 31, 2019:
December 31, 2019
Prime rate is 4.75%
Prime rate increase of:
200 basis points to 6.75%
100 basis points to 5.75%
Prime rate decrease of:
100 basis points to 3.75%
200 basis points to 2.75%
Increase (Decrease) In
Net Interest Income
($000)
(%)
Return On
Average Equity
2019=9.49%
$
143
300
(2,353)
(6,844)
0.1%
0.3%
(2.3)%
(6.8)%
0.03%
0.05%
(0.42)%
(1.24)%
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, 2020 and 2019 (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.
December 31, 2020
December 31, 2019
Changes In
Economic Value of Equity
Amount of Change
($000)
Percent of Change
(%)
$
$
84,951
50,226
(85,484)
(73,391)
23,610
18,564
(104,270)
(32,286)
17.3%
10.2%
(17.4)%
(14.9)%
4.0%
3.2%
(17.8)%
(5.5)%
Interest Rates
(basis points)
+200 bp
+100 bp
-200 bp
-100 bp
+200 bp
+100 bp
-200 bp
-100 bp
40
As indicated above, at December 31, 2020, 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, 2020, 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.
41
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
December 31, 2020 and 2019
(In thousands, except share data)
Assets
Cash and due from banks:
Non-interest bearing
Interest bearing
Federal funds sold
Cash and cash equivalents
Certificates of deposit investments
Investment securities:
Available-for-sale, at fair value
Held-to-maturity, at amortized cost (estimated fair value of $5,119 and $69,572 at
December 31, 2020 and 2019, respectively)
Equity securities, at fair value
Loans held for sale
Loans
Less allowance for credit losses
Net loans
Interest receivable
Other real estate owned
Premises and equipment, net
Goodwill, net
Intangible assets, net
Bank owned life insurance
Right of use asset
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Repurchase agreements with customers
Interest payable
FHLB borrowings
Other borrowings
Junior subordinated debentures, net
Subordinated debt, net
Lease liability
Other liabilities
Total liabilities
Stockholders’ Equity:
Common stock, $4 par value; authorized 30,000,000 shares; issued 17,361,898 shares in 2020 and
17,287,882 shares in 2019; outstanding 16,741,207 shares in 2020 and 16,673,479 shares in 2019
Additional paid-in capital
Retained earnings
Deferred compensation
Accumulated other comprehensive income
Less treasury stock at cost, 620,691 shares in 2020 and 614,403 shares in 2019
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
42
2020
2019
75,152 $
340,821
1,308
417,281
2,695
76,498
7,656
926
85,080
4,625
879,240
685,636
5,016
218
1,924
3,136,495
(41,910)
3,094,585
19,287
2,489
58,206
104,992
23,128
68,955
17,209
31,123
4,726,348 $
936,926 $
2,755,858
3,692,784
206,937
2,345
93,969
—
19,027
94,253
17,351
31,454
4,158,120
71,449
297,806
197,726
2,980
17,095
(18,828)
568,228
4,726,348 $
69,542
412
1,820
2,693,527
(26,911)
2,666,616
15,577
3,644
59,491
104,992
28,265
67,225
17,006
29,495
3,839,426
633,331
2,284,035
2,917,366
208,109
2,261
113,895
5,000
18,858
—
17,007
30,321
3,312,817
71,152
295,925
166,667
2,760
8,360
(18,255)
526,609
3,839,426
$
$
$
$
Consolidated Statements of Income
For the years ended December 31, 2020, 2019 and 2018
(In thousands, except per share data)
Interest income:
Interest and fees on loans
Interest on investment securities
Taxable
Exempt from federal income tax
Interest on certificates of deposit investments
Interest on federal funds sold
Interest on deposits with other financial institutions
Total interest income
Interest expense:
Interest on deposits
Interest on securities sold under agreements to repurchase
Interest on FHLB borrowings
Interest on other borrowings
Interest on junior subordinated debentures
Interest on subordinated debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income:
Wealth management revenues
Insurance commissions
Service charges
Securities gains, net
Mortgage banking revenue, net
ATM / debit card revenue
Bank owned life insurance
Other income
Total other income
Other expense:
Salaries and employee benefits
Net occupancy and equipment expense
Net other real estate owned expense
FDIC insurance expense
Amortization of intangible assets
Stationery and supplies
Legal and professional
ATM / debit card expense
Marketing and donations
Other expense
Total other expense
Income before income taxes
Income taxes
Net income
Per share data:
Basic net income per common share
Diluted net income per common share
Cash dividends declared per common share
2020
2019
2018
$
126,814 $
126,825 $
105,772
11,449
5,517
84
3
274
144,141
12,751
488
1,851
26
682
931
16,729
127,412
16,103
111,309
16,153
17,477
5,862
1,106
5,075
8,962
1,730
3,155
59,520
66,452
16,708
42
1,309
5,062
1,080
5,427
2,290
1,616
11,101
111,087
59,742
14,472
45,270 $
2.71 $
2.70
0.81
15,662
5,381
137
14
1,702
149,721
18,939
911
2,706
15
1,476
—
24,047
125,674
6,433
119,241
15,570
16,029
7,837
802
1,746
8,491
1,755
3,787
56,017
62,578
17,680
443
219
5,848
1,104
5,164
3,488
2,031
13,437
111,992
63,266
15,323
47,943 $
2.88 $
2.87
0.76
13,070
5,167
66
8
482
124,565
8,571
330
2,071
446
1,409
—
12,827
111,738
8,667
103,071
8,460
5,592
7,435
901
1,205
7,487
1,389
2,945
35,414
46,803
14,533
282
1,059
3,215
963
5,243
2,971
1,794
13,117
89,980
48,505
11,905
36,600
2.53
2.52
0.70
$
$
See accompanying notes to consolidated financial statements.
43
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2020, 2019 and 2018
(in thousands)
Net income
Other Comprehensive Income (Loss)
2020
2019
2018
$
45,270 $
47,943 $
36,600
Unrealized gains (losses) on available-for-sale securities, net of taxes of $(3,873), $(6,258), and
$1,475 for the years ended December 31, 2020, 2019 and 2018, respectively
Unamortized holding losses on held to maturity securities transferred from available for sale, net of
taxes of $(15), $(34), and $(33) for December 31, 2020, 2019 and 2018, respectively
Less: reclassification adjustment for realized gains included in net income net of taxes of $321,
$233, and $261 for the years ended December 31, 2020, 2019 and 2018, respectively
Other comprehensive income (loss), net of taxes
Comprehensive income
9,485
15,319
(3,611)
35
83
(785)
8,735
54,005 $
(569)
14,833
62,776 $
$
82
(640)
(4,169)
32,431
See accompanying notes to consolidated financial statements.
44
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2020, 2019 and 2018
(In thousands, except share and per share data)
Additional
Common
Stock
Paid-In-
Capital
Accumulated
Other
Retained
Earnings
Deferred
Compensation
Comprehensive Treasury
Income
Stock
Total
December 31, 2019
Cumulative change in accounting principal for
adoption of ASU 2016-13
December 31, 2019 (as adjusted for change in
accounting principal)
Net income
Other comprehensive income, net of tax
Dividends on common stock ($.810 per share)
Issuance of 13,804 common shares pursuant to the
Dividend Reinvestment Plan
Issuance of 12,921 common shares pursuant to the
Deferred Compensation Plan
Issuance of 24,867 restricted common shares pursuant
to the 2017 Stock Incentive Plan
Issuance of 11,037 common shares pursuant to
Employee Stock Purchase Plan
Purchase of 6,288 treasury shares
Deferred compensation
Tax benefit related to deferred compensation
distributions
Grant of restricted stock units pursuant to the 2017
Stock Incentive Plan
Release of restricted stock units pursuant to the 2017
Stock Incentive Plan
Vested restricted shares/units compensation expense
December 31, 2020
$
71,152 $
295,925 $
166,667 $
2,760 $
8,360 $
(18,255) $ 526,609
—
—
(717)
—
—
—
(717)
71,152
—
—
—
295,925
—
—
—
165,950
45,270
—
(13,494)
102
578
52
313
99
758
44
—
—
—
201
—
—
22
—
584
—
—
—
—
—
—
—
—
2,760
—
—
—
—
—
—
—
—
360
—
—
8,360
—
8,735
—
(18,255) 525,892
45,270
8,735
(13,494)
—
—
—
—
—
—
—
—
—
—
—
—
680
—
365
—
857
—
(213)
(360)
245
(213)
—
—
22
—
584
—
—
71,449 $
(516)
(59)
297,806 $
—
—
197,726 $
$
—
(140)
2,980 $
—
—
17,095 $
—
—
(516)
(199)
(18,828) $ 568,228
See accompanying notes to consolidated financial statements.
45
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2020, 2019 and 2018
(In thousands, except share and per share data)
Additional
Common Paid-In-
Capital
Stock
Retained Deferred
Earnings
Compensation Income (Loss)
Stock
Total
Accumulated
Other
Comprehensive Treasury
December 31, 2018
Net income
Other comprehensive income, net of tax
Dividends on common stock ($.76 per share)
Issuance of 22,949 common shares pursuant to the
Dividend Reinvestment Plan
Issuance of 11,072 common shares pursuant to the
Deferred Compensation Plan
Issuance of 25,950 restricted common shares pursuant to
the 2017 Stock Incentive Plan
Issuance of 8,899 common shares pursuant to Employee
Stock Purchase Plan
Purchase of 40,026 treasury shares
Deferred compensation
Tax benefit related to deferred compensation
distributions
Grant of restricted stock units pursuant to the 2017 Stock
Incentive Plan
Vested restricted shares/units compensation expense
December 31, 2019
$
70,876 $
—
—
—
293,937 $
—
—
—
131,392 $
47,943
—
(12,668)
2,761 $
—
—
—
(6,473) $
—
14,833
—
(16,629) $
—
—
—
475,864
47,943
14,833
(12,668)
92
44
713
329
104
760
36
—
—
—
246
—
—
56
—
—
—
—
—
—
—
—
—
—
—
—
333
—
—
—
—
—
—
—
—
—
—
—
805
373
864
—
(1,293)
(333)
282
(1,293)
—
—
56
—
—
71,152 $
515
(631)
295,925 $
—
—
166,667 $
$
—
(334)
2,760 $
—
—
8,360 $
—
—
(18,255) $
515
(965)
526,609
See accompanying notes to consolidated financial statements.
46
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2020, 2019 and 2018
(In thousands, except share and per share data)
Additional
Common Paid-In-
Capital
Stock
Retained Deferred
Earnings
Compensation
Accumulated
Other
Comprehensive Treasury
Loss
Stock
Total
$
December 31, 2017
Net income
Other comprehensive loss, net of tax
Dividends on common stock ($.70 per share)
Issuance of 1,643,900 common shares pursuant to
acquisition of First Banctrust Corporation, net proceeds
Issuance of 1,330,571 common shares pursuant to
acquisition of SCB Bancorp, net proceeds
Issuance of 947,368 common shares pursuant to capital
raise
Issuance of 30,655 common shares pursuant to the
Dividend Reinvestment Plan
Issuance of 9,043 common shares pursuant to the
Deferred Compensation Plan
Issuance of 13,250 restricted common shares pursuant
to the 2017 Stock Incentive Plan
Purchase of 3,900 treasury shares
Deferred compensation
Tax benefit related to deferred compensation
distributions
Grant of restricted stock units pursuant to the 2017
Stock Incentive Plan
Issuance of 10,500 common shares pursuant to the
exercise of stock options
Vested restricted shares/units compensation expense
December 31, 2018
$
54,925 $
—
—
—
163,603 $
—
—
—
104,683 $
36,600
—
(9,891)
3,540 $
—
—
—
(2,304) $
—
(4,169)
—
(16,483) $
—
—
—
307,964
36,600
(4,169)
(9,891)
6,576
54,646
5,322
42,770
3,789
30,197
123
976
36
309
53
—
—
463
—
—
—
160
—
566
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8
—
—
—
—
—
—
—
—
—
—
—
—
—
61,222
—
48,092
—
33,986
—
1,099
—
345
—
(138)
(8)
—
—
516
(138)
—
160
566
52
—
70,876 $
247
—
293,937 $
—
—
131,392 $
—
(787)
2,761 $
—
—
(6,473) $
—
—
(16,629) $
299
(787)
475,864
See accompanying notes to consolidated financial statements.
47
Consolidated Statements of Cash Flows
For the years ended December 31, 2020, 2019 and 2018
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation, amortization and accretion, net
Change in cash surrender value of bank owned life insurance
Stock-based compensation expense
Operating lease payments
Gains on investment securities, net
Losses on sales of other real property owned, net
(Gain) loss on write down of premises and equipment
Gains on sale of loans held for sale, net
Deferred income taxes
Decrease (increase) in accrued interest receivable
Increase in accrued interest payable
Origination of loans held for sale
Proceeds from sale of loans held for sale
Gains on equity securities
Increase in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments
Purchase of certificates of deposit investments
Proceeds from sales of securities available-for-sale
Proceeds from maturities of securities available-for-sale
Proceeds from maturities of securities held-to-maturity
Purchases of securities available-for-sale
Net increase in loans
Purchases of premises and equipment
Proceeds from sales of other real property owned
Cash received related to acquisition, net of cash and cash equivalents acquired
Net cash used in investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Increase (decrease) in federal funds purchased
Increase (decrease) in repurchase agreements
Proceeds from FHLB advances
Repayment of FHLB advances
Proceeds from short-term debt
Proceeds from long-term debit
Repayment of short-term debt
Repayment of long-term debt
Repayment of junior subordinated debentures
Proceeds from issuance of common stock
Direct expenses related to capital transactions
Purchase of treasury stock
Dividends paid on common stock
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2020
2019
2018
$
45,270 $
47,943 $
36,600
16,103
11,721
(1,730)
774
(2,766)
(1,106)
195
(5)
(5,248)
(4,963)
(3,710)
327
(196,469)
201,613
(133)
(2,045)
5,713
63,541
2,910
(980)
9,061
324,148
55,000
(506,458)
(445,694)
(2,463)
2,054
—
(562,422)
775,418
(5,000)
(1,172)
19,000
(39,000)
5,000
94,253
(5,000)
—
—
610
—
(213)
(12,814)
831,082
332,201
85,080
417,281 $
6,433
10,842
(1,755)
453
(2,680)
(802)
4
90
(1,504)
1,885
1,304
821
(101,714)
102,906
—
(4,680)
3,282
62,828
2,944
—
60,900
154,167
—
(188,608)
(59,797)
(4,103)
2,425
—
(32,072)
(71,320)
5,000
15,779
50,000
(56,000)
—
—
—
(7,724)
(10,310)
655
—
(1,293)
(11,863)
(87,076)
(56,320)
141,400
85,080 $
8,667
7,881
(1,337)
294
—
(901)
132
30
(1,070)
4,283
(1,708)
829
(62,623)
63,210
—
(4,266)
(7,846)
42,175
1,486
—
13,152
55,035
—
(38,852)
(96,665)
(3,112)
1,606
56,389
(10,961)
(19,548)
—
15,762
45,000
(35,000)
—
—
—
(10,313)
—
36,645
(2,309)
(138)
(8,792)
21,307
52,521
88,879
141,400
$
48
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2019, 2018 and 2017
(In thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
Income taxes
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned
Dividends reinvested in common stock
Initial recognition of right-of-use assets
Initial recognition of lease liabilities
Net tax benefit related to option and deferred compensation plans
Supplemental disclosure of purchase of capital stock:
Fair value of assets acquired
Consideration paid:
Cash paid
Common stock issued
Total consideration paid
Fair value of liabilities assumed
Supplemental disclosure of purchase of capital stock:
Fair value of assets acquired
Consideration paid:
Cash paid
Common stock issued
Total consideration paid
Fair value of liabilities assumed
2020
2019
2018
$
16,645 $
18,624
23,544 $
15,556
783
680
—
—
22
3,570
805
14,116
14,116
56
11,671
9,645
518
1,099
—
—
160
First Bank
$
501,285
10,275
61,350
71,625
429,660
$
Soy Capital
$
479,056
19,046
48,260
67,306
411,750
$
See accompanying notes to consolidated financial statements.
49
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”), Mid-Illinois Data Services, Inc. (“MIDS”), 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 2020 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 is an unprecedented event that provides 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.
Acquisition
On September 25, 2020, the Company and Eval Sub Inc., wholly-owned subsidiary of the Company ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger
Agreement") with LINCO Bancshares, Inc., the former parent of Providence Bank ("LINCO"), and the sellers as defined therein, pursuant to which, among other things, the
Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business combination whereby Merger Sub merged with and into LINCO,
whereupon the separate corporate existence of Merger Sub ceased and LINCO continued as the surviving company and a wholly-owned subsidiary of the Company (the
"Merger").
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $1.00 per share, of LINCO issued and
outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by LINCO) was converted into and 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 Merger closed on February 22, 2021. It is anticipated that Providence Bank will be merged with and into First Mid Bank in the second quarter of 2021. At the time of the
bank merger, Providence Bank’s banking offices will become branches of First Mid Bank.
Website
The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and
Exchange Commission (“SEC”) can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC.
General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution
of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.
Loan Purchase
On April 21, 2020, First Mid Bank completed an acquisition of loans in the St. Louis metro market totaling $183 million. There were no loans purchased with deteriorated credit.
50
Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company uses estimates and employs the
judgments of management in determining the amount of its allowance for credit losses and income tax accruals and deferrals, in its fair value measurements of investment
securities, and in the evaluation of impairment of loans, goodwill, investment securities, and premises and equipment. As with any estimate, actual results could differ from these
estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses. In connection with the
determination of the allowance for credit losses, management obtains independent appraisals for significant properties.
Fair Value Measurements
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded
and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as
quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair
value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and
unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within
hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon
the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 11 –
“Disclosures of Fair Values of Financial Instruments.”
Cash and Cash Equivalents
For purposes of reporting cash flows, cash equivalents include non-interest bearing and interest-bearing cash and due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods.
Certificates of Deposit Investments
Certificates of deposit investments have original maturities of three to five years and are carried at cost.
Investment Securities
The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale in accordance with ASC 320. Securities classified as held-to-maturity
are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are
available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar
instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is
possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of
the Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that
may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment is other-than-
temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is
expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income.
Loans
Loans are stated at the principal amount outstanding net of unearned discounts, unearned income and the allowance for credit losses. Unearned income includes deferred loan
origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximate the effective interest rate
method. Interest on substantially all loans is credited to income based on the principal amount outstanding.
The Company’s policy is to discontinue the accrual of interest income on any loan that becomes ninety days past due as to principal or interest or earlier when, in the opinion of
management there is reasonable doubt as to the timely collection of principal or interest. Nonaccrual loans are returned to accrual status when, in the opinion of management, the
financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectability of interest or principal.
Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or fair value, taking into
consideration future commitments to sell the loans.
51
Allowance for Credit Losses
The Company believes the allowance for credit losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its
consolidated financial statements. An estimate of potential losses inherent in the loan portfolio is determined and an allowance for those losses is established by considering
factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, the Company uses organizational history and experience
with credit decisions and related outcomes. The allowance for credit losses represents the best estimate of losses inherent in the existing loan portfolio. The allowance for credit
losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The Company evaluates the allowance for credit
losses at least quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for credit losses is adjusted.
The Company estimates the appropriate level of allowance for credit losses by separately evaluating impaired and nonimpaired loans. A specific allowance is assigned to an
impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a nonimpaired loan is more
subjective. Generally, the allowance assigned to nonimpaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for
qualitative factors including the volume and severity of identified classified loans, changes in economic conditions, changes in credit policies or underwriting standards, and
changes in the level of credit risk associated with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on
any given borrower, can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there still
exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for credit losses would be required.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is 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
5 years to 15 years
Leasehold improvements
3 years to 7 years
Furniture and equipment
Goodwill and Intangible Assets
The Company has goodwill from business combinations, identifiable intangible assets assigned to core deposit relationships and customer lists acquired, and intangible assets
arising from the rights to service mortgage loans for others.
Identifiable intangible assets generally arise from branches acquired that the Company accounted for as purchases. Such assets consist of the excess of the purchase price over
the fair value of net assets acquired, with specific amounts assigned to core deposit relationships and customer lists primarily related to insurance agency. Intangible assets are
amortized by the straight-line method over various periods up to fifteen years. Management reviews intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” codified into ASC 350, the Company obtained an independent evaluation of its
goodwill as of June 30, 2020 and also performed its annual testing of goodwill for impairment as of September 30, 2020 and each time determined that, as of that date, goodwill
was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets.
Other Real Estate Owned
Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the
time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value
of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a
valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and
losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.
Bank Owned Life Insurance
First Mid Bank has purchased life insurance policies on certain senior management. Bank owned life insurance is recorded at the amount that can be realized under the insurance
contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts that are probable at settlement.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock
is based on a predetermined formula.
52
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax returns with each organization computing its taxes on a separate company basis. Amounts
provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under tax laws.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences existing between the financial statement carrying amounts
of assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry forwards. To the extent that current available evidence about the future raises
doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized as an increase or decrease in income tax expense in the period in which such change is enacted.
Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes,” codified
within ASC 740. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For
tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets
the "more likely than not" test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken
by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.
Captive Insurance Company
First Mid Captive, Inc. ("the Captive"), a wholly-owned subsidiary of the Company which was formed and began operations in December 2019, is a Nevada- based captive
insurance company. The Captive insures against certain risks unique to the operations of the Company and its subsidiaries for which insurance may not be currently available or
economically feasible in today's insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread
a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of
Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,300,000, 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.
Trust 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. At December 31, 2020, the First Mid Wealth Management Company managed or administered 1,411 trust accounts with assets totaling
approximately $1,563.0 million. At December 31, 2019, the Company managed or administered 1,635 trust accounts with assets totaling approximately $1,487.5 million.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
Stock Incentive Awards
At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to succeed the
Company's 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the
Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its
Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the
opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.
A maximum of 149,983 shares of common stock may be issued under the SI Plan. The Company awarded 25,950, 26,700, and 28,700 shares during 2020, 2019, and 2018,
respectively as stock and stock unit awards.
Employee Stock Purchase Plan
At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP is
intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount
through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 600,000
shares of common stock may be issued under the ESPP. As of December 31, 2020 and 2019, 11,037 and 8,899 shares, respectively were issued pursuant to the ESPP.
53
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2020 substantially all of the Company's leases are operating leases for
real estate property for bank branches, ATM locations, and office space. For leases in effect January 1, 2019 and for leases commencing thereafter, the Company recognizes a
lease liability and a right-of-use asset, based on the present value of lease payments over the lease term. The discount rate used in determining present value was the Company's
incremental borrowing rate which is the FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the commencement date for leases subsequently
entered into.
Revenue Recognition
Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), establishes a revenue recognition model for reporting information about the
nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. Most of the Company’s revenue-
generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans and investment securities, and revenue related to
mortgage servicing activities, which are subject to other accounting standards. A description ofthe 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 is 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. Early adoption is
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Although the Company cannot anticipate future goodwill
impairment, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate a material impact on
the Company's financial statements. The current accounting policies and procedures of the Company did not change, except for the elimination of Step 2 analysis.
Accounting Standards Update 2016-02, Leases (Topic 842)("ASU 2016-02"). On February 25, 2016, FASB issued ASU 2016-02 which creates Topic 842, Leases and
supersedes Topic 840, Leases. ASU 2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among
organizations. Under the new guidance, a lessee is required to record all leases with lease terms of more than 12 months on their balance sheet as lease liabilities with a
corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease
classification determined in a manner similar to existing lease guidance. The new guidance is effective for public companies for fiscal years beginning on or after December 15,
2018, and for private companies for fiscal years beginning on or after December 15, 2019. The Company adopted the guidance effective January 1, 2019 and recorded a right of
use asset of $14.1 million and a lease liability of $14.1 million.
Accounting Standards Update 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value
Measurement (“ASU 2018-13”). In August 2018, FASB issued ASU 2018-13. This ASU eliminates, adds and modifies certain disclosure requirements for fair
54
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 revises 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 requires an entity to utilize a new impairment model known as the current expected credit loss
("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net
amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new
disclosures for financial assets measured at amortized cost, loans and available-for- sale debt securities. ASU 2016-13 is effective for annual periods beginning after December
15, 2019, including interim periods within those fiscal years.
Management formed an internal, cross functional committee in 2017 to evaluate implementation steps and assess the impact ASU 2016-13 would have on the Company’s
consolidated financial statements. The committee assigned roles and responsibilities, key tasks to complete, and established a general time-line for implementation. The
Company also engaged an outside consultant to assist with the methodology review and data validation, as well as other key aspects of implementing the standard. The
committee met periodically to discuss the latest developments and ensure progress was being made. In addition, the committee kept current on evolving interpretations and
industry practices related to ASU 2016-13. The committee evaluated and validated data resources and different loss methodologies. Key implementation activities for 2019
included finalization of models, establishing processes and controls, development of supporting analytics and documentation, policies and disclosure, and implementing parallel
processing.
The Company adopted ASU 2016-13 using the modified retrospective method for financial assets measured at amortized cost-effective January 1, 2020. Results for the periods
beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the previously applicable accounting standards.
The Company recorded a reduction to retained earnings of approximately $717,000 upon adoption of ASU 2016-13. The transition adjustment included an increase to the
allowance for credit losses on loans of $1.7 million and an increase to the allowance for credit losses on off-balance sheet credit exposure of $69,000. There was no allowance
for credit losses recorded for held-to- maturity debt securities. The transition adjustment included corresponding increases in deferred tax assets.
The Company adopted ASU 2016-13 using the prospective transition approach for financial assets considered purchased credit deteriorated ("PCD") that were previously
classified as purchase credit impaired ("PCI") and accounted for under ASC 310-30 effective January 1, 2020. In accordance with the standard, the Company did not reassess
whether the PCI assets met the criteria of PCD assets as of the adoption date. The amortized cost of the PCD assets were adjusted to reflect the addition of $833,000 to the
allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost) will be accreted into interest income at the effective interest rate over the
remaining life of the assets.
The following table illustrates the impact of ASU 2016-13 adoption (in thousands):
Assets:
Construction & Land Development
Farm
1-4 Family Residential Properties
Commercial Real Estate
Agricultural
Commercial & Industrial
Consumer
Allowance for credit losses for all loans
Liabilities:
Allowance for credit losses on off-balance sheet exposures
As reported
under ASU
2016-13
January 1, 2020
Pre-ASU
2016-13
Adoption
Impact of ASU
2016-13
Adoption
$
$
$
1,033 $
1,323
2,142
11,739
1,023
9,428
1,895
28,583 $
1,146 $
1,093
1,386
11,198
1,386
9,273
1,429
26,911 $
69
— $
(113)
230
756
541
(363)
155
466
1,672
69
The following table illustrates the impact of ASU 2013-13 adoption for PCD assets previously classified as PCI included in the table above (in thousands):
Construction & Land Development
1-4 Family Residential Properties
Commercial Real Estate
Commercial & Industrial
Allowance for credit losses for all loans
As reported
under ASU
2016-13
January 1, 2020
Pre-ASU
2016-13
Adoption
Impact of ASU
2016-13
Adoption
1,033 $
2,142
11,739
9,428
28,583 $
1,146 $
1,386
11,198
9,273
26,911 $
(113)
756
541
155
1,672
$
$
55
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income included in stockholders’ equity as of December 31, 2020 and 2019 are as follows (in thousands):
December 31, 2020
Net unrealized gains on securities available-for-sale
Unamortized losses on securities held-to-maturity transferred from available-for-sale
Tax Expense
Balance at December 31, 2020
December 31, 2019
Net unrealized gains on securities available-for-sale
Unamortized losses on securities held-to-maturity transferred from available-for-sale
Tax Expense
Balance at December 31, 2019
Unrealized Gain
(Loss) on
Securities
$
$
$
$
24,077
—
(6,982)
17,095
11,825
(50)
(3,415)
8,360
Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the years ended December 31, 2020, 2019
and 2018, were as follows (in thousands):
Realized gains on available-for-sale securities
Total reclassifications out of accumulated other
comprehensive income
$
$
Amounts Reclassified from Other Comprehensive Income
2018
2019
2020
Affected Line Item in the
Statements of Income
1,106 $
(321)
802
(233)
Securities gains, net (Total
reclassified amount before tax)
901
(261) Tax expense
785 $
569 $
640 Net reclassified amount
See “Note 4 – Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.
56
Note 2 -- Earnings Per Share
Basic net income per common share available to common stockholders is calculated as net income less preferred stock dividends divided by the weighted average number of
common shares outstanding. Diluted net income per common share available to common stockholders is computed using the weighted average number of common shares
outstanding, increased by the assumed conversion of the Company’s convertible preferred stock and the Company’s stock options and restricted stock awarded, unless anti-
dilutive.
The components of basic and diluted net income per common share available to common stockholders for the years ended December 31, 2020, 2019 and 2018 were as follows:
Basic Net Income per Common Share Available to Common Stockholders:
Net income available to common stockholders
Weighted average common shares outstanding
Basic earnings per common share
Diluted Net Income per Common Share Available to Common Stockholders:
Net income available to common stockholders
Weighted average common shares outstanding
Dilutive potential common shares:
Assumed conversion of stock options
Restricted stock awarded
Dilutive potential common shares
Diluted weighted average common shares outstanding
Diluted earnings per common share
2020
2019
2018
$
$
45,270,000
16,716,880
47,943,000
16,675,269
2.71 $
2.88 $
36,600,000
14,487,126
2.53
45,270,000 $
16,716,880
47,943,000 $
16,675,269
36,600,000
14,487,126
—
45,976
45,976
16,762,856
—
34,207
34,207
16,709,476
$
2.70 $
2.87 $
209
13,250
13,459
14,500,585
2.52
There were no shares not considered in computing diluted earnings per share for the years ended December 31, 2020, 2019 and 2018.
Note 3 -- Cash and Due from Banks
Aggregate cash and due from bank balances of $0, $18,038,000 and $14,564,000 were maintained in satisfaction of statutory reserve requirements of the Federal Reserve Bank
at December 31, 2020, 2019 and 2018, respectively. At December 31, 2020, the Company's cash accounts exceeded federal insurance limits by $10.4 million.
Note 4 -- Investment Securities
The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at December 31, 2020
and 2019 were as follows (in thousands):
December 31, 2020
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Other securities
Total available-for-sale
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies
December 31, 2019
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Other securities
Total available-for-sale
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Fair Value
127,067 $
237,886
479,470
10,740
855,163 $
790 $
11,995
12,038
252
25,075 $
(788) $
(37)
(160)
(13)
(998) $
127,069
249,844
491,348
10,979
879,240
5,016 $
103 $
— $
5,119
106,428 $
172,460
391,307
3,751
673,946 $
952 $
5,990
5,331
6
12,279 $
(60) $
(17)
(512)
—
(589) $
107,320
178,433
396,126
3,757
685,636
69,542 $
99 $
(69) $
69,572
$
$
$
$
$
$
57
The Company also had $218,000 and $412,000 of equity securities, at fair value, as of December 31, 2020 and 2019, respectively. All the Company's held-to-maturity securities
are government agency-backed securities for which the risk of loss is minimal. As such, as of December 31, 2020, the Company did not record an allowance for credit losses on
its held-to-maturity securities.
Proceeds from sales of available-for-sale investment securities, realized gains and losses and income tax expense were as follows during the years ended December 31, 2020,
2019 and 2018 (in thousands):
Proceeds from sales
Gross gains
Gross losses
Income tax expense
$
2020
2019
2018
8,864 $
1,132
(26)
321
60,900 $
875
(73)
233
13,152
941
(40)
261
The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity presented at amortized
cost at December 31, 2020 and the weighted average yield for each range of maturities (in thousands):
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and
agencies
Obligations of state and political subdivisions
Mortgage-backed securities: GSE residential
Other securities
Total investments
$
$
Weighted average yield
Full tax-equivalent yield
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and
agencies
Weighted average yield
Full tax-equivalent yield
One
year or
less
After 1
through
5 years
After 5
through
10 years
After
ten years
Total
85,047
29,972
50,930
—
165,949
$
$
1.94%
2.14%
30,206
71,906
295,989
10,979
409,080
$
$
2.30%
2.49%
11,816
144,237
144,429
—
300,482
$
$
1.85%
2.25%
—
3,729
—
—
3,729
$
$
2.96%
3.95%
127,069
249,844
491,348
10,979
879,240
2.08%
2.35%
$
—
$
5,016
$
—%
—%
2.06%
2.06%
—
$
—%
—%
—
$
5,016
—%
—%
2.06%
2.06%
The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax- equivalent yields
have been calculated using a 21% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no
investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at December 31, 2020.
Investment securities carried at approximately $531 million and $688 million at December 31, 2020 and 2019, respectively, were pledged to secure public deposits and
repurchase agreements and for other purposes as permitted or required by law.
58
The following table presents the aging of gross unrealized losses and fair value by investment category as of December 31, 2020 and 2019 (in thousands):
December 31, 2020
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Other securities
Total
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
December 31, 2019
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE residential
Total
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or more
Fair
Value
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
$
$
$
$
$
59,211 $
5,380
57,609
3,977
126,177 $
(788) $
(37)
(160)
(13)
(998) $
— $
—
2,377
—
2,377 $
— $
—
—
—
— $
59,211 $
5,380
59,986
3,977
128,554 $
(788)
(37)
(160)
(13)
(998)
— $
— $
— $
— $
— $
—
23,375 $
3,469
67,080
93,924 $
(60) $
(16)
(322)
(398) $
— $
347
20,888
21,235 $
— $
(1)
(190)
(191) $
23,375 $
3,816
87,968
115,159 $
(60)
(17)
(512)
(589)
$
14,996 $
(25) $
24,565 $
(44) $
39,561 $
(69)
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At December 31, 2020 and 2019, there were no available-for-sale U.S. Treasury
securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more.
At December 31, 2020 there were no held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss
position for twelve months or more. At December 31, 2019 there were four held-to maturity U.S. Treasury securities and obligations of U.S. government corporations and
agencies with a fair value of $24,565,000 and unrealized losses of $44,000 in a continuous unrealized loss position for twelve months or more.
Obligations of states and political subdivisions. At December 31, 2020 there were no obligations of states and political subdivisions in a continuous unrealized loss position
for twelve months or more. At December 31, 2019, there was one obligation of states and political subdivisions with a fair value of $347,000 and unrealized losses of $1,000 in a
continuous unrealized loss position for twelve months or more.
Mortgage-backed Securities: GSE Residential. At December 31, 2020 there were two mortgage-backed securities with a fair value of $2,377,000 and unrealized losses of $0
in a continuous unrealized loss position for twelve months or more. At December 31, 2019, there were fourteen mortgage-backed security with a fair value of $20,888,000 and
unrealized losses of $190,000 in a continuous unrealized loss position for twelve months or more.
Other-than-temporary Impairment
Upon acquisition of a security, the Company determines whether it is within the scope of the accounting guidance for investments in debt and equity securities or whether it must
be evaluated for impairment under the accounting guidance for beneficial interests in securitized financial assets.
59
Maturities of investment securities were as follows at December 31, 2020 (in thousands):
Available-for-sale:
Due in one year or less
Due after one-five years
Due after five-ten years
Due after ten years
Mortgage-backed securities: GSE residential
Total available-for-sale
Held-to-maturity:
Due in one year or less
Due after one-five years
Total held-to-maturity
Amortized
Cost
Estimated
Fair Value
$
$
115,134 $
108,899
148,294
3,366
375,693
479,470
855,163
—
5,016
5,016 $
115,019
113,091
156,053
3,729
387,892
491,348
879,240
—
5,119
5,119
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Note 5 -- Loans and Allowance for Credit Losses
Loans are stated at the principal amount outstanding net of unearned discounts, unearned income and allowance for credit losses. Unearned income includes deferred loan
origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximated the effective interest rate
method. Interest on substantially all loans is credited to income based on the principal amount outstanding. A summary of loans at December 31, 2020 and 2019 follows (in
thousands):
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Gross loans
Less: Loans held for sale
Less:
Net deferred loan fees, premiums and discounts
Allowance for credit losses
Net loans
2020
2019
$
$
122,853 $
254,662
325,480
189,265
1,176,290
2,068,550
137,333
741,819
78,023
118,196
3,143,921
1,924
3,141,997
5,502
41,910
3,094,585 $
94,462
240,481
336,553
155,132
997,175
1,823,803
136,023
528,987
83,544
126,807
2,699,164
1,820
2,697,344
3,817
26,911
2,666,616
Net loans increased $428 million as of December 31, 2020 compared to December 31, 2019. Of this increase, approximately $183 million were loans purchased from Stifel Bank
and $168 million were PPP loans. Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost
or fair value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties. Accrued interest on loans, which is
excluded from the amortized cost of the balances above, totaled $15.9 million and $12.4 million at December 31, 2020 and 2019, respectively.
The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the
board of directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are
generally observed. The vast majority of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system.
Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company
adheres to loan underwriting standards consistent with industry guidelines for all loan segments. The Company’s lending can be summarized into the following primary areas:
Commercial Real Estate Loans. Commercial real estate loans are generally comprised of loans to small business entities to purchase or expand structures in which the business
operations are housed, loans to owners of real estate who lease space to non-related commercial entities, loans for construction and land development,
60
loans to hotel operators, and loans to owners of multi-family residential structures, such as apartment buildings. Commercial real estate loans are underwritten based on historical
and projected cash flows of the borrower and secondarily on the underlying real estate pledged as collateral on the debt. For the various types of commercial real estate loans,
minimum criteria have been established within the Company’s loan policy regarding debt service coverage while maximum limits on loan-to-value and amortization periods
have been defined. Maximum loan- to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while the desired minimum debt coverage ratio is
1.20x.
Amortization periods for commercial real estate loans are generally limited to twenty years. The Company’s commercial real estate portfolio is well below the thresholds that
would designate a concentration in commercial real estate lending, as established by the federal banking regulators.
Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund accounts receivable
that are secured by business assets other than real estate. These loans are generally written for one year or less. Also, equipment financing is provided to businesses with these
loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years. Commercial loans are often accompanied by a personal guaranty of
the principal owners of a business. Like commercial real estate loans, the underlying cash flow of the business is the primary consideration in the underwriting process. The
financial condition of commercial borrowers is monitored at least annually with the type of financial information required determined by the size of the relationship. Measures
employed by the Company for businesses with higher risk profiles include the use of government-assisted lending programs through the Small Business Administration and U.S.
Department of Agriculture.
Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and harvest corn and
soybeans and term loans to fund the purchase of equipment. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Specific underwriting
standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm
input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop. Loan-to-value ratios on loans secured by
farmland generally do not exceed 65% and have amortization periods limited to twenty-five years. Federal government-assistance lending programs through the Farm Service
Agency are used to mitigate the level of credit risk when deemed appropriate.
Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties consisting of one-to-four
units and home equity loans and lines of credit. The Company sells the vast majority of its long-term fixed rate residential real estate loans to secondary market investors. The
Company also releases the servicing of these loans upon sale. The Company retains all residential real estate loans with balloon payment features. Balloon periods are limited to
five years. Residential real estate loans are typically underwritten to conform to industry standards including criteria for maximum debt-to-income and loan-to-value ratios as
well as minimum credit scores. Loans secured by first liens on residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have
amortization periods of twenty-five years or less. The Company does not originate subprime mortgage loans.
Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an automobile or other living
expenses. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio, employment history, and collateral coverage. Typically,
consumer loans are set up on monthly payments with amortization periods based on the type and age of the collateral.
Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or equipment purchases. Underwriting
guidelines for these loans are consistent with those established for commercial loans with the additional repayment source of the taxing authority of the municipality.
Allowance for Credit Losses
The allowance for credit losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses expected over the remaining
contractual life of the assets. The provision for credit losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an
adequate allowance for credit losses. In determining the adequacy of the allowance for credit losses, and therefore the provision to be charged to current earnings, the Company
relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by the
overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Factors considered by the Company in
evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and troubled debt restructurings, trends in
volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry
conditions and the current economic conditions in the region where the Company operates. The Company estimates the appropriate level of allowance for credit losses by
evaluating large impaired loans separately from non-impaired loans.
Impaired loans
The Company individually evaluates certain loans for impairment. In general, these loans have been internally identified via the Company’s loan grading system as credits
requiring management’s attention due to underlying problems in the borrower’s business or collateral concerns. This evaluation considers expected future cash flows, the value
of collateral and also other factors that may impact the borrower’s ability to make payments when due. For loans greater than $250,000, and loans identified as troubled debt
restructurings, impairment is individually measured each quarter using one of three alternatives: (1) the present value of expected future cash flows discounted at the loan’s
effective interest rate; (2) the loan’s observable market price, if available; or (3) the fair value of the collateral less costs to sell for collateral dependent loans and loans for which
foreclosure is deemed to be probable. A specific allowance is assigned when expected cash flows or collateral are less than the carrying amount of the loan. The carrying value
of the loan reflects reductions from prior charge-offs.
Non-Impaired loans
Non-impaired loans comprise the vast majority of the Company’s total loan portfolio and include loans in accrual status and those credits not identified as troubled debt
61
restructurings. A small portion of these loans are considered “criticized” due to the risk rating assigned reflecting elevated credit risk due to characteristics, such as a strained
cash flow position, associated with the individual borrowers. Criticized loans are those assigned risk ratings of Special Mention, Substandard, or Doubtful.
Beginning January 1, 2020, the allowance for credit losses was estimated using the current expected credit loss model ("CECL"). The Company uses the Loss Rate method to
estimate the historical loss rate for all non-impaired loans. Under this method, 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. For each pool, a historical loss rate is computed based
on the average remaining contractual life of the pool. Adjustments to historical loss rates are made using qualitative factors relevant to each pool including merger & acquisition
activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. In addition, a twelve-month forecast, using reasonable and supportable future
conditions, is prepared that is used to estimate expected changes to existing and historical conditions in the current period.
The Company also considers specific current economic events occurring globally, in the U.S. and in its local markets. In March 2020, in response to the COVID-19 outbreak, its
significant disruptions in the U.S. economy and impacts on local markets, First Mid Bank offered a 90-day commercial deferral program, primarily to hotel and restaurant
borrowers. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings. These deferrals were,
however, considered in the factors used to estimate the required allowance for credit losses for non-impaired loans. Other COVID-19 related impacts considered included
revenue losses of businesses required to restrict or cease services, income loss to workers laid off as a result of COVID-19 restrictions, various federal and state government
stimulus programs and additional deferral programs offered by First Mid Bank beginning in April 2020. Other events considered include the status of trade agreements with
China, scheduled increases in minimum wage and changes to the minimum salary threshold for overtime provisions, current and projected unemployment rates, current and
projected grain and oil prices and economies of local markets where customers work and operate.
Within each pool, risk elements are evaluated that have specific impacts to the borrowers within the pool. These, along with the general risks and events, and the specific lending
policies and procedures by loan type described above, are analyzed to estimate the qualitative factors used to adjust the historical loss rates. During the current period, the
following assumptions and factors were considered when determining the historical loss rate and any potential adjustments by loan pool.
Construction and Land Development Loans. The average life of the construction and land development segment was determined to be twelve months. Historical losses in this
segment remained very low. Current activity in this industry was deemed essential and has continued during COVID-19. There was no adjustment to the qualitative factor for
this segment.
Agricultural Real Estate Loans. The average life of the agricultural real estate segment was determined to be thirty-six months. Historical losses in the segment remain very
low. Farmland values have remained steady over an extended period of time and there are no indications that this will change in the next year. There was a slight adjustment
down to the qualitative factor for this segment to reflect the improvement in the overall agriculture economy.
1- 4 Family Residential Properties Loans. The average life of the 1-4 Family Residential segment was determined to be: Residential Real Estate-non-owner occupied, sixty
months; Residential Real Estate-owner occupied, sixty months; Home Equity lines of credit, thirty months. COVID-19 has impacted the finances of consumers from layoffs and
furloughs resulting from employers that must reduce or suspend operations. Increased risk in this segment includes consumer ability to make mortgage and rent payments. Some
of this impact has been offset by governmental actions such as stimulus payments and extended unemployment benefits. First Mid Bank has also offered short-term loan
payment deferral to borrowers in this segment. Overall, the historical loss rate for this segment increased slightly for the period however there was no change in the qualitative
factor.
Commercial Real Estate Loans. The average life of the commercial real estate segment was determined to be thirty-six months. This segment includes the Company's majority
of exposure to the hotel industry which has been significantly impacted by COVID-19 events. Other impacted industries in this segment include restaurants and retail
establishments. First Mid Bank has implemented a deferral program for borrowers in this segment in order to ease the impact to these borrowers. There was a slight increase in
the historical loss rate, however the qualitative factor for this segment was not changed.
Agricultural Loans. The average life of the agricultural segment was determined to be eighteen months. Losses in this segment are very low and it is believed that borrowers in
this segment will benefit from current governmental programs such as PPP and MFP. Many farmers are holding grain from the 2019 operating season and should be able to take
advantage of an increase in prices. In addition to a slight decrease in the historical loss rate, the qualitative factor of this segment was decreased to reflect the improvement in the
overall agriculture economy.
Commercial and Industrial Loans. The average life of the commercial and industrial segment was determined to be twenty-four months. The COVID-19 impacts include forced
closures and scaled-back services for many industries within this segment including retailers, restaurants and video gaming establishments. Some of this risk is offset by
government relief programs as well as, First Mid Bank's payment deferral program. There was a slight decrease in the historical loss rate, however the qualitative factor for this
segment was not changed.
Consumer Loans. The average life of the consumer segment was determined to be thirty-six months. The financial status of many borrowers has been impacted by COVID-19
events including layoffs and reduced hours. Some of this impact has been offset by government stimulus programs, increased paid leave and increased and extended
unemployment benefits, however these benefits are now expiring. Additionally, First Mid Bank has offered a short-term payment deferral program. There was a slight decrease
in the historical loss rate, however the qualitative factor for this segment was not changed.
62
Acquired Loans. Prior to January 1, 2020 loans acquired with evidence of credit deterioration since origination and for which it was probable that all contractually required
payments would not be collected were considered purchased credit impaired at the time of acquisition. Purchase credit-impaired ("PCI") loans were accounted for under ASC
310-30, Receivables--Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), and were initially measured at fair value, which included the
estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans was not carried over and
recorded at the acquisition date. The cash flows expected to be collected were estimated using current key assumptions, such as default rates, value of underlying collateral,
severity and prepayment speeds.
Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are
considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk
characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the
purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price,
there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is
considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the
life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date. Accordingly, on January 1, 2020, the amortized cost basis of the
PCD loans were adjusted to reflect the addition of $833,000 to the allowance for credit losses.
For acquired loans not deemed purchased credit deteriorated at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as
interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit
loss expense. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated
loans.
The following tables present the balance in the allowance for credit losses and the recorded investment in loans based on portfolio segment and impairment method as of
December 31, 2020, 2019 and 2018 (in thousands):
Construction
& Land
Development
Agricultural
Real Estate
1-4 Family
Residential
Properties
Commercial
Real Estate
Agricultural
Loans
Commercial
& Industrial
Consumer
Loans
Total
Twelve months ended December 31, 2020
Beginning
Balance (prior
to adoption of ASC 326)
Impact of adopting ASC 326
Provision for credit loss expense
Loans charged off
Recoveries collected
Ending balance
$
$
Twelve months ended December 31, 2019
Beginning Balance
$
Provision for credit loss expense
Loans charged off
Recoveries collected
Ending balance
$
Twelve months ended December 31, 2018
Beginning Balance
$
Provision for credit loss expense
Loans charged off
Recoveries collected
Ending balance
$
1,146 $
(113)
646
13
—
1,666 $
561 $
585
—
—
1,146 $
1,202 $
(631)
10
—
561 $
1,093 $
230
(239)
—
—
1,084 $
1,246 $
(153)
—
—
1,093 $
1,001 $
245
—
—
1,246 $
1,386 $
756
274
393
299
2,322 $
1,504 $
1,268
1,478
92
1,386 $
886 $
1,628
1,111
101
1,504 $
11,198 $
541
8,581
829
169
19,660 $
11,102 $
1,827
1,743
12
11,198 $
7,918 $
3,353
170
1
11,102 $
1,386 $
(363)
503
—
—
1,526 $
951 $
459
24
—
1,386 $
743 $
301
93
—
951 $
9,273 $
155
5,869
1,991
179
13,485 $
1,429 $
466
469
618
421
2,167 $
26,911
1,672
16,103
3,844
1,068
41,910
9,893 $
1,053
1,828
155
9,273 $
7,425 $
3,155
832
145
9,893 $
932 $
1,394
1,253
356
1,429 $
26,189
6,433
6,326
615
26,911
802 $
616
777
291
932 $
19,977
8,667
2,993
538
26,189
Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is
to promptly charge these loans off in the period the uncollectible loss is reasonably determined. For all loan portfolio segments except 1-4 family residential properties and
consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that
includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs
the borrower’s ability to adequately meet its obligations. For impaired loans that are considered solely collateral dependent, a partial charge-off is recorded when a loss has been
confirmed by an updated appraisal or other appropriate valuation of the collateral.
The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company
adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value
less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value
when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured
and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.
63
The following table presents the amortized cost basis of collateral-dependent loans by class of loans that were individually evaluated to determine expected credit losses, and the
related allowance for credit losses, as of December 31, 2020 (in thousands):
Construction and land development
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Commercial and industrial loans
Consumer loans
Total loans
Credit Quality
Real Estate
Business
Assets
Other
Total
Collateral
Allowance
for Credit
Losses
$
$
516 $
2,393
1,914
11,527
16,350
—
—
16,350 $
— $
—
—
—
—
3,458
—
3,458 $
— $
—
—
—
—
—
8
8 $
516 $
2,393
1,914
11,527
16,350
3,458
8
19,816 $
246
158
—
863
1,267
664
—
1,931
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information,
historical payment experience, collateral support, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans
individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Company uses the following definitions for risk ratings, which are
commensurate with a loan considered "criticized":
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may
result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current sound-worthiness and paying capacity of the obligor or of the collateral pledged, if any.
Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution
will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing factors, conditions and values, highly questionable and improbable.
64
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered pass rated loans. The following tables present the credit
risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2020 (in thousands):
Risk Rating
December 31, 2020
Construction & Land Development Loans
2020
Term Loans by Origination Year
2019
2018
2017
2016
Prior
Revolving
Loans
Total
Pass
Special Mention
Substandard
Total
Agricultural Real Estate
Loans
Pass
Special Mention
Substandard
Total
$
$
$
$
1-4 Family Residential Property Loans
41,842 $
—
—
41,842 $
40,989 $
—
128
41,117 $
31,500 $
—
—
31,500 $
2,760 $
—
517
3,277 $
871 $
—
—
871 $
3,822 $
—
50
3,872 $
73,630 $
1,845
—
75,475 $
81,366 $
192
296
81,854 $
34,412 $
3,970
—
38,382 $
29,695 $
2,142
695
32,532 $
37,839 $
533
800
39,172 $
38,163 $
523
1,915
40,601 $
16,138 $
469
208
16,815 $
23,086 $
2,720
1,859
27,665 $
13,559 $
1,106
64
14,729 $
26,676 $
247
1,996
28,919 $
58,291 $
11,232
245
69,768 $
62,942 $
1,578
7,516
72,036 $
Pass
Special Mention
Substandard
Total
Commercial Real Estate
Loans
Pass
Special Mention
Substandard
Total
Agricultural Loans
Pass
Special Mention
Substandard
Total
Commercial & Industrial
Loans
Pass
Special Mention
Substandard
Total
Consumer Loans
Pass
Special Mention
Substandard
Total
Total Loans
Pass
Special Mention
Substandard
Total
$
$
$
$
$
$
$
$
$
$
$
$
368,750 $
2,469
1,863
373,082 $
83,377 $
21,070
68
104,515 $
237,119 $
1,300
40
238,459 $
171,591 $
6,108
7,081
184,780 $
148,283 $
11,262
2,022
161,567 $
143,400 $
6,741
4,905
155,046 $
215,616 $
16,947
18,435
250,998 $
15,680 $
4,483
238
20,401 $
5,978 $
694
25
6,697 $
1,838 $
224
—
2,062 $
635 $
148
—
783 $
2,856 $
38
—
2,894 $
371,683 $
4,116
889
376,688 $
132,148 $
32,130
2,360
166,638 $
31,609 $
—
15
31,624 $
21,384 $
24
16
21,424 $
70,497 $
849
532
71,878 $
12,084 $
24
111
12,219 $
78,890 $
489
1,689
81,068 $
8,279 $
1
95
8,375 $
42,439 $
1,101
136
43,676 $
114,904 $
730
969
116,603 $
3,150 $
1
67
3,218 $
1,022 $
—
120
1,142 $
1,052,257 $
29,692
3,131
1,085,080 $
511,427 $
44,049
3,477
558,953 $
367,652 $
8,731
10,464
386,847 $
279,274 $
15,165
6,390
300,829 $
230,730 $
9,344
7,168
247,242 $
459,453 $
30,525
27,335
517,313 $
40,363 $
293
1,499
42,155 $
2,941,156
137,799
59,464
3,138,419
65
— $
—
—
— $
— $
—
—
— $
40,363 $
293
1,499
42,155 $
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
121,784
—
695
122,479
233,869
19,155
1,317
254,341
302,291
7,695
15,776
325,762
1,284,759
44,827
34,346
1,363,932
110,364
26,657
331
137,352
810,561
39,415
6,575
856,551
77,528
50
424
78,002
The following table presents the credit risk profile of the Company’s loan portfolio base on risk rating category as of December 31, 2019 (in thousands):
Special
Mention
Substandard
Total
Construction & land development
Agricultural real estate
1-4 Family residential property loans
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial & industrial loans
Consumer loans
Total loans
Pass
$
$
93,413 $
231,227
314,999
1,103,543
1,743,182
129,811
603,047
82,117
2,558,157 $
413 $
6,902
5,743
14,156
27,214
3,862
40,395
140
71,611 $
316 $
2,112
15,685
31,951
50,064
2,451
12,138
926
65,579 $
The following table presents the Company’s loan portfolio aging analysis at December 31, 2020 and 2019 (in thousands):
30-59 days
Past Due
60-89 days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total Loans
Receivable
$
$
$
$
— $
1,198
1,121
—
2,618
4,937
43
2,426
145
—
7,551 $
235 $
1,595
3,834
1,348
602
7,614
300
767
454
—
9,135 $
— $
34
1,105
—
341
1,480
—
8
50
—
1,538 $
— $
—
2,288
46
495
2,829
—
855
196
—
3,880 $
128 $
—
2,033
—
794
2,955
236
1,420
149
—
4,760 $
— $
47
4,713
1,131
2,241
8,132
307
5,989
150
—
14,578 $
128 $
1,232
4,259
—
3,753
9,372
279
3,854
344
—
13,849 $
235 $
1,642
10,835
2,525
3,338
18,575
607
7,611
800
—
27,593 $
122,351 $
253,109
321,503
189,632
1,170,547
2,057,142
137,073
734,459
77,658
118,238
3,124,570 $
93,907 $
238,599
325,592
151,423
992,364
1,801,885
135,517
521,362
82,383
126,607
2,667,754 $
122,479 $
254,341
325,762
189,632
1,174,300
2,066,514
137,352
738,313
78,002
118,238
3,138,419 $
94,142 $
240,241
336,427
153,948
995,702
1,820,460
136,124
528,973
83,183
126,607
2,695,347 $
December 31, 2020
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
December 31, 2019
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
Impaired Loans
94,142
240,241
336,427
1,149,650
1,820,460
136,124
655,580
83,183
2,695,347
Total
Loans > 90
days &
Accruing
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Within all loan portfolio segments, loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all
amounts due from the borrower in accordance with the contractual terms of the loan. The entire balance of a loan is considered delinquent if the minimum payment contractually
required to be made is not received by the specified due date. Impaired loans, excluding certain troubled debt restructured loans, are placed on nonaccrual status. Impaired loans
include nonaccrual loans and loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These
concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being modified remain on nonaccrual status until, in the opinion of
management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. If the restructured loan is
on accrual status prior to being modified, the loan is reviewed to determine if the modified loan should remain on accrual status.
66
The following tables present impaired loans as of December 31, 2020 and 2019 (in thousands):
Loans with a specific allowance:
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Total loans
Loans without a specific allowance:
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Total loans
Total loans:
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Total loans
Recorded
Balance
2020
Unpaid
Principal
Balance
Specific
Allowance
Recorded
Balance
2019
Unpaid
Principal
Balance
Specific
Allowance
$
$
$
$
$
$
516 $
—
4,005
1,914
11,528
17,963
—
3,523
112
21,598 $
162 $
359
4,262
267
552
5,602
659
907
218
7,386 $
678 $
359
8,267
2,181
12,080
23,565
659
4,430
330
28,984 $
516 $
—
4,157
1,914
11,794
18,381
228
4,878
114
23,601 $
175 $
359
4,715
267
581
6,097
431
1,331
313
8,172 $
691 $
359
8,872
2,181
12,375
24,478
659
6,209
427
31,773 $
246 $
—
158
—
863
1,267
—
664
—
1,931 $
— $
—
—
—
—
—
—
—
—
— $
246 $
—
158
—
863
1,267
—
664
—
1,931 $
256 $
—
5,154
4,254
5,904
15,568
85
7,653
134
23,440 $
41 $
479
3,719
—
1,721
5,960
724
916
391
7,991 $
297 $
479
8,873
4,254
7,625
21,528
809
8,569
525
31,431 $
256 $
—
5,351
4,254
6,408
16,269
669
8,789
134
25,861 $
41 $
479
4,263
—
1,724
6,507
140
3,065
713
10,425 $
297 $
479
9,614
4,254
8,132
22,776
809
11,854
847
36,286 $
—
—
182
19
587
788
8
301
1
1,098
—
—
—
—
—
—
—
—
—
—
—
—
182
19
587
788
8
301
1
1,098
The Company’s policy is to discontinue the accrual of interest income on all loans for which principal or interest is ninety days past due. The accrual of interest is discontinued
earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but
uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded
only after principal recovery is reasonably assured. Interest on loans determined to be troubled debt restructurings is recognized on an accrual basis in accordance with the
restructured terms if the loan is in compliance with the modified terms. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial
position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory
performance of not less than six months before returning a nonaccrual loan to accrual status.
67
The following tables present average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2020, 2019 and 2018 (in
thousands):
2020
2019
2018
Average
Investment
in Impaired
Loans
Interest
Income
Recognized
Average
Investment
in Impaired
Loans
Interest
Income
Recognized
Average
Investment
in Impaired
Loans
Interest
Income
Recognized
Construction and land development
Farm loans
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total loans
$
$
694 $
827
8,557
2,325
12,387
24,790
815
4,941
392
—
30,938 $
7 $
—
17
—
41
65
—
1
—
—
66 $
622 $
1,218
9,659
6,490
12,189
30,178
808
10,065
649
—
41,700 $
32 $
—
80
89
234
435
3
9
1
—
448 $
2,558 $
415
6,297
9,666
9,818
28,754
727
9,003
131
3
38,618 $
37
—
144
137
271
589
23
6
1
—
619
The amount of interest income recognized by the Company within the periods stated above was due to loans modified in a troubled debt restructuring that remained on accrual
status. The average balance of loans modified in a troubled debt restructuring included in the impaired loans stated above that were still accruing was $4.4 million, $2.7 million
and $2.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The amount of interest income recognized using a cash-basis method of accounting during
the period that the loans were impaired was not material.
Nonaccrual Loans
The following table presents the Company’s recorded balance of nonaccrual loans at December 31, 2020 and December 31, 2019 (in thousands). This table excludes performing
purchased credit deteriorated loans and performing troubled debt restructurings.
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Total loans
Nonaccrual
with no
Allowance for
Credit Loss
2020
Nonaccrual
2019
Nonaccrual
$
$
162 $
359
6,747
2,181
7,345
16,794
659
3,677
327
21,457 $
162 $
359
6,930
2,181
8,760
18,392
659
4,372
327
23,750 $
41
479
7,379
3,137
4,351
15,387
769
8,441
521
25,118
The aggregate principal balances of nonaccrual, past due ninety days or more loans were $23.8 million and $25.1 million at December 31, 2020 and 2019, respectively. Interest
income that would have been recorded under the original terms of such nonaccrual loans totaled $921,000, $906,000 and $1,189,000 in 2020, 2019 and 2018, respectively.
68
Acquired Loans
The Company acquired certain loans considered to be credit-impaired in its business combinations prior to the adoption of ASU 2016-13. At acquisition, these loans evidenced
deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these
loans was included in the consolidated balance sheet amounts for Loans. The amount of these loans at December 31, 2019 was as follows (in thousands):
Construction and land development
Agricultural real estate
1-4 Family residential properties
Multifamily residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Carrying amount
Allowance for credit losses
Carrying amount, net of allowance
December 31,
2019
256
—
371
2,077
2,247
4,951
—
—
—
4,951
(365)
4,586
$
$
For PCI loans, the difference between contractually required payments at acquisition and the cash flow expected to be collected is referred to as the non-accretable difference.
Any excess of expected cash flows over the fair value is referred to as the accretable yield. Subsequent decreases to the expected cash flows resulted in a provision for loan and
lease losses. Subsequent increases in expected cash flows resulted in a reversal of the provision for loan and lease losses to the extent of prior charges and then an adjustment to
accretable yield, which had a positive impact on interest income. As of December 31, 2019, subsequent changes in expected cash flows resulted in approximately $365,000 of
provision recorded and approximately $1,229,000 provision reversed.
Troubled Debt Restructuring
The balance of troubled debt restructurings ("TDRs") at December 31, 2020 and 2019 was $9,502,000 and $5,803,000, respectively. Approximately $1,016,000 and $381,000 in
specific reserves were established with respect to these loans as of December 31, 2020 and 2019, respectively. As troubled debt restructurings, these loans are included in
nonperforming loans and are classified as impaired which requires that they be individually measured for impairment. The modification of the terms of these loans included one
or a combination of the following: a reduction of stated interest rate of the loan; an extension of the maturity date and change in payment terms; or a permanent reduction of the
recorded investment in the loan. There was no significant change between pre- and post-modification balances.
The following table presents the Company’s recorded balance of troubled debt restructurings at December 31, 2020 and 2019 (in thousands).
Troubled debt restructurings:
1-4 Family residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
Total
Performing troubled debt restructurings:
1-4 Family residential properties
Commercial real estate
Loans secured by real estate
Agricultural Loans
Commercial and industrial loans
Consumer loans
Total
$
$
$
$
2020
2019
1,603 $
5,170
6,773
228
2,389
112
9,502 $
1,268 $
3,045
4,313
-
58
2
4,373 $
1,905
1,746
3,651
669
1,349
134
5,803
1,382
1,146
2,528
40
128
5
2,701
69
The following table presents loans modified as TDRs during the years ended December 31, 2020 and 2019 as a result of various modified loan factors (in thousands). The
change in the recorded investment from pre-modification to post-modification was not material.
Number of
Modifications
December 31, 2020
Recorded
Investment
Type of
Number of
Type of
Modifications Modifications
Modifications
December 31, 2019
Recorded
Investment
1-4 Family residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer Loans
Total
Type of modifications:
(a) Reduction of stated interest rate of loan
(b) Change in payment terms
(c) Extension of maturity date
(d) Permanent reduction of the recorded investment
2 $
4
6
0
4
1
11 $
87
3,622 (b)
3,709
- (b)(c)
2,314 (b)
8 (b)
6,031
3 $
3
6
1
5
1
13 $
131 (a)(b)(c)
1,507 (b)(d)
1,638
40 (b)
127 (b)(c)
11 (c)
1,816
A loan is considered to be in payment default once it is ninety days past due under the modified terms. There were no loans modified as troubled debt restructurings during the
prior twelve months that experienced defaults for years ended December 31, 2020 and 2019.
At December 31, 2020 and 2019, the balance of real estate owned includes $2,489,000 and $3,644,000, respectively of foreclosed real estate properties recorded as a result of
obtaining physical possession of the property. At December 31, 2020 and 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties
for which formal foreclosure proceeds are in process was $713,000 and $667,000.
Note 6 -- Premises and Equipment, Net
Premises and equipment at December 31, 2020 and 2019 consisted of (in thousands):
Land
Buildings and improvements
Furniture and equipment
Leasehold improvements
Construction in progress
Subtotal
Accumulated depreciation and amortization
Total
2020
2019
$
$
14,599 $
53,147
22,996
3,636
576
94,954
36,748
58,206 $
14,734
52,542
22,051
3,582
797
93,706
34,215
59,491
Depreciation and amortization expense was $3.8 million, $3.6 million and $3.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Note 7 -- Goodwill and Intangible Assets
The Company has goodwill from business combinations, intangible assets from branch acquisitions, identifiable intangible assets assigned to core deposit
relationships and customer lists of business lines acquired. The following table presents gross carrying amount and accumulated amortization by major intangible
asset class as of December 31, 2020 and 2019 (in thousands):
2020
2019
Goodwill not subject to amortization
Intangibles from branch acquisition
Core deposit intangibles
Customer list intangibles
$
$
108,752 $
3,015
32,355
16,389
160,511 $
3,760 $
3,015
20,910
5,222
32,907 $
All goodwill was assigned to the banking segment of the Company. This goodwill is not deductible for tax purposes.
70
Gross
Carrying
Value
Accumulated
Amortization
Gross
Carrying
Value
Accumulated
Amortization
3,760
3,015
17,746
3,917
28,438
108,752 $
3,015
32,355
16,129
160,251 $
The unpaid principal balance of mortgage loans serviced for others was $126.8 million and $186.2 million at December 31, 2020 and 2019, respectively. The following
table summarizes the activity pertaining to the mortgage servicing rights included in intangible assets as of December 31, 2020 and 2019 (in thousands):
December 31,
2020
December 31,
2019
Beginning Balance
Acquired Balance
Mortgage Servicing rights capitalized
Valuation reserve
Mortgage Servicing rights amortized
I/O strip
Ending Balance
$
$
1,444 $
—
—
(273)
(593)
(62)
516 $
Total amortization expense for the years ended December 31, 2020, 2019 and 2018 was as follows (in thousands):
2020
2019
2018
Core deposit intangibles
Customer list intangibles
Mortgage Servicing Rights
$
$
3,164 $
1,305
593
5,062 $
Estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands):
For year ended 12/31/21
For year ended 12/31/22
For year ended 12/31/23
For year ended 12/31/24
For year ended 12/31/25
3,729 $
1,269
850
5,848 $
$
2,101
—
—
(380)
(411)
134
1,444
2,544
363
308
3,215
4,408
3,526
3,214
2,946
2,633
In accordance with the provisions of SFAS 142 ”Goodwill and Other Intangible Assets,” codified in ASC 350, the Company performed testing of goodwill for
impairment as of September 30, 2019 and 2018, and determined, as of each of these dates, that goodwill was not impaired. Management also concluded that the
remaining amounts and amortization periods were appropriate for all intangible assets. The weighted average amortization period for core deposit, customer lists and
total intangibles was 3.32, 4.92 and 4.11, respectively, at December 31, 2020.
Note 8 – Deposits
As of December 31, 2020 and 2019, deposits consisted of the following (in thousands):
Demand deposits:
Non-interest bearing
Interest-bearing
Savings
Money market
Time deposits
Total deposits
2020
2019
$
$
936,926 $
1,031,183
499,427
748,179
477,069
3,692,784 $
633,331
850,956
428,778
419,801
584,500
2,917,366
Total interest expense on deposits for the years ended December 31, 2020, 2019 and 2018 was as follows (in thousands):
Interest-bearing demand
Savings
Money market
Time deposits
Total
2020
2019
2018
$
$
1,462 $
426
2,270
8,593
12,751 $
2,741 $
590
3,742
11,866
18,939 $
1,158
579
2,135
4,699
8,571
71
As of December 31, 2020, 2019 and 2018, the aggregate amount of time deposits in denominations of more than $250,000 was as follows (in thousands):
Time deposit balances in denominations of more than $250,000
$
98,277 $
107,285 $
87,517
2020
2019
2018
The following table shows the amount of maturities for all time deposits as of December 31, 2020 (in thousands):
Less than 1 year
1 year to 2 years
2 years to 3 years
3 years to 4 years
4 years to 5 years
Over 5 years
Total
$
$
In 2020 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of
approximately $227.6 million and $258.4 million in various checking accounts and time deposits as of December 31, 2020 and 2019, respectively. These balances are
subject to change depending upon the cash flow needs of the public entity.
Note 9 -- Repurchase Agreements and Other Borrowings
As of December 31, 2020 and 2019 borrowings consisted of the following (in thousands):
Securities sold under agreements to repurchase
Federal Home Loan Bank (FHLB) Fixed-term advances
Subordinated debt
Junior subordinated debentures
Other borrowings:
Federal funds purchased
Due after one year
Total
2020
2019
$
$
206,937 $
93,969
94,253
19,027
—
—
414,186 $
Aggregate annual maturities of FHLB advances and debt (excluding unamortized discounts and premiums) at December 31, 2020 are (in thousands):
349,506
70,312
26,498
18,555
12,100
98
477,069
208,109
113,895
—
18,858
5,000
—
345,862
2021
2022
2023
2024
2025
Thereafter
Unamortized discount
Subordinated
Debt
Jr. Subordinated
Debentures
— $
—
—
—
—
96,000
96,000
(1,747)
94,253 $
—
—
—
—
—
20,620
20,620
(1,593)
19,027
19,000 $
5,000
15,000
10,000
5,000
40,000
94,000
(31)
93,969 $
FHLB
$
$
72
FHLB advances represent borrowings by First Mid Bank to fund loan demand. At December 31, 2020 the advances totaling $94 million were as follows:
Advance
$
5,000,000
5,000,000
4,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
10,000,000
5,000,000
5,000,000
5,000,000
5,000,000
10,000,000
15,000,000
Term (in years)
3.5
5.0
1.0
7.0
5.0
8.0
3.5
3.5
5.0
5.0
10.0
10.0
10.0
10.0
10.0
Interest Rate
1.83%
1.85%
2.00%
2.55%
2.71%
2.40%
1.51%
0.77%
1.45%
0.91%
1.14%
1.15%
1.12%
1.39%
1.41%
Maturity Date
February 1, 2021
April 12, 2021
May 3, 2021
October 1, 2021
March 21, 2022
January 9, 2023
July 31, 2023
September 11, 2023
December 31, 2024
March 10, 2025
October 3, 2029
October 3, 2029
October 3, 2029
December 31, 2029
December 31, 2029
Securities sold under agreements to repurchase were $206.9 million at December 31, 2020, a decrease of $1.2 million from $208.1 million at December 31, 2019
primarily due to seasonal cash needs of customers. Securities sold under agreements to repurchase have overnight maturities and a weighted average rate of .16%.
(in thousands)
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end
Average amount outstanding for the year
2020
2019
2018
$
350,288 $
219,298
208,109 $
169,437
192,330
140,622
The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of
the repurchase agreement should the Company be in default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of
principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third party
financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity
repurchase agreements, the collateral is held by the Company in a segregated custodial account under a tri- party agreement. The Company is required by the
counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities.
The Company closely monitors collateral levels to ensure adequate levels are maintained, while mitigating the potential of over-collateralization in the event of
counterparty default.
Repurchase agreements by class of collateral pledged are as follows (in thousands):
US Treasury securities and obligations of U.S. government corporations & agencies
Obligations of states and political subdivisions
Mortgage-backed securities: GSE: residential
Miscellaneous
Total
December 31, 2020
$
$
37,423 $
—
168,480
1,034
206,937 $
December 31, 2019
77,333
2,375
128,401
—
208,109
At December 31, 2020, there was no outstanding loan balance on the revolving credit agreement with The Northern Trust Company. This loan was renewed on April
10, 2020 for one year as a revolving credit agreement with a maximum available balance of $15 million. The interest rate is floating at 2.25% over the federal funds
rate. The loan is secured by all the stock of First Mid Bank. Management believes that the Company and its subsidiary banks were in compliance with all the existing
covenants at December 31, 2020 and 2019.
On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the
“Notes”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National Association, as
trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the Company and the
Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes are unsecured,
subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding October 15, 2025, the Notes will
bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a
floating rate equal to three-month Term SOFR plus a spread of 383 basis points, or such other rate as determined pursuant to the Supplemental Indenture, provided that in no
event shall the applicable floating interest rate be less than zero per annum.
The Company may, beginning with the interest payment date of October 15, 2025, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at a
redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The
73
Company may also redeem the Notes at any time, including prior to October 15, 2025, at the Company’s option, in whole but not in part, if: (i) a change or prospective change in
law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude
the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment
Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding
the redemption date.
The Company had approximately $1.8 million of costs, including a debt issuance discount of $1.4 million, in connection with the debt issuance. This expense is being amortized
to interest expense over the life of the notes. At December 31, 2020, the recorded balance of subordinated notes was $94,253,000.
On February 27, 2004, the Company completed the issuance and sale of $10 million of floating rate trust preferred securities through Trust I, a statutory business trust
and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering. On October 7, 2019, these trust preferred securities were redeemed, along
with $310,000 in common securities issued by Trust I and held by the Company, as a result of the concurrent redemption of 100% of he Company's junior
subordinated debentures due 2034 and held by Trust I, which supported the trust preferred securities. The redemption price for the junior subordinated debentures was
equal to 100% of the principal amount plus accrued interest, if any, up to, but not including, the redemption date of October 7, 2019. The proceeds from the
redemption of the junior subordinated debentures were simultaneously applied to redeem all of the outstanding common securities and the outstanding trust preferred
securities at a price of 100% of the aggregate liquidation amount of the trust preferred securities plus accumulated but unpaid distributions up to but not including the
redemption date. The redemption was made pursuant to the optional redemption provision of the underlying indenture.
On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through Trust II, a statutory business
trust and wholly-owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II for the purpose of issuing the trust
preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common equity of Trust
II, a total of $10,310,000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to
Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points) after
June 15, 2011 (1.82% and 3.49% at December 31, 2020 and 2019). The net proceeds to the Company were used for general corporate purposes, including the
Company’s acquisition of Mansfield.
On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a wholly
owned unconsolidated subsidiary of First Clover Financial. The $4 million of trust preferred securities and an additional $124,000 additional investment in common
equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear interest at three-month LIBOR
plus 185 basis points (2.07% and 3.74% at December 31, 2020 and 2019, respectively) and resets quarterly.
On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly owned
unconsolidated subsidiary of First BancTrust Corporation. The $6 million of trust preferred securities and an additional $186,000 additional investment in common
equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear interest at three-month
LIBOR plus 170 basis points (1.92% and 3.59% at December 31, 2020 and 2019, respectively) and resets quarterly.
The trust preferred securities issued by Trust II, CLST I, and FBTCSTI are included as Tier 1 capital of the Company for regulatory capital purposes. On March 1,
2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1 capital for
regulatory purposes. The final rule provided a five-year transition period, ending September 30, 2010, for application of the revised quantitative limits. On March 17,
2009, the Federal Reserve Board adopted an additional final rule that delayed the effective date of the new limits on inclusion of trust preferred securities in the
calculation of Tier 1 capital until March 31, 2012. The application of the revised quantitative limits did not and is not expected to have a significant impact on its
calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized. The Dodd-Frank Act, signed into law July 21, 2010, removes trust preferred
securities as a permitted component of a holding company’s Tier 1 capital after a three-year phase-in period beginning January 1, 2013 for larger holding companies.
For holding companies with less than $15 billion in consolidated assets, existing issues of trust preferred securities are grandfathered and not subject to this new
restriction. Similarly, the final rule implementing the Basel III reforms allows holding companies with less than $15 billion in consolidated assets as of December 31,
2009 to continue to count toward Tier 1 capital any trust preferred securities issued before May 19, 2010. New issuances of trust preferred securities, however would
not count as Tier 1 regulatory capital.
In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt rules that prohibit banks and their
affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity
funds). This rule is generally referred to as the “Volcker Rule.” On December 10, 2013, the federal banking agencies issued final rules to implement the prohibitions
required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry regarding the adverse impact the final
rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies approved an interim final rule to permit banking
entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities. Under the interim final rule, the agencies permit the
retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets if (1) the collateralized debt obligation was established and
issued prior to May 19, 2010, (2) the banking entity reasonably believes that the offering proceeds received by the collateralized debt obligation were invested primarily
in qualifying trust preferred collateral, and (3) the banking entity’s interests in the collateralized debt obligation was acquired on or prior to December 10, 2013.
Although the Volcker Rule impacts many large banking entities, the Company does not currently anticipate that the Volcker Rule will have a material effect on the
operations of the Company or First Mid Bank.
Note 10 -- Regulatory Capital
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory
requirements established by the Board of Governors of the Federal Reserve System (“Federal Reserve System”), and First Mid Bank follow similar minimum regulatory
74
requirements established for national banks by the Office of the Comptroller of the Currency (“OCC”). Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Quantitative measures established by each regulatory capital standards to ensure capital adequacy require the Company and its subsidiary bank to maintain a minimum capital
amounts and ratios (set forth in the table below). Management believes that, as of December 31, 2020 and 2019, the Company and First Mid Bank all capital adequacy
requirements.
As of December 31, 2020 and 2019, the most recent notification from the primary regulators categorized First Mid Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, minimum total risk-based capital, Tier 1 risk-based capital, Common Equity Tier 1 risk-based capital, and Tier 1
leverage ratios must be maintained as set forth in the table below. At December 31, 2020, there were no conditions or events since the most recent notification that management
believes have changed this categorization.
($ in thousands)
December 31, 2020
Total Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Common Equity Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to average assets)
Company
First Mid Bank
December 31, 2019
Total Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Common Equity Tier 1 Capital (to risk-weighted assets)
Company
First Mid Bank
Tier 1 Capital (to average assets)
Company
First Mid Bank
Actual
Amount
Ratio
Required Minimum For
Capital Adequacy Purposes
with Capital Buffer
Ratio
Amount
To Be Well-Capitalized Under
Prompt Corrective Action
Provisions
Amount
Ratio
$
$
589,352
446,308
458,325
409,534
439,299
409,534
458,325
409,534
444,305
411,196
417,394
384,285
398,536
384,285
417,394
384,285
18.82% $
14.30%
328,865
327,685
>10.50%
>10.50% $
N/A
312,081
N/A
> 10.00%
14.63%
13.12%
266,224
265,269
> 8.50
> 8.50
N/A
249,665
14.03%
13.12%
219,243
218,457
> 7.00
> 7.00
N/A
202,853
10.22%
9.18%
179,302
178,497
> 4.00
> 4.00
N/A
223,121
N/A
> 8.00
N/A
> 6.50
N/A
> 5.00
15.74% $
14.65%
296,378
294,703
>10.50%
>10.50% $
N/A
280,670
N/A
> 10.00%
14.79%
13.69%
239,925
238,569
> 8.50
> 8.50
N/A
224,536
14.12%
13.69%
197,585
196,469
> 7.00
> 7.00
N/A
182,435
11.20%
10.37%
149,044
148,268
> 4.00
> 4.00
N/A
185,335
N/A
> 8.00
N/A
> 6.50
N/A
> 5.00
The Company's risk-weighted assets, capital and capital ratios for December 31, 2020 and 2019 were computed in accordance with Basel III capital rules which were effective
January 1, 2015. Prior periods were computed following previous rules. See heading "Basel III" in the Overview section of this report for a more detailed description of Basel III
rules. As of December 31, 2020 and 2019, the Company and First Mid Bank had capital ratios above the required minimums for regulatory capital adequacy, and First Mid Bank
had capital ratios that qualified it for treatment as well-capitalized under the regulatory framework for prompt corrective action with respect to banks.
75
Note 11 -- Disclosures of Fair Values of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair
value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to
measure fair value:
Level 1
Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets or liabilities.
Level 2
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or
comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices
in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance
sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-Sale Securities. The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an
active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar
characteristics or independent asset pricing services and pricing models, the inputs of which are market- based or independently sources market parameters, including but not
limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation
hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
Equity Securities. The fair value of current equity securities is determined by obtaining quoted market prices in an active market and are classified within Level 1. In cases
where quoted market prices are not available, fair values are estimated by using quoted prices of securities with similar characteristics and are classified in Level 2 of the
valuation hierarchy.
Derivatives. The fair value of derivatives is based on models using observable market data as of the measurement date and are therefore classified in Level 2 of the valuation
hierarchy.
76
The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value
measurements fall as of December 31, 2020 and 2019 (in thousands):
Quoted Prices in
Active Markets
for Identical
Fair Value Measurements Using:
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Assets (Level 1)
December 31, 2020
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and
agencies
Obligations of states and political subdivisions
Mortgage-backed securities
Other securities
Total available-for-sale securities
Equity securities
Derivative assets: interest rate swaps
Total assets
Derivative liabilities: interest swaps
December 31, 2019
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and
agencies
Obligations of states and political subdivisions
Mortgage-backed securities
Other securities
Total available-for-sale securities
Equity securities
Total assets
Derivative liabilities: interest swaps
$
$
$
$
$
$
127,069 $
249,844
491,348
10,979
879,240
218
1,399
880,857 $
— $
—
—
—
—
218
—
218 $
127,069 $
249,050
491,348
10,979
878,446
193
1,399
880,038 $
2,892 $
— $
2,892 $
107,320 $
178,433
396,126
3,757
685,636
412
686,048 $
— $
—
—
—
—
219
219 $
107,320 $
177,460
396,126
3,757
684,663
193
684,856 $
325 $
— $
325 $
—
794
—
—
794
—
—
794
—
—
973
—
—
973
0
973
—
The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2020 and 2019 is summarized
as follows (in thousands):
Beginning balance
Transfers into Level 3
Transfers out of Level 3
Total gains or losses
Included in net income
Included in other comprehensive income (loss)
Purchases, issuances, sales and settlements
Purchases
Issuances
Sales
Settlements
Ending balance
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to
assets and liabilities still held at the reporting date
77
Obligations of State and Political
Subdivisions
December 31,
2020
December 31,
2019
$
$
$
973 $
—
—
5
—
—
—
—
(184)
794 $
— $
967
—
—
6
—
—
—
—
—
973
—
Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as
well as the general classification of such assets pursuant to the valuation hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods
for determining the amount of impairment and estimating fair value include using the fair value of the collateral for collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current
independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value
hierarchy when impairment is determined using the fair value method.
Management establishes a specific allowance for loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a change
in specific allowance has occurred as of December 31, 2020 was $16,789,000 and a fair value of $14,876,000 resulting in specific loss exposures of $1,913,000. As of December
31, 2019, the total carrying amount of loans for which a change specific allowance has occurred was $13,775,000. These loans had a fair value of $12,727,000 which resulted in
specific loss exposures of $1,047,600.
When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for credit losses. Losses are recognized in the
period an obligation becomes uncollectible. The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or
desirable to defer writing off the loan even though partial recovery may be affected in the future.
Foreclosed Assets Held For Sale
Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the
time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value
of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation
allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the
disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real estate owned as of
December 31, 2020 was $2,489,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period
amounted to $290,000. The total carrying amount of other real estate owned as of December 31, 2019 was $3,644,000. Other real estate owned included in the total carrying
amount and measured at fair value on a nonrecurring basis during the period amounted to $935,000.
Mortgage Servicing Rights
As of December 31, 2020, mortgage servicing rights had a carrying value of $1,098,000 and a fair value of $516,000 resulting in a valuation reserve of $581,000. As of
December 31, 2019, mortgage servicing rights had a carrying value of $1,690,000 and a fair value of $1,444,000 resulting in a valuation reserve of $245,000. The fair value used
to determine the valuation reserve for mortgage servicing rights was estimated using the discounted cash flow models. Due to the nature of the valuation inputs, mortgage
servicing rights are classified within Level 3 of the fair value hierarchy.
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair
value measurements fall at December 31, 2020 and 2019 (in thousands):
December 31, 2020
Impaired loans (collateral dependent)
Foreclosed assets held for sale
Mortgage servicing rights
December 31, 2019
Impaired loans (collateral dependent)
Foreclosed assets held for sale
Mortgage servicing rights
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
— $
—
—
— $
—
—
— $
—
—
— $
—
—
14,876
290
517
12,727
935
1,444
Fair Value
$
$
14,876 $
290
516
12,727 $
935
1,444
78
Sensitivity of Significant Unobservable Inputs
The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at December 31, 2020.
Impaired loans (collateral dependent)
Foreclosed assets held for sale
Mortgage servicing rights
Fair Value
Valuation
(in thousands)
Technique
Unobservable Inputs
$
14,876 Third party valuations Discount to reflect realizable value
290
Third party valuations
517 Third party valuations
Discount to reflect realizable value
less estimated selling costs
PSA standard prepayment model
rate
Range (Weighted
Average)
0% - 40% (20%)
(35%)
0% - 40%
242 - 441 (384)
The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at December 31, 2019.
Impaired loans (collateral dependent)
Foreclosed assets held for sale
$
Mortgage servicing rights
Fair Value
Valuation
(in thousands)
Technique
Unobservable Inputs
935
Third party valuations
12,727 Third party valuations Discount to reflect realizable value
Discount to reflect realizable value
less estimated selling costs
PSA standard prepayment model
rate
1,444 Third party valuations
Range (Weighted
Average)
0% - 40%
0% - 40%
(20%)
(35%)
152 - 437
(189)
79
The following tables present estimated fair values of the Company’s financial instruments at December 31, 2020 and 2019 (in thousands):
December 31, 2020
Financial Assets
Cash and due from banks
Federal funds sold
Certificates of deposit investments
Available-for-sale securities
Held-to-maturity securities
Equity securities
Loans held for sale
Loans net of allowance for credit losses
Interest receivable
Federal Reserve Bank stock
Federal Home Loan Bank stock
Financial Liabilities
Deposits
Securities sold under agreements to repurchase
Interest payable
Federal Home Loan Bank borrowings
Other borrowings
Subordinated debentures
Junior subordinated debentures
December 31, 2019
Financial Assets
Cash and due from banks
Federal funds sold
Certificates of deposit investments
Available-for-sale securities
Held-to-maturity securities
Equity securities
Loans held for sale
Loans net of allowance for loan losses
Interest receivable
Federal Reserve Bank stock
Federal Home Loan Bank stock
Financial Liabilities
Deposits
Securities sold under agreements to repurchase
Interest payable
Federal Home Loan Bank borrowings
Other borrowings
Junior subordinated debentures
Note 12 -- Deferred Compensation Plan
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
$
$
415,973 $
1,308
2,695
879,240
5,016
218
1,924
3,094,585
19,287
9,401
5,450
3,692,784
206,937
2,345
93,969
—
94,253
19,027
84,154 $
926
4,625
685,636
69,542
412
1,820
2,666,616
15,577
9,401
4,105
2,917,336
208,109
2,261
113,895
5,000
18,858
415,973 $
1,308
2,695
879,240
5,119
218
1,924
3,056,344
19,287
9,401
5,450
3,697,105
206,945
2,345
96,669
—
94,253
14,604
84,154 $
926
4,625
685,636
69,572
412
1,820
2,622,053
15,577
9,401
4,105
2,924,144
208,016
2,261
114,510
5,000
15,596
415,973 $
1,308
—
0
—
218
—
—
—
—
—
— $
—
2,695
878,446
5,119
—
1,924
—
19,287
9,401
5,450
—
—
—
—
—
—
—
3,215,715
206,945
2,345
96,669
—
94,253
14,604
84,154 $
926
—
—
—
219
—
—
—
—
—
—
—
—
—
5,000
—
— $
—
4,625
684,856
69,572
—
1,820
—
15,577
9,401
4,105
2,332,866
208,016
2,261
114,510
—
15,596
—
—
—
794
—
—
—
3,056,344
—
—
—
481,390
—
—
—
—
—
—
—
—
—
780
—
193
—
2,622,053
—
—
—
591,278
—
—
—
—
—
The Company follows the provisions of ASC 710, for purposes of the First Mid-Illinois Bancshares, Inc. Deferred Compensation Plan (“DCP”). At December 31, 2020, the
Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $4,241,000 as treasury stock. The Company also
classified the cost basis of its related deferred compensation obligation of approximately $4,241,000 as an equity instrument (deferred compensation). The DCP was effective as
of June 1984. The purpose of the DCP is to enable directors, advisory directors, and key employees the opportunity to defer a portion of the fees and cash compensation paid by
the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. The Company invests all participants’ deferrals in shares of common
stock. Dividends paid on the shares are credited to participants’ DCP accounts and invested in additional shares. During 2020 and 2019 the Company issued 12,921 common
shares and 11,072 common shares, respectively, pursuant to the DCP.
The Company also maintains deferred compensation arrangements that were acquired in the Soy Capital acquisition. Individual participants in the agreements are primarily
business development employees in the First Mid Insurance and First Mid Wealth Management divisions. The total liabilities associated with these agreements are included in
other liabilities on the Company's consolidated balance sheets as of December 31, 2020 and 2019.
80
Note 13 -- Stock Incentive Plan
At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to succeed the
Company's 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the
Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its
Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the
opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.
A maximum of 149,983 shares are authorized under the SI Plan. There have been no options awarded since 2008. All previously issued, unexercised options expired on
December 16, 2018. The Company awarded 25,950, 26,700 and 28,700 shares (under the 2017 Stock Incentive Plan) during 2020, 2019, 2018, respectively as stock and stock
unit awards.
The following table summarizes the compensation cost, net of forfeitures, related to stock-based compensation for the years ended December 31, 2020, 2019 and 2018 (in
thousands):
Stock and stock unit awards:
Pre-tax compensation expense
Income tax benefit
Total share-based compensation expense, net of income taxes
2020
2019
2018
$
$
774 $
(163)
611 $
453 $
(95)
358 $
314
(66)
248
A summary of option activity under the 1997 Stock Incentive Plan as of December 31, 2018, and changes during the years then ended is presented below:
Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
Weighted-
Average
2018
Weighted-
Average
Remaining
Shares
Exercise Price Contractual Term
Aggregate
Intrinsic
Value
10,500 $
0
(10,500)
0
0 $
0 $
23.00
0.00
23.00
0.00
0.00
0.00
0.00 $
0.00 $
—
—
The total intrinsic value of options exercised during 2018 was $176,000. There were no stock options for shares of common stock not considered in computing the aggregate
intrinsic value of outstanding shares and exercisable shares for 2018 because they were anti-dilutive. There were no stock options remaining after 2018.
The following table summarizes non-vested stock and stock unit activity for the years ended December 31, 2020, 2019 and 2018:
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
Fair value of shares vested
2020
Weighted-avg
Grant-date
Fair Value
Shares
2019
Weighted-avg
Grant-date
Fair Value
2018
Shares
Shares
Weighted-avg
Grant-date
Fair Value
37,908 $
25,950
(21,305)
(333)
42,220 $
$
35.49
34.46
35.99
(33.31)
34.62
766,774
24,280 $
26,700
(13,072)
0
37,908 $
$
38.92
33.31
37.42
0.00
35.49
489,110
0 $
28,700
(4,420)
0
24,280 $
$
0.00
38.92
38.92
0.00
38.92
172,026
The fair value of the awards is amortized to compensation expense over the vesting periods of the awards (four years for restricted stock unit awards and three years for restricted
stock awards) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. As of
December 31, 2020, 2019 and 2018, there was $1,156,000, $1,053,000, and $795,000, respectively, of total unrecognized compensation cost related to unvested stock and stock
unit awards under the SI Plan.
81
Note 14 -- Retirement Plans
The Company has a defined contribution retirement plan which covers substantially all employees and which provides for a Company contribution equal to 4% of each
participant’s compensation and a Company matching contribution of up to 100% of the first 3% and 50% of the next 2% of pre-tax contributions made by each participant.
Employee contributions are limited to the 402(g) limit of compensation. The total expense for the plan amounted to $2,623,000, $2,429,000 and $1,881,000 in 2020, 2019 and
2018, respectively. The Company also has an agreement in place to pay $50,000 annually for 20 years from the retirement date to a senior officer that retired December 31,
2013. Total expense under this agreement amounted to $28,000, $32,000 and $36,000 in 2020, 2019 and 2018 respectively. The current liability recorded for this agreement was
$441,000 and $465,000, as of December 31, 2020 and 2019, respectively.
Note 15 -- Income Taxes
The components of federal and state income tax expense for the years ended December 31, 2020, 2019 and 2018 were as follows (in thousands):
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Total
2020
2019
2018
$
$
12,315 $
7,120
19,435
(3,318)
(1,645)
(4,963)
14,472 $
8,538 $
4,900
13,438
1,368
517
1,885
15,323 $
4,841
2,781
7,622
2,818
1,465
4,283
11,905
Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. federal tax rate of 21% to income before income taxes).
During 2020, 2019 and 2018, the Company was in a graduated tax rate position. The principal reasons for the difference are as follows (in thousands):
Expected income taxes
Effects of:
Tax-exempt income from bank owned life insurance
Other tax-exempt income
Nondeductible interest expense
State taxes, net of federal taxes
Other items
Adjustment of deferred tax assets and liabilities for enacted change in tax laws
Effect of marginal tax rate
Total
$
2020
2019
2018
$
12,546
$
13,286
$
10,186
(363)
(1,758)
45
4,325
(158)
—
(165)
14,472
$
(563)
(1,701)
70
4,280
116
—
(165)
15,323
$
(283)
(1,598)
43
3,354
218
—
(15)
11,905
Tax expense recorded by the Company during 2020, 2019 and 2018 did not include any interest or penalties. Tax returns filed with the Internal Revenue Service and Illinois
Department of Revenue are subject to review by law under a three-year statute of limitations. The Company is no longer subject to U.S. federal or state income tax examinations
by tax authorities for years before 2017.
82
The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are
presented below (in thousands):
2020
2019
Deferred tax assets:
Allowance for credit losses
Deferred compensation
Supplemental retirement
Core deposit premium and other intangible assets
Deferred loan costs
Stock compensation expense
Deferred revenue
Acquisition costs
Other
Total gross deferred tax assets
Deferred tax liabilities:
Deferred expenses
Intangibles amortization
Prepaid expenses
FHLB stock dividend
Depreciation
Purchase accounting
Accumulated accretion
Mortgage servicing rights
Available-for-sale investment securities
Total gross deferred tax liabilities
Net deferred tax assets (liabilities)
$
$
11,858
3,486
126
948
987
80
460
265
682
18,892
108
5,034
863
23
2,566
7,937
135
148
6,941
23,755
(4,863)
$
$
7,512
3,487
133
889
—
54
521
265
749
13,610
13
4,584
754
23
2,500
7,906
304
411
3,415
19,910
(6,300)
Net deferred tax assets are recorded in other assets on the consolidated balance sheets, while net deferred tax liabilities are recorded in other liabilities. No valuation allowance
related to deferred tax assets was recorded at December 31, 2020 and 2019 as management believes it is more likely than not that the deferred tax assets will be fully realized.
Note 16 -- Dividend Restrictions
The National Bank Act imposes limitations on the amount of dividends that may be paid by a national bank, such as First Mid Bank. Generally, a national bank may pay
dividends out of its undivided profits, in such amounts and at such times as the bank’s board of directors deems prudent. Without prior OCC approval, however, a national bank
may not pay dividends in any calendar year which, in the aggregate, exceed the bank’s year-to-date net income plus the bank’s adjusted retained net income for the two
preceding years. Factors that could adversely affect First Mid Bank’s net income include other-than- temporary impairment on investment securities that result in credit losses
and economic conditions in industries where there are concentrations of loans outstanding that result in impairment of these loans and, consequently loan charges and the need
for increased allowances for losses. See “Item 1A. Risk Factors,” Note 4 – “Investment Securities” and Note 5 – “Loans” for a more detailed discussion of the factors.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.
As described above, First Mid Bank exceeded their minimum capital requirements under applicable guidelines as of December 31, 2020. As of December 31, 2020,
approximately $46.2 million was available to be paid as dividends to the Company by First Mid Bank. Notwithstanding the availability of funds for dividends, however, the
OCC may prohibit the payment of any dividends by First Mid Bank if the OCC determines that such payment would constitute an unsafe or unsound practice.
Note 17 -- Commitments and Contingent Liabilities
First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial
instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements of credit, interest
rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and requires similar collateral in
approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the
contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments.
83
The off-balance sheet financial instruments whose contract amounts represent credit risk at December 31, 2020 and 2019 were as follows (in thousands):
Unused commitments and lines of credit:
Commercial real estate
Commercial operating
Home equity
Other
Total
Standby letters of credit
2020
2019
$
$
$
56,309
396,345
40,464
112,327
605,445
10,048
$
$
$
122,479
308,393
38,933
103,912
573,717
11,535
Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded within ninety days. Lines
of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long as there is no violation of any condition established
in the loan agreement. Both commitments to originate credit and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the lines and some commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties. Standby letters of credit are
primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending credit facilities to customers. The maximum amount of credit that would be extended under letters of credit is equal to the total off-
balance sheet contract amount of such instrument at December 31, 2020 and 2019. The Company's deferred revenue under standby letters of credit was nominal.
The Company is also subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition of ultimate
resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.
Note 18 -- Related Party Transactions
Certain officers, directors and principal stockholders of the Company and its subsidiaries, their immediate families or their affiliated companies (“related parties”) have loans
with one or more of the subsidiaries. These loans are made in the ordinary course of business on substantially the same terms, including interest and collateral, as those
prevailing for comparable transactions with others. Loans to related parties totaled approximately $55,125,000 and $88,536,000 at December 31, 2020 and 2019, respectively.
Activity during 2020 and 2019 was as follows (in thousands):
Beginning balance
New loans
Loan repayments
Retired director no longer a related party
Ending balance
2020
2019
$
$
88,536
49,439
(1,511)
(81,339)
55,125
$
$
94,006
3,693
(9,163)
—
88,536
Deposits from related parties held by First Mid Bank at December 31, 2020 and 2019 totaled $48,478,000 and $51,798,000, respectively.
Note 19 -- Business Combinations
On September 25, 2020, the Company and Eval Sub Inc., a newly formed Missouri corporation and wholly-owned subsidiary of the Company ("Merger Sub"), entered into an
Agreement and Plan of Merger (the "Merger Agreement") with LINCO Bancshares, Inc., a Missouri corporation ("LINCO"), and the sellers as defined therein, pursuant to
which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business combination whereby Merger Sub will
merge with and into LINCO, whereupon the separate corporate existence of Merger Sub will cease and LINCO will continue as the surviving company and a wholly-owned
subsidiary of the Company (the "Merger").
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $1.00 per share, of LINCO issued and
outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by LINCO) will be 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 have collectively elected pursuant to the Merger Agreement to receive varying amounts of cash or
shares of common stock of the Company as consideration in the Merger. In addition, immediately prior to the closing of the proposed merger, LINCO paid a special dividend to
its shareholders in the aggregate amount of $13 million.
84
The Merger closed on February 22, 2021. Disclosures could not be made as the initial accounting is incomplete. It is anticipated that Providence Bank will be merged with and
into First Mid Bank in the second quarter of 2021. At the time of the bank merger, Providence Bank’s banking offices will become branches of First Mid Bank.
Note 20 -- Leases
Effective January 1, 2019, the Company adopted ASU 2016-02 Leases (Topic 842). As of December 31, 2020, substantially all of the Company's leases are operating leases for
real estate property bank branches, ATM locations, and office space. These leases are generally for periods of 1 to 25 years with various renewal options. The Company elected
the optional transition method permitted by Topic 842. Under this method, an entity recognizes and measures leases that exist at the application date and prior comparative
periods are not adjusted. In addition, the Company elected the package of practical expedients:
1.
2.
3.
An entity need not reassess whether any expired or existing contracts contain leases.
An entity need not reassess the lease classification for any expired or existing leases.
An entity need to reassess initial direct costs for any existing leases.
The Company also elected the practical expedient, which may be elected separately or in conjunction with the package noted above, to use hindsight in determining the lease
term and in assessing the right-of-use assets. This expedient must be applied consistently to all leases. Lastly, the Company has elected to use the practical expedient to include
both lease and non-lease components as a single component and account for it as a lease. In addition, the Company has elected not to include short-term leases (i.e. leases with
terms of twelve months or less) or equipment leases (primarily copiers) deemed immaterial, on the consolidated balance sheets.
For leases in effect at January 1, 2019 and for leases commencing thereafter, the Company recognizes a lease liability and a right-of-use asset, based on the present value of lease
payments over the lease term. The discount rate used in determining the present value was the Company's incremental borrowing rate which is the FHLB fixed advance rate
based on the remaining lease term as of January 1, 2019, or the commencement date for leases subsequently entered into. The following table contains supplemental balance
sheet information related to leases (dollars in thousands):
Operating lease right-of-use assets
Operating lease liabilities
Weighted-average remaining lease term
Weighted-average discount rate
$
2020
2019
$
17,209
17,351
7.3 years
2.85%
17,006
17,007
7.3 years
3.07%
Certain of the Company's leases contain options to renew the lease; however, not all renewal options are included in the calculation of lease liabilities as they are not reasonably
certain to be exercised. The Company's leases do not contain residual value guarantees or material variable lease payments. The Company does not have any other material
restrictions or covenants imposed by leases that would impact the Company's ability to pay dividends or cause the Company to incur additional financial obligations. Future
minimum lease payments under operating leases are (in thousands):
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
Less imputed interest
Total lease liability
Operating Leases
$
2,626
2,470
2,201
1,826
1,561
9,158
19,842
(2,491)
17,351
$
The components of lease expense for the twelve months ended December 31, 2020 and 2019 were as follows (in thousands):
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
Income from subleases
Net lease cost
2020
2019
$
$
2,717 $
56
491
3,264
(730)
2,534 $
2,470
262
918
3,650
(842)
2,808
85
As the Company elected not to separate lease and non-lease components, the variable lease cost primarily represents variable payment such as common area maintenance and
copier expense. The Company does not have any material sub-lease agreements. Cash paid for amounts included in the measurement of lease liabilities was (in thousands):
Operating cash flows from operating leases
Note 21 -- Derivatives
2020
2019
$
2,766
$
2,680
The Company utilizes interest rate swaps, designated as fair value hedges, to mitigate the risk of changing interest rates on the fair value of fixed rate loans. For derivative
instruments that are designed and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting loss or gain in the hedged asset attributable
to the hedged risk, is recognized in current earnings.
Derivatives Designated as Hedging Instruments
The following table provides the outstanding notional balances and fair value of outstanding derivatives designated as hedging instruments as of December 31, 2020 and 2019
(in thousands):
Derivative
December 31, 2020
Interest rate swap agreements
December 31, 2019
Interest rate swap agreements
Balance Sheet
Location
Weighted Average
Remaining Maturity
(Years)
Notional
Amount
Estimated
Value
Other liabilities
Other liabilities
8.3
9.3
$
14,334 $
(2,892)
$
14,748 $
(325)
The effects of fair value hedges on the Company's income statement during the twelve months ended December 31, 2020 and 2019 were as follows (in thousands):
Derivative
Interest rate swap agreements
Derivative
Interest rate swap agreements
Location of Gain (Loss) on Derivative
Interest income on loans
Location of Gain (Loss) on Hedged Items
Interest income on loans
2020
2020
$
$
1,168 $
2019
2019
(605)
(1,168) $
605
As of December 31, 2020, the following amounts were recorded on the balance sheet related to the cumulative basis adjustment for fair value hedges (in thousands):
Line Item in the Balance Sheet in
Which the Hedge Items are Included
Loans
Carrying Amount of
the Hedged Assets
$
12,841
Cumulative Amount of Fair Value Hedging
Adjustments Included in the Carrying
Amount of the Hedged Assets
$
1,494
Derivatives Not Designated as Hedging Instruments
The following table provides the outstanding notional balances and fair value of outstanding derivatives not designated as hedging instruments as of December 31, 2020 (in
thousands):
December 31, 2020
Interest rate swap agreements
Interest rate swap agreements
Balance Sheet
Location
Other assets
Other liabilities
Weighted Average
Remaining Maturity
(Years)
Notional
Amount
Estimated
Value
7.0
7.0
$
42,657
42,657
$
1,399
(1,399)
Note 22 -- Parent Company Only Financial Statements
86
Presented below are condensed balance sheets, statements of income and cash flows for the Company (in thousands):
First Mid Bancshares, Inc. (Parent Company)
Balance Sheets
Assets
Cash
Premises and equipment, net
Investment in subsidiaries
Other assets
Total Assets
Liabilities and Stockholders’ equity
Liabilities
Debt
Other liabilities
Total Liabilities
Stockholders’ equity
Total Liabilities and Stockholders’ equity
December 31,
2020
2019
$
$
$
$
122,163 $
4,423
553,150
4,062
683,798 $
113,280 $
2,290
115,570
568,228
683,798 $
13,792
3,564
525,418
4,529
547,303
18,858
1,836
20,694
526,609
547,303
First Mid Bancshares, Inc. (Parent Company)
Statements of Income and Comprehensive Income
Income:
Dividends from subsidiaries
Other income
Total income
Operating expenses
Income before income taxes and equity in undistributed earnings of subsidiaries
Income tax benefit
Income before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
Other comprehensive income (loss), net of taxes
Comprehensive income
2020
Years ended December 31,
2019
2018
$
$
29,663 $
43
29,706
4,697
25,009
1,231
26,240
19,030
45,270
8,735
54,005 $
38,688 $
12
38,700
4,492
34,208
1,256
35,464
12,479
47,943
14,833
62,776 $
21,694
171
21,865
5,424
16,441
1,274
17,715
18,885
36,600
(4,169)
32,431
87
First Mid Bancshares, Inc. (Parent Company)
Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization, accretion, net
Dividends received from subsidiary
Equity in undistributed earnings of subsidiaries
Increase in other assets
Increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Investment in subsidiary
Net cash from business acquisition
Net cash used in investing activities
Cash flows from financing activities:
Repayment of short-term debt
Proceeds from short-term debt
Repayment of long-term debt
Issuance of subordinated debt
Proceeds from issuance of common stock
Payment to repurchase common stock
Direct expense related to capital transactions
Dividends paid on common stock
Net cash provided by (used in) financing activities
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Note 23 -- Quarterly Financial Data - Unaudited
2020
Years ended December 31,
2019
2018
$
45,270 $
47,943 $
36,600
104
29,663
(19,030)
(30,121)
1,349
27,235
(700)
0
(700)
(5,000)
5,000
—
94,253
610
(213)
—
(12,814)
81,836
108,371
13,792
122,163 $
125
38,688
(12,479)
(39,042)
(17,104)
18,131
(343)
310
(33)
—
—
(10,310)
—
589
(1,293)
—
(11,863)
(22,877)
(4,779)
18,571
13,792 $
90
21,694
(18,885)
(1,645)
79
37,933
(13,430)
(29,321)
(42,751)
—
—
(10,313)
—
36,645
(138)
(2,309)
(8,792)
15,093
10,275
8,296
18,571
$
The following table presents summarized quarterly data for each of the two years ended December 31, 2020 and 2019 (in thousands):
Selected operations data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expense
Income before income taxes
Income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
March 31
June 30
September 30 December 31
Quarters ended in 2020
34,741 $
4,868
29,873
5,481
24,392
16,510
27,731
13,171
3,172
9,999 $
0.60 $
0.60
35,535 $
3,953
31,582
6,136
25,446
13,885
26,098
13,233
3,096
10,137 $
0.61 $
0.60
36,295 $
3,778
32,517
3,883
28,634
13,578
26,927
15,285
3,720
11,565 $
0.69 $
0.69
37,570
4,130
33,440
603
32,837
15,547
30,331
18,053
4,484
13,569
0.81
0.81
$
$
$
88
Selected operations data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expense
Income before income taxes
Income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
March 31
June 30
September 30 December 31
Quarters ended in 2019
38,051 $
5,799
32,252
947
31,305
14,639
28,310
17,634
4,318
13,316 $
0.80 $
0.80
37,571 $
6,258
31,313
91
31,222
13,588
30,187
14,623
3,642
10,981 $
0.66 $
0.66
37,578 $
6,453
31,125
2,658
28,467
12,917
25,894
15,490
3,820
11,670 $
0.70 $
0.70
36,521
5,537
30,984
2,737
28,247
14,873
27,601
15,519
3,543
11,976
0.72
0.72
$
$
$
89
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid Bancshares, Inc.
Mattoon, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Mid Bancshares, Inc. (the “Company”) as of December 31, 2020 and 2019, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2020, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over
financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 8, 2021, expressed an unqualified opinion.
Adoption of New Accounting Standard
As discussed in Notes 1 and 5 to the consolidated financial statements, the Company changed its method of accounting for credit losses on loans in 2020 due to the adoption of
ASC Topic 326, Financial Instruments-Credit Losses. As discussed below, the allowance for credit losses is considered a critical audit matter.
Basis for Opinion
The financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are
not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses
The Company adopted Accounting Standards Codification 326 effective January 1, 2020. As more fully described in Notes 1 and 5 to the consolidated financial statements, the
Company estimates the allowance for credit losses (ACL) at a level that is appropriate to cover estimated credit losses on individually evaluated loans, as well as estimated credit
losses inherent in the remainder of the loan and lease portfolio. The determination of the ACL requires significant judgment reflecting the Company’s best estimate of expected
credit losses. Expected credit losses are measured on a collective (pool) basis using a combination of loss-rate methods when the financial assets share similar risk
characteristics. Loans that do not share similar risk characteristics are evaluated on an individual basis. Historical loss rates reflecting estimated life of loan losses are analyzed
and applied to their respective loan segments comprised of loans not subject to individual evaluation. Historical loss rates are adjusted for significant factors that, in
management’s judgment, reflect the impact of any current conditions on loss recognition, as well as for certain known model limitations. Forecast factors are developed based
on information obtained from external sources, as well as consideration of other internal information, and are included in the ACL model for a reasonable and supportable 12-
month forecast period, with loss factors immediately reverting back to historic loss rates. Management continually reevaluates the other subjective and forecast factors included
in its ACL analysis.
90
The primary reason for our determination that the ACL is a critical audit matter is that auditing the estimated ACL involved significant judgment and complex review. Auditing
the ACL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s model selections, segmentation, weighted average life
calculations, assessment of economic conditions and other environmental factors, assessment of forecast factors, evaluating the adequacy of specific allowances associated with
individually evaluated loans and assessing the appropriateness of loan grades.
Our audit procedures related to the estimated ACL included the following procedures, among others.
•
•
•
•
•
•
•
•
•
•
•
•
Obtaining an understanding of the Company’s process for establishing the ACL, including model selection and the implementation of the calculation and the
qualitative and forecast factor adjustments of the ACL and any limitations of the model
Testing the design and operating effectiveness of internal controls, including those related to technology, over the ACL calculation including data completeness
and accuracy, verification of historical net loss data and calculated net loss rates, the establishment of qualitative and forecast adjustments, grading and risk
classification of loans by segment, including internal independent loan review functions, establishment of reserves on individually evaluated loans and
management’s review controls over the ACL as a whole
Testing of the completeness and accuracy of the information utilized in the calculation of the ACL, including reports used in management review controls over
the ACL
Assessing the relevance and reliability of assumptions and data
Testing clerical and computational accuracy of the formulas within the ACL model
Evaluating how historical losses are determined for each segment
Evaluating segmentation of the loan portfolio for reasonableness based on risk characteristics of the pooled loans
Evaluating the qualitative factor and forecast adjustments, including assessing the basis and reasonableness for the adjustments
Evaluating management’s risk ratings of loans
Evaluating specific reserves on individually analyzed loans
Preparation of an independent estimate of an acceptable range of the qualitative and forecast factors included in the ACL to compare to management’s estimate
Evaluating overall reasonableness of estimated reserve by considering and comparing past performance of the Company’s loan portfolio, trends in credit
quality of the loan portfolio and trends in the credit quality of peer institutions
We have served as the Company’s auditor since 2005.
Decatur, Illinois
March 8, 2021
91
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of
the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of December 31, 2020. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that the
Company’s disclosure controls and procedures as of December 31, 2020, were effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s
internal control over financial reporting is a process designed under the supervision of the Company’s chief executive officer and chief financial officer to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 based on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control—Integrated Framework (2013).”
Based on the assessment, management determined that, as of December 31, 2020, the Company’s internal control over financial reporting is effective, based on those
criteria. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by BKD,
LLP, an independent registered public accounting firm, as stated in their report following.
March 8, 2021
Joseph R. Dively
President and Chief Executive Officer
Matthew K. Smith
Chief Financial Officer
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fourth fiscal quarter of 2020 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
92
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid Bancshares, Inc.
Mattoon, Illinois
Opinion on the Internal Control over Financial Reporting
We have audited First Mid Bancshares, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal
Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control – Integrated Framework: (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements
of the Company and our report dated March 8, 2021 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may
deteriorate.
Decatur, Illinois
March 8, 2021
93
ITEM 9B.OTHER INFORMATION
None.
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information called for by Item 10 with respect to directors and director nominees is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual
Meeting of the Company’s shareholders under the captions “Proposal 1 – Election of Directors,” “Corporate Governance Matters” and “Section 16 – Beneficial Ownership
Reporting Compliance.”
The information called for by Item 10 with respect to executive officers is incorporated by reference to Part I hereof under the caption “Supplemental Item – Executive Officers
of the Company” and to the Company’s Proxy Statement for the 2021 Annual Meeting of the Company’s shareholders under the caption “Section 16 – Beneficial Ownership
Reporting Compliance.”
The information called for by Item 10 with respect to audit committee financial expert is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual
Meeting of the Company’s shareholders under the captions “Audit Committee” and “Report of the Audit Committee to the Board of Directors.”
The information called for by Item 10 with respect to corporate governance is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of the
Company’s shareholders under the caption “Corporate Governance Matters.”
The Company has adopted a code of conduct for directors, officers, and employees including senior financial management of the Company. This code of conduct is posted on
the Company’s website. In the event that the Company amends or waives any provisions of this code of conduct, the Company intends to disclose the same on its website at
www.firstmid.com.
ITEM 11.EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of the Company’s shareholders under the
captions “Executive Compensation,” “Non-qualified Deferred Compensation,” "Potential Payments Upon Termination or Change in Control of the Company,” “Director
Compensation,” "Corporate Governance Matters – Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report.”
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by Item 12 with respect to equity compensation plans is provided in the table below.
Plan category
Equity compensation plans approved by security holders:
(A) Deferred Compensation Plan
(B) Stock Incentive Plan
Equity compensation plans not approved by security holders (3)
Total
Equity Compensation Plan Information
Number of securities
to be issued upon
exercise of
outstanding options
(a)
Weighted-average
exercise price of
outstanding options
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(c)
—
—
—
—
$
$
—
—
—
—
315,235 (1)
82,291 (2)
—
397,526
(1) Consists of shares issuable with respect to participant deferral contributions invested in common stock.
(2) Consists of restricted stock and/or restricted stock units.
(3) The Company does not maintain any equity compensation plans not approved by stockholders. The Company’s equity compensation plans approved by security holders
consist of the Deferred Compensation Plan and the Stock Incentive Plan. Additional information regarding each plan is available in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Stock Plans” and Note 13 – Stock Incentive Plan herein.
The information called for by Item 12 with respect to security ownership is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of the
Company’s shareholders under the caption “Voting Securities and Principal Holders Thereof.”
94
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information called for by Item 13 is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of the Company’s shareholders under the
captions “Certain Relationships and Related Transactions” and “Corporate Governance Matters – Board of Directors.”
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is incorporated by reference to the Company’s Proxy Statement for the 2021 Annual Meeting of the Company’s shareholders under the
caption “Fees of Independent Auditors.”
95
ITEM 15.EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
PART IV
The following consolidated financial statements and financial statement schedules of the Company are filed as part of this document under Item 8.
Financial Statements and Supplementary Data:
Consolidated Balance Sheets -- December 31, 2020 and 2019
Consolidated Statements of Income -- For the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income -- For the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity -- For the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2020, 2019 and 2018.
•
•
•
•
•
(a)(3) – Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that follows the Signature Page and immediately precedes the exhibits
filed.
ITEM 16.FORM 10-K SUMMARY
None.
96
Exhibit
Number
2.1
Exhibit Index to Annual Report on Form 10-K
Description and Filing or Incorporation Reference
Agreement and Plan of Merger by and among First Mid Bancshares, Inc., Eval Sub Inc., LINCO Bancshares, Inc. and the sellers as defined therein, dated
September 25, 2020. Incorporated by reference to Exhibit
2.1 to First Mid Bancshares, Inc.’s Form 8-K filed with the Securities and Exchange Commission on September 28, 2020.
2.2
First Amendment to Agreement and Plan of Merger, dated February 21, 2021, by and among First Mid Bancshares, Inc., Eval Sub Inc., a Missouri
corporation, Eval Sub Inc., a Delaware corporation, LINCO Bancshares, Inc. and the sellers named therein Incorporated by reference to
Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 22, 2021.
3.1
Restated Certificate of Incorporation of First Mid-Illinois Bancshares, Inc. Incorporated by
reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on April 26, 2019.
3.2
Amended and Restated Bylaws of First Mid-Illinois Bancshares, Inc.
Incorporated by reference to Exhibit 3.3 to First Mid-Illinois Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on April 26, 2019.
4.1
The Registrant agrees to furnish to the Commission, upon request, a copy of each instrument with respect to issues of long-term debt involving a total amount
which does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis.
4.2
Description of Common Stock
Incorporated by reference to Exhibit 4.2 of the Company’s Annual Report of Form 10-K filed with the SEC on March 9, 2020.
4.3
Indenture, dated as of October 6, 2020, between First Mid Bancshares, Inc. and U.S. Bank National Association, as Trustee
Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 6, 2020
4.4
First Supplemental Indenture, dated as of October 6, 2020, between First Mid Bancshares, Inc. and U.S. Bank National Association, as Trustee (including the
form of Note attached as an exhibit thereto)
Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 6, 2020
4.5
Form of 3.95% Fixed-to-Floating Rate Subordinated Note due 2030 (included in Exhibit 4.4)
10.1
Employment Agreement between the Company and Joseph R. Dively
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 23, 2019.
10.2
Employment Agreement between the Company and Michael L. Taylor
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 17, 2020.
10.3
Employment Agreement between the Company and Matthew K. Smith
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 17, 2020.
10.4
Employment Agreement between the Company and Eric S. McRae
Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on December 23, 2019.
10.5
Employment Agreement between the Company and Bradley L. Beesley
Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on December 23, 2019.
10.6
First Amendment to the First Mid-Illinois Bancshares, Inc. Amended and Restated Deferred Compensation Plan
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 26, 2018.
10.7
2017 Stock Incentive Plan
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 1, 2017.
10.8
Form of 2017 Incentive Plan Stock Unit Agreement
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 25, 2017.
10.9
Form Agreement to Accelerate the Vesting of the First Mid-Illinois Bancshares, Inc. Stock Unit Awards
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 19, 2017.
10.10
Form of Restricted Stock Award Agreement
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 29, 2018.
10.11
Form of Stock Unit/Restricted Stock Award Agreement
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on January 29, 2018.
10.12
2007 Stock Incentive Plan
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 23, 2007.
10.13
Supplemental Executive Retirement Plan
Incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the for the year ended December 31, 2005.
10.14
First Amendment to Supplemental Executive Retirement Plan
Incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the for the year ended December 31, 2005.
10.15
Participation Agreement (as Amended and Restated) to Supplemental Executive Retirement Plan between the Company and William S. Rowland
Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
10.16
Description of Incentive Compensation Plan
Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
10.17
Sixth Amended and Restated Credit Agreement
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 15, 2019.
10.18
First Amendment to Sixth Amended and Restated Credit Agreement by and between First Mid Bancshares, Inc. and The Northern Trust Company, dated as of
April 10, 2020
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 10, 2020.
10.19
Second Amendment to Sixth Amended and Restated Credit Agreement
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 27, 2021.
10.20
Registration Rights Agreement, dated as of February 22, 2021, by and between First Mid Bancshares, Inc. and the stockholder named therein
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-K filed with the SEC on February 22, 2021
21.1
Subsidiaries of the Company
(Filed herewith)
23.1
Consent of BKD LLP
(Filed herewith)
31.1
Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
31.2
Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline
XBRL document.
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
97
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
SIGNATURES
FIRST MID BANCSHARES, INC.
(Registrant)
Date: March 8, 2021
Joseph R. Dively
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 8th day of March 2021, by the following persons on behalf of the
Company and in the capacities listed.
Signature and Title
Joseph R. Dively, Chairman of the Board,
President and Chief Executive Officer and Director
(Principal Executive Officer)
Matthew K. Smith, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Holly B. Adams, Director
Robert Cook, Director
Steven L. Grissom, Director
Zachary I. Horn, Director
J. Kyle McCurry, Director
Ray A. Sparks, Director
Mary J. Westerhold, Director
James Zimmer, Director
98
Subsidiaries of the Company
Exhibit 21.1
First Mid Bank & Trust, N.A. (a national banking association)
Mid-Illinois Data Services, Inc. (a Delaware corporation)
First Mid Wealth Management Company (an Illinois corporation)
First Mid Insurance Group, Inc. (an Illinois corporation)
First Mid Captive, Inc. (a Nevada corporation)
First Mid-Illinois Statutory Trust II (a Delaware business trust)
Clover Leaf Statutory Trust I (a Maryland business trust)
FBTC Statutory Trust I (a Delaware business trust)
Providence Bank (a Missouri state-chartered depository trust company)
PBEI Holdings, LLC (a Missouri limited liability company)
PBDIL Holdings, LLC (a Missouri limited liability company)
PBSP Holdings, LLC (a Missouri limited liability company)
PBGD&N Holdings, LLC (a Missouri limited liability company)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
The Board of Directors
First Mid Bancshares, Inc.
Re: Registration Statements
Registration No. 333-81850 on Form S-3
Registration No. 333-161582 on Form S-3
Registration No. 333-207199 on Form S-3
Registration No. 333-216855 on Form S-3
Registration No. 333-227595 on Form S-3
Registration No. 333-251465 on Form S-3
Registration No. 033-64061 on Form S-8
Registration No. 033-64139 on Form S-8
Registration No. 333-69673 on Form S-8
Registration No. 333-81852 on Form S-8
Registration No. 333-148080 on Form S-8
Registration No. 333-186919 on Form S-8
Registration No. 333-218691 on Form S-8
Registration No. 333-224508 on Form S-8
We consent to incorporation by reference in the Registration Statement on Form S-3 and S-8 of First Mid Bancshares, Inc. of our reports dated March 8, 2021, on our audits of
the consolidated financial statements of First Mid Bancshares, Inc. as of December 31, 2020 and 2019 and for each of three years in the period ended December 31, 2020, and
the effectiveness of the Company's internal control over financial reporting as of December 31, 201920 which reports appear in the December 31, 2020 annual report on Form
10-K of First Mid Bancshares, Inc.
Decatur, Illinois
March 8, 2021
I, Joseph R. Dively, certify that:
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of First Mid Bancshares, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 8, 2021
By:
Joseph R. Dively
President and Chief Executive Officer
I, Matthew K. Smith, certify that:
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of First Mid Bancshares, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 8, 2021
By:
Matthew K. Smith Chief Financial Officer
Exhibit 32.1
Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid Bancshares, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Joseph R. Dively, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 8, 2021
Joseph R. Dively
President and Chief Executive Officer
Exhibit 32.2
Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of First Mid Bancshares, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Matthew K. Smith, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 8, 2021
Matthew K. Smith
Chief Financial Officer