Corporate
Profile
First Mid Bancshares, Inc. (“First Mid”) is the parent company of
First Mid Bank & Trust, N.A. (“First Mid Bank”), First Mid Wealth
Management Co., and First Mid Insurance Group, Inc.
First Mid is a $6.7 billion community-focused organization that provides a
full-suite of financial services including banking, wealth management, brokerage,
ag services, and insurance through a sizeable network of locations throughout
Illinois, Missouri, and the greater Indianapolis, Indiana and Dallas, Texas
areas. Together, our First Mid team takes great pride in their work and
their ability to serve our customers well over the last 157 years.
More information about First Mid is available on our website at www.firstmid.com.
Our stock is traded in the NASDAQ Stock Market LLC under the ticker symbol “FMBH.”
Focusing on our
STRATEGIC
PRIORITIES
1421 Charleston Avenue | Mattoon IL 61938
www.firstmid.com
2022
Annual Report
First Mid LeadershipTRANSFER, DIVIDEND PAYING, AND DIVIDEND REINVESTMENT PLAN AGENTFor stockholder inquiries or for information concerning payments of the Company’s dividend, or the Dividend Reinvestment Plan, contact: REGULAR MAIL ComputersharePO Box 43006Providence RI 02940-3006STREET ADDRESS FOR OVERNIGHT DELIVERYComputershare150 Royall Street, Suite 101Canton MA 02021312-360-5377 | 877-373-6374www.computershare.com/contactusFORM 10-K A copy of the 2022 Annual Report on Form 10-K with all exhibits filed with the Securities and Exchange Commission (SEC) is available, free of charge, at www.firstmid.com by clicking on “Investor Relations” under “About First Mid.” All periodic and current reports of First Mid Bancshares, Inc. can be accessed through this website as soon as reasonably practicable after these materials are filed with the SEC.A copy may also be obtained by sending a written request to:Mr. Aaron Holt First Mid Bancshares, Inc.1421 Charleston Avenue, PO Box 499Mattoon IL 61938or by email to: aholt@firstmid.comYear-End Market Price of StockFMBH stock price on December 31.$45$40$35$30$25$20$15$10$5$0$42.79$32.08$22.00$18.55$26.00$34.00$38.54$31.92$33.66 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022$35.25This document contains forward looking statements. For a discussion of factors that could cause actual results to differ materially from those contained in such statements, please see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K included herein, and our other filings with the Securities and Exchange Commission.Earnings Per Share (Diluted) and Dividends Per Share ( )$4.00$3.50$3.00$2.50$2.00$1.50$1.00$0.50$0$2.87$1.73$1.85$1.81$2.05$2.13$2.52$2.87$2.70 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022$3.60Year-End Assets (Dollars in Thousands)$7,000,000$6,000,000$5,000,000$4,000,000$3,000,000$2,000,000$1,000,000$0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022First Mid Bancshares, Inc. Assets Trust & Wealth Management Assets Under Management$ 100.00 $ 84.42 $ 95.30 $ 93.60 $ 121.49 $ 93.30$ 100.00 $ 95.62 $ 125.72 $148.85 $191.58 $156.88$ 100.00 $ 85.39 $ 111.10 $ 95.52 $126.19 $108.91* $100 invested on 12/31/17 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Source: S&P Global Market Intelligence © 2023First Mid Bancshares, Inc.S&P 500 IndexS&P U.S. BMI Banks - Midwest Region Index12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22Comparison of Five Year Cumulative Total Return*Among First Mid Bancshares, Inc., the S&P 500 Index, and S&P U.S. BMI Banks - Midwest Region Index12/31/17 12/31/18 12/31/19 12/31/20 12/21/21 12/31/22$200$150$100$ 50JOSEPH R. DIVELY Chairman and Chief Executive OfficerMICHAEL L. TAYLOR Senior Executive Vice President, Chief Operating OfficerMATTHEW K. SMITH Executive Vice President, Chief Financial Officer LAUREL G. ALLENBAUGH Executive Vice President, Chief Operations Officer BRADLEY L. BEESLEY Chief Executive Officer, First Mid Wealth Management Co.CLAY M. DEAN Chief Executive Officer, First Mid Insurance Group, Inc.RHONDA R. GATONS Executive Vice President, Chief Human Resources OfficerHOLLY B. ADAMS Lead Independent DirectorPresident, Howell Asphalt Company President, Howell Paving, Inc.ROBERT S. COOK Managing Partner, TAR CO Investments, LLC JOSEPH R. DIVELY Chairman and Chief Executive Officer, First Mid Bancshares, Inc.STEVEN L. GRISSOM Chief Executive Officer, SKL Investment Group, LLCZACHARY I. HORN President and Founder, Metro Communications Company, Inc.GISELE A. MARCUS Professor of Practice, Olin Business SchoolWashington University in St. LouisJ. KYLE MCCURRY Chair, Nominating and Governance CommitteeChief Operating Officer and General Counsel,Paige Sports EntertainmentMARY J. WESTERHOLD Chair, Audit CommitteeChief Financial Officer, Madison Communications, Inc.JAMES E. ZIMMER Chair, Compensation CommitteeCo-Founder, Moraine Farmland PartnersAMANDA D. LEWIS Executive Vice President, Chief Deposit Services OfficerERIC S. MCRAE Executive Vice President,Chief Lending Officer JASON M. CROWDER Senior Vice President, General CounselDAVID R. HIDEN Senior Vice President, Chief Information OfficerMEGAN E. MCELWEESenior Vice President, Chief Credit OfficerJORDAN D. READ Senior Vice President, Chief Risk OfficerANYA Y. SCHUETZSenior Vice President, Director of Project ManagementExecutive Management TeamBoard of DirectorsANNUAL MEETING OF STOCKHOLDERS The annual meeting of stockholders will be Wednesday, April 26, 2023 at 4:00 p.m. in the lobby of First Mid Bank & Trust, 1515 Charleston Avenue, Mattoon, Illinois.StockholderInformation Message from
the Chairman
Thanks to a strong start, 2022 was another
successful year for First Mid. We achieved
the majority of our goals for the year despite the
challenging economy and rising interest rates. We
accelerated our cross-selling momentum, saw organic
loan growth greater than 10%, and reached double-digit
revenue growth in both insurance and wealth management
business lines. We continued to advance community
development initiatives and managed to increase our already
impressive employee engagement scores. I am extremely proud
of the resilience and customer focus of the entire First Mid team.
We completed the successful acquisition and conversion of Delta
Bancshares, Inc., holding company for Jefferson Bank and Trust, and
welcomed Jefferson’s customers and strong team of community bankers
to First Mid in the second quarter. The Jefferson acquisition contributed
to the growth of our asset size to $6.7 billion and allowed us to expand our
presence in the St. Louis market with the addition of five branch locations.
Joseph Dively
Chairman and Chief Executive Officer
Even with the growth we achieved, the year was not without its challenges. The pace and size of interest rate
increases midway through 2022 put pressure on our net interest margin. We balanced market-based pricing
and profitability expectations as deposit costs rose more quickly than loan yields, resulting in compressed
margins. However, we were able to navigate this difficult economic environment due to our strong asset quality,
diversified revenue with nearly 30% from noninterest income, and focused expense management.
Board of Directors Retirement
On April 26, 2023, Steven L. Grissom will step off the Board of Directors due to mandatory
retirement provisions in our bylaws. Steve has served as a director of the Company and as an
audit committee financial expert since 2000. His expertise in tax and accounting functions
was an invaluable asset to the board. These skills played a major role in First Mid’s growth
over the years, serving the board in its assessment of complex financial and strategic matters.
Steve will be missed by our team but his impact will be felt for many years to come.
Strategic Highlights
Before we turn our attention to the 2022 financial performance, I wanted to
share additional highlights that tie directly to our strategic priorities:
Steven Grissom
• M&A Execution: Beyond the Jefferson acquisition, our wealth management group also completed
a targeted acquisition that added business line diversity and expanded coverage.
• Relationship Development: Our banking, insurance, and wealth management teams continue
to work closely together in delivering customer solutions, while deepening our relationships.
We continue to see momentum on cross-selling initiatives across business lines. The diversity
of our product lines and revenue streams is a strategic advantage for First Mid.
• Empowering Employer: Empowering our employees is fundamental to our culture. Conducted by Gallup, our
annual employee survey achieved our all-time highest employee engagement score along with an impressive 98.7%
participation level. These outstanding metrics demonstrate that our employees care about First Mid and allow us to
more accurately identify areas where we are fulfilling expectations as well as areas of opportunity for improvement.
• Commitment to Community: Volunteerism, financial support, and sponsorship are important components
of our Commitment to Community strategic initiative. They are ways that we simply demonstrate our gratitude
and passion for the communities in which we live, play, and work. First Mid employees volunteered over
15,800 hours to community organizations in 2022. In October, we introduced a new volunteer paid time off
benefit that is perfectly aligned with our culture of giving back. Employees are able to use this time to support
activities that enhance and serve our communities. In addition to increasing volunteer efforts, we also
added strategic partnerships in underserved communities and increased our CRA investments in 2022.
First Mid Bancshares, Inc. • 2022 Annual Report | 1 |
Financial Highlights
We delivered a record year with $73.0 million in net income and diluted
earnings per share of $3.60. These results reflected an increase of $21.5 million,
or 41.7%, over the prior year. This increase was driven by a combination of organic
growth and the acquisition of Jefferson Bank and Trust, which closed in February.
Our balance sheet grew by $757.6 million, or 12.7%, and total assets ended the year
over $6.7 billion. This increase was driven by both the Jefferson acquisition and a record
year of loan growth. The rapid increase in interest rates in 2022 resulted in pressure on our
deposit balances and some volatility in our net interest margin. While net interest margin
increased in the first three quarters, peaking at 3.21% in the third quarter, the ratio declined
to 3.07% in the fourth quarter as earning assets were slower to reprice than our funding costs. We
offset this pressure with growth in our noninterest income and focused expense management.
The diversification of our revenue sources is a key differentiator for First Mid. In a period when many
financial institutions saw a decline in noninterest income, we delivered a record high of $74.7 million,
an increase of 7% over the prior year. This increase was the result of strong growth in our insurance and
wealth management business lines, which more than offset lower mortgage banking revenues. These business
lines recognized double-digit growth in the year, with insurance increasing by 14.2% and wealth management
increasing by 10.2%. Our noninterest income represented approximately 29% of our total revenues for 2022.
Operating expenses for the year were $162.9 million, an increase of 4.7% over the prior year. The increase
was primarily driven by a combination of the Jefferson acquisition and inflationary pressures. We continue
to operate with a solid efficiency ratio, while investing in technology, employees, and our communities.
Our full-time equivalent employees ended the year at 1,043 versus 965 at the end of 2021.
Our asset quality ratios ended the year at or near a historic best. Nonperforming loans to total
loans declined to 0.40% from 0.55%. The allowance for credit losses to nonperforming loans ratio
increased to 308% from 248% and the reserve to total loans ended the year at 1.22%.
We continued to deliver a competitive dividend and increased our quarterly dividend per
share from $0.22 to $0.23 in the third quarter. In total, we paid $0.90 per share in dividends
for 2022, returning $17.8 million to shareholders throughout the year.
In Summary
In summary, First Mid had a solid 2022 despite the economic challenges. Our strategic plan, focused on all
our stakeholders, continues to provide direction and accountability for our actions and results. 2023 will be a
challenging year, but we will navigate this current market cycle just as we have over the past 157 years in our
Company’s history. We will continue to manage what is in our control, which includes a warm and consultative
customer experience, cross-selling to deepen relationships, and enhancing the First Mid culture around our core
values. Our team has never been stronger, and I have never been more confident and excited about our future.
Sincerely,
Joseph R. Dively
Chairman and Chief Executive Officer
| 2 | 2022 Annual Report • First Mid Bancshares, Inc.
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, 2022
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 001-36434
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
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
NONE
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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error
to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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 $639,158,758. 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 3, 2023, 20,497,489 shares of the Registrant’s common stock, $4.00par value, were outstanding.
Document
Portions of the Proxy Statement for 2023 Annual Meeting of Shareholders to be held on April 26, 2023
Into Form 10-K Part:
III
DOCUMENTS INCORPORATED BY REFERENCE
1,264
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
[Reserved]
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
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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 8
Item 9
Item 9A
Item 9B
Item 9C
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Item 16
Exhibit Index
Signatures
Page
3
13
17
17
17
17
17
17
18
37
39
89
89
91
91
91
91
91
92
92
92
92
93
95
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 subsidiary, First Mid Bank & Trust, N.A. (“First Mid Bank”). The Company offers insurance products and services to
customers through its wholly owned subsidiary, First Mid Insurance Group, Inc. (“First Mid Insurance”). The Company offers trust, farm services, investment services,
and retirement planning through its wholly owned subsidiary, First Mid Wealth Management Company. The Company also wholly owns a captive insurance company,
First Mid Captive, Inc. In addition, the Company wholly owns three statutory business trusts, First Mid-Illinois Statutory Trust II (“First Mid Trust II”), Clover Leaf
Statutory Trust I ("CLST Trust"), and FBTC Statutory Trust I ("FBTCST I"), all of which are unconsolidated subsidiaries of the Company. On February 14, 2022, the
Company acquired Jefferson Bank, which was merged into First Mid Bank on June 10, 2022.
The Company, a Delaware corporation, was incorporated on September 8, 1981, and pursuant to the approval of the Board of Governors of the Federal Reserve
System (the “Federal Reserve Board”) became the holding company owning all of the outstanding stock of First National Bank, Mattoon (“First National”) on June 1,
1982. First National changed its name to First Mid-Illinois Bank & Trust, N.A. in 1992, and subsequently changed its name to First Mid Bank & Trust, N.A. in 2019. The
Company has also acquired all the outstanding stock of a number of community banks or thrift institutions, and subsequently combined their operations with those of
the Company and First Mid Bank.
Human Capital
The Company seeks to provide a work environment that attracts, develops, and retains top talent. The Company’s culture is derived from its core values: Integrity,
Motivation, Professionalism, Accountability, Commitment, and Teamwork. These values are the framework for providing employees an engaging work experience that
allows for career fulfillment and growth.
Diversity and Inclusion
The Company’s commitment to diversity starts with its Board of Directors, which oversees the culture and holds management accountable to build and maintain a
diverse and inclusive environment. Management believes a diverse workforce is critical to sustainable success. To improve results and increase accountability, the
Company named its first Diversity, Equity and Inclusion ("DEI") officer in 2022. The DEI officer reports directly to the CEO. As of December 31, 2022, the Company
employed 1070 employees with 95% of those full-time and 5% part-time. The Company’s current employee base include 72% females, 8% minorities, and 2%
veterans. The Company’s commitment to diversity resulted in a year over year increase in minorities within its workforce from 6.7% to 8%. The increased diversity
within the Company’s team is due to its emphasis on partnering with organizations that enable job postings to reach a greater percentage of diverse applicants. The
Company is proud of its workforce and the opportunity to further diversify its team going forward.
Maintaining a work environment where every employee is treated with dignity and respect is essential to ensuring that employees can devote their full attention to
performing their jobs to the best of their ability. The Company understands that its success is dependent on continuing to strengthen its culture of inclusion.
Talent Engagement
During the last four years, the Company has partnered with a trusted industry leader to conduct an annual employee engagement survey. Employee participation in the
engagement survey was 98.7% for 2022. The high level of participation in the survey provides the Company confidence that the results are meaningful and that the
areas identified as needing improvement are genuine. The ability to target areas for improvement has resulted in the overall engagement score increasing each year.
The Company also has an Employee First Committee (“EFC”) whose purpose is to improve employee satisfaction and fulfillment by promoting fun, fellowship and
generosity within the Company and the community across the Company footprint. Another purpose of the EFC is to raise money and supplies for local charities
through events that are sponsored by the Company and staffed by its employees.
The Company’s CEO has an annual award called the Chairman’s Award for Excellence which allows employees to nominate peers who have gone above and beyond.
This award recognizes individuals in the organization who have consistently performed above expectations or achieved extraordinary results while exemplifying the
Company’s core values.
The CEO hosts an all employee call each quarter to share Company information and ongoing initiatives with Company employees. In addition to sharing important
updates, employees are encouraged to submit questions in advance or during the call to be answered by management. Finally, a tradition of the quarterly call is to
recognize the Company’s top performers, both at work and in the communities we serve.
Talent Development
The Company supports the personal and professional development of its employees in a variety of ways. First, the Company offers tuition reimbursement to support
employee's continued education and development by providing employees up to $3,500 annually for eligible educational courses. All employees also receive annual
regulatory training, and, by partnering with a 3rd party, the Company can tailor the training to fit the job functions of its employees. In addition, employees can access a
variety of career development content within the online learning management system to expand their skills.
The Company provides for development opportunities through a program that allows employees the opportunity to shadow other roles. This gives the employee the
chance to observe and experience a new role and determine what positions might be an ideal fit for advancement opportunities. In addition, those that participate
develop a broader knowledge of the Company as a whole.
3
Professional development training is provided to support job function, leadership, and compliance. The Banker Basics Mentor Program is an example of the
Company's efforts to develop its frontline employees. Frontline employees are chosen by management to mentor and train new hires on core systems, customer
service and processing customer transactions. The new employee spends the first ten days of employment working one on one with a peer learning on the job. In
addition, the implementation of Leadership Development Training in 2022, provided all managers with information to enhance their skills with the hiring process,
coaching, crucial conversations, and employee engagement.
The Company also provides leadership training based on the book The Leadership Pipeline. This training is provided for executive, upper and mid-level management
employees and is highly interactive. The purpose of this engaging program is to educate leaders that their role is to coach and mentor their team members. Regular
one-on-one meetings with purposeful conversations is an expectation because it leads to better results and engagement of their team. After the formal training, the
participants continue to expand their learning by participating in follow up cohort groups for the following six months. In 2022, the Company provided leadership
training to 20 managers through our Leader of Leaders and Leader of Others programs.
Lastly, succession planning is conducted annually for the Company’s most senior leaders and high impact roles. The process includes identifying potential successors
for different positions and assessing their readiness level to fill the role should it become vacant. Management focuses on intentional development with activities
needed to prepare the employee for the next level.
Total Rewards
The Company is committed to offering a competitive total rewards package for its employees which includes compensation and benefits. The Company invested in its
workforce during 2021 by readjusting job grade and pay ranges to better align positions with current market trends. Each position within the Company is placed in a job
grade based on the necessary skill and experience needed to succeed in the position. Management provided complete transparency to team members by publishing
each job grade and pay grade through a job value matrix.
In 2022 the Company addressed inflation by awarding employees making $70,000 or less a 3% wage increase, so the Company is well positioned to retain its
workforce. The Company continually reviews its benefits compared to peers in the market and make changes as needed to ensure it remains competitive.
The Company offers a wide array of benefits for its employees including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Medical, Dental, and Vision Insurance Plans
Flexible Spending Accounts
Health Savings Accounts with a Company Matching Contribution
Company provided Life Insurance
Company provided Long Term Disability
Company provided Premier Checking Account
401(k) Plan including a Company Match
Profit Sharing Contribution
Employee Stock Purchase Plan with an Employee Discount
Voluntary Ancillary Insurance Plans
Paid Time Off (Vacation, Sick, Volunteer and Personal Time)
Maternity/Paternity Paid Leave
Tuition Reimbursement
Computer Purchase Program
Dress Professional Program
Service Anniversary/Retirement Recognition & Award
Chairman’s Award – Top Peer Recognition
Volunteer Time Recognition
Company Apparel – Company Pays 50%
Opportunity for Bonus and Stock awards
4
Encouraging Volunteerism
The Company invests in and contributes to the growth and development of its communities. The Commitment to the Communities program encourages employees to
be engaged in the communities where they live and work. In 2022, the Company’s employees volunteered 15,889 hours to organizations in their communities. The
Company also encourages employees to serve in leadership roles in these organizations as part of their professional development. Over 50% of the Company’s
workforce contributed to its annual United Way campaign which resulted in a total contribution to the United Way of over $145,000.
Business Strategies
Vision Statement. The Company’s vision statement is to be a nimble, independent, community-focused financial organization committed to quality, growth and earned
independence for the benefit of all stakeholders.
Growth Strategy. The Company believes that growth of revenues and its customer base is vital to the goal of increasing the value of its shareholders’ investment. The
Company strives to create shareholder value by maintaining a strong balance sheet and increasing profits.
Management attempts to grow in two primary ways:
•
•
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.
Within the community banking line, the Company has focused on a variety of lending and deposit services products that meet the needs of the communities it serves.
The Company has achieved significant growth in these areas. Total commercial real estate loans have increased from $907 million at December 31, 2018 to $2.0 billion
at December 31, 2022. Of this increase, approximately $773 million was the result of strategic acquisitions during the period. Approximately 65% of the Company’s
total revenues were derived from lending activities in the fiscal year ended December 31, 2022. 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 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.
5
The Senior Loan Committee, consisting of the most experienced lenders within the organization, must approve all underwriting decisions in excess of $10 million and
up to $30 million. The Board of Directors must approve all underwriting decisions in excess of $30 million. The legal lending limit for First Mid Bank was $111.8 million
at December 31, 2022. 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 $3.6 million (0.12% of total loans) over the past five years. Nonperforming loans were $19.2 million (0.40% of total loans) at December 31,
2022. 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 can lead to some amount of compression in the
net interest margin. During 2022, the Company’s net interest margin on a tax-effected basis decreased to 3.13% from 3.21% in 2021 primarily due to less accretion
income and lower interest rates in a more competitive and challenging interest rate environment.
Markets and Competition
The Company has active competition in all areas in which First Mid Bank does business. First Mid Bank competes for commercial and individual deposits and loans
with many Illinois, Missouri and Texas banks, savings and loan associations, and credit unions. The principal methods of competition in the banking and financial
services industry are quality of services to customers, ease of access to facilities, on-line services and pricing of services, including interest rates paid on deposits,
interest rates charged on loans, and fees charged for fiduciary and other banking services.
During 2022, First Mid Bank operated branches in the Illinois counties of Adams, Champaign, Christian, Clark, Coles, Cumberland, Douglas, Edgar, Effingham,
Jackson, Jefferson, Knox, Lawrence, Macon, Madison, Moultrie, McLean, Peoria, Piatt, Saline, St Clair, Wabash, White and Williamson, and in Missouri counties of
Boone, Lincoln, Cole, Camden, Saint Charles and Saint Louis, and the Texas county of Tarrant. Each branch primarily serves the community in which it is located. First
Mid Bank served forty-seven different communities with fifty-two separate locations in Illinois, thirteen locations in Missouri, one location in Texas, and a loan production
office in Indiana.
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.
2021 Loan Purchase
During 2021, First Mid Bank completed an acquisition of loans in the St. Louis Metro market totaling $208 million. There were no loans purchased with deteriorated
credit. First Mid Bank also assumed $219 million of related customer deposits and recorded a core deposit intangible asset of approximately $4.9 million that is being
amortized on an accelerated basis over ten years.
LINCO Bancshares, Inc.
On September 25, 2020, the Company and Eval Sub Inc., a wholly owned subsidiary of the Company ("LINCO Merger Sub"), entered into an Agreement and Plan of
Merger (the "LINCO 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 LINCO
Merger Sub merged with and into LINCO, whereupon the separate corporate existence of LINCO Merger Sub ceased and LINCO continued as the surviving company
and a wholly owned subsidiary of the Company (the "LINCO Merger").
Subject to the terms and conditions of the LINCO Merger Agreement, at the effective time of the LINCO Merger, each share of common stock, par value $1.00 per
share, of LINCO issued and outstanding immediately prior to the effective time of the LINCO Merger (other than shares held in treasury by LINCO) was converted into
and became the right to receive, cash or shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable
taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the
LINCO Merger was $103.5 million in cash and 1,262,246 shares of the Company’s common stock, provided that the shareholders of LINCO have collectively elected
pursuant to the LINCO 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 LINCO merger, LINCO paid a special dividend to its shareholders in the aggregate amount of $13 million.
The LINCO Merger closed on February 22, 2021 and Providence Bank was merged into First Mid Bank on May 15, 2021.
Delta Bancshares Company
On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Delta Merger
Sub”), entered into an Agreement and Plan of Merger (the “Delta Merger Agreement”) with Delta Bancshares Company, a Missouri corporation (“Delta”), pursuant to
which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a business combination whereby Delta will
merge with and into Merger Sub, whereupon the separate corporate existence of Delta will cease and Merger Sub will continue as the surviving company and a wholly-
owned subsidiary of First Mid (the “Delta Merger”).
Subject to the terms and conditions of the Delta Merger Agreement, at the effective time of the Delta Merger, each share of common stock, par value $10.00 per share,
of Delta issued and outstanding immediately prior to the effective time of the Delta Merger (other than shares held in treasury by Delta) converted into and became the
right to receive cash and shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required
6
to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the Delta Merger to
Delta’s shareholders and option holders was approximately $15.2 million in cash and 2,292,270 shares of Company common stock. Delta’s outstanding stock vested
upon consummation of the Delta Merger, and all outstanding Delta options that are unexercised prior to the effective time of the Delta Merger were cashed out.
The Delta Merger closed February 14, 2022 and Jefferson Bank was merged into First Mid Bank on June 10, 2022.
Supervision and Regulation General
Financial institutions, financial services companies, and their holding companies are extensively regulated under federal and state law. As a result, the growth and
earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable
state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the Office of the Comptroller of the
Currency (the “OCC”), the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”), the Missouri Division of Finance (“MDOF”), the Internal
Revenue Service and state taxing authorities. Any change in applicable laws, regulations or regulatory policies may have material effects on the business, operations
and prospects of the Company and First Mid 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:
7
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.
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 known as the Volker Rule, a financial institution's ability to engage in proprietary trading or to own or
invest in certain private equity and hedge funds.
•
•
•
•
•
•
•
•
•
Basel III
In September 2010, the Basel Committee on Banking Supervision proposed higher global minimum capital standards, including a minimum Tier 1 common capital ratio
and additional capital and liquidity requirements. On July 2, 2013, the Federal Reserve Board approved a final rule to implement these reforms and changes required
by the Dodd-Frank Act. This final rule was subsequently adopted by the OCC and the FDIC.
The final rule included new risk-based capital and leverage ratios, which were phased in from 2015 to 2019, and refined the definition of what constitutes “capital” for
purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and First Mid Bank beginning in 2015 were: (i) a new
common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The rule also established
a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and will
result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new
capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk weighted assets and increased by that amount each year until fully
implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital
level falls below the buffer amount.
The final rule also made three changes to the proposed rule of June 2012 that impacted the Company. First, the proposed rule required banking organizations to
include accumulated other comprehensive income (“AOCI”) in common equity tier 1 capital. AOCI includes accumulated unrealized gains and losses on certain assets
and liabilities that have not been included in net income. Under existing general risk-based capital rules, most components of AOCI are not included in a banking
organization's regulatory capital calculations. The final rule allowed community banking organizations to make a one-time election not to include these additional
components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from
regulatory capital. The Company made this election.
Second, the proposed rule modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential
mortgage exposure into two categories in order to determine the applicable risk weight. The final rule, however, retained the existing treatment for residential mortgage
exposures under the general risk-based capital rules.
Third, the proposed rule required banking organizations with total consolidated assets of less than $15 billion as of December 31, 2009, such as the Company, to
phase out over ten years any trust preferred securities and cumulative perpetual preferred securities from its Tier 1 capital regulatory capital. The final rule, however,
permanently grandfathered into Tier 1 capital of depository institution holding companies with total consolidated assets of less than $15 billion as of December 31,
2009, any trust preferred securities or cumulative perpetual preferred stock issued before May 19, 2010.
The Company
General. As a registered financial holding company under the BHCA that has elected to become a financial holding company under the GLB Act, the Company is
subject to regulation by the Federal Reserve Board. In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength
to First Mid Bank and to commit resources to support First Mid Bank in circumstances where the Company might not do so absent such policy. The Company is subject
to inspection, examination, and supervision by the Federal Reserve Board.
Activities. As a financial holding company, the Company may affiliate with securities firms and insurance companies and engage in other activities that are financial in
nature or incidental or complementary to activities that are financial in nature. A bank holding company that is not also a financial holding company is limited to
8
engaging in banking and such other activities as determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto.
No Federal Reserve Board approval is required for the Company to acquire a company (other than a bank holding company, bank, or savings association) engaged in
activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. However, the Company
generally must give the Federal Reserve Board after-the-fact notice of these activities. Prior Federal Reserve Board approval is required before the Company may
acquire beneficial ownership or control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank, or savings association.
If any subsidiary bank of the Company ceases to be “well-capitalized” or “well-managed” under applicable regulatory standards, the Federal Reserve Board may,
among other actions, order the Company to divest its depository institution. Alternatively, the Company may elect to conform its activities to those permissible for a
bank holding company that is not also a financial holding company.
If any subsidiary bank of the Company receives a rating under the Community Reinvestment Act of less than “satisfactory”, the Company will be prohibited, until the
rating is raised to “satisfactory” or better, from engaging in new activities or acquiring companies other than bank holding companies, banks, or savings associations.
Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve Board capital adequacy
guidelines. The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies for 2019, which
include the full phase in of the capital conservation buffer: a total capital to total risk-based capital ratio of not less than 10.50%, a Tier 1 risk-based ratio of not less than
8.50%, a common equity Tier 1 capital ratio of not less than 7.00%, and a Tier 1 leverage ratio of not less than 4.00%. For purposes of these capital standards, Tier 1
capital consists primarily of permanent stockholders’ equity, less intangible assets (other than certain mortgage servicing rights and purchased credit card
relationships), and total capital means Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital, limited amounts of unrealized
gains on equity securities and a portion of the Company’s allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements, and higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve Board’s capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities
trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible
capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.
As of December 31, 2022, the Company had regulatory capital, calculated on a consolidated basis, in excess of the Federal Reserve Board’s minimum requirements,
and its capital ratios exceeded those required for categorization as well-capitalized under the capital adequacy guidelines established by bank regulatory agencies with
a total risk-based capital ratio of 15.20%, a Tier 1 risk-based ratio of 12.40%, a common equity Tier 1 capital ratio of 12.03% and a leverage ratio of 9.68%.
Control Acquisitions. The Change in Bank Control Act prohibits a person or group of people from acquiring “control” of a bank holding company unless the Federal
Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of
10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as
amended, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the Company. In addition, any
company is required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding
company) or more of the outstanding common of the Company, or otherwise obtaining control of a “controlling influence” over the Company or First Mid Bank.
Interstate Banking and Branching. The Dodd-Frank Act expands the authority of banks to engage in interstate branching. The Dodd-Frank Act allows a state or
national bank to open a de novo branch in another state if the law of the state where the branch is to be located would permit a state bank chartered by that state to
open the branch.
Privacy and Security. The GLB Act establishes a minimum federal standard of financial privacy by, among other provisions, requiring banks to adopt and disclose
privacy policies with respect to consumer information and setting forth certain rules with respect to the disclosure to third parties of consumer information. The
Company has adopted and disseminated its privacy policies pursuant to the GLB Act. Regulations adopted under the GLB Act set standards for protecting the security,
confidentiality, and integrity of customer information, and require notice to regulators, and in some cases, to customers, in the event of security breaches. A number of
states have adopted their own statutes requiring notification of security breaches. In addition, the GLB Act requires the disclosure of agreements reached with
community groups that relate to the CRA, and contains various other provisions designed to improve the delivery of financial services to consumers while maintaining
an appropriate level of safety in the financial services industry.
First Mid Bank
General. First Mid Bank is a national bank, chartered under the National Bank Act. The FDIC insures the deposit accounts of the banks. The Bank is a member of the
Federal Reserve System and is subject to the examination, supervision, reporting and enforcement requirements of the OCC, as the primary federal regulator of
national banks, and the FDIC, as administrator of the deposit insurance fund.
Deposit Insurance. As an FDIC-insured institution, banks are required to pay deposit insurance premium assessments to the FDIC. A number of requirements with
respect to the FDIC insurance system have affected results, including insurance assessment rates.
The Company expensed $1,805,000, $1,604,000 and $1,309,000 for its insurance assessment during 2022, 2021, and 2020 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 years ended December 31, 2022, 2021, and 2020
the Company expensed supervisory fees totaling $868,000, $745,000, and $572,000, respectively. Changes in total expense are due to changes in assessment rates
and increases in total assets of First Mid Bank.
9
Capital Requirements. The banking regulators established the following minimum capital standards for banks as of 2019, which include the full phase in of the capital
conservation buffer in a total capital to total risk-based capital ratio of not less than 10.50%, a Tier 1 risk-based ratio of not less than 8.50%, a common equity Tier 1
capital ratio of not less than 7.00%, and a Tier 1 leverage ratio of not less than 4.00%. For purposes of these capital standards, Tier 1 capital and total capital consists
of substantially the same components as Tier 1 capital and total capital under the Federal Reserve Board’s capital guidelines for bank holding companies (See “The
Company—Capital Requirements”).
The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles
of individual institutions. For example, the banking regulators provide that additional capital may be required to take adequate account of, among other things, interest
rate risk or the risks posed by concentrations of credit, nontraditional activities, or securities trading activities.
During the year ended December 31, 2022, 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 14.18%, Tier 1 risk-based ratio was 13.17%, common equity Tier 1 ratio was 13.17% and leverage ratio was 10.22%.
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, 2022. As of
December 31, 2022, approximately $82.3 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 is 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 to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to “related
interests” of such directors, officers, and principal stockholders.
First Mid Bank 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.
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 is subject to the Community Reinvestment Act (CRA). The CRA and the regulations issued thereunder are intended to
encourage banks to help meet the credit needs of their service areas, including low and moderate income neighborhoods, consistent with the safe and sound
operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering
applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. The Financial Institutions
Reform, Recovery and Enforcement Act of 1989 requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a
bank holding company, the CRA performance record of its bank subsidiaries is reviewed by federal banking agencies in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or thrift or to merge with any other bank holding company. An unsatisfactory record can substantially delay or
block the transaction. First Mid Bank received satisfactory CRA ratings from its regulator in its most recent CRA examination.
10
Consumer Laws and Regulations. In addition to the laws and regulations discussed above, First Mid Bank is 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.
11
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 (63)
Michael L. Taylor (54)
Matthew K. Smith (48)
Eric S. McRae (57)
Bradley L. Beesley (51)
Laurel G. Allenbaugh (62)
Clay M. Dean (48)
Amanda D. Lewis (43)
Rhonda Gatons (51)
David Hiden (60)
Jason Crowder (52)
Jordan Read (33)
Megan McElwee (35)
Anya Schuetz (48)
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
Executive Vice President
Senior Vice President
Senior Vice President
Senior Vice President
Senior Vice President
Vice President
Joseph R. Dively, age 63, 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 54, 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 48, 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 and with Marine Bank in Springfield, Illinois prior.
Eric S. McRae, age 57, has been Executive Vice President of the Company and Executive Vice President, Chief Lending Officer of First Mid Bank since January 2022.
He was Chief Credit Officer from January 2017 to December 2021. He served as Senior Lender of First Mid Bank from December 2008 to December 2016 and he
served as President of the Decatur region from 2001 to December 2008.
Bradley L. Beesley, age 51, 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 62, has been Executive Vice President of the Company and Executive Vice President, Chief Operations Officer of First Mid Bank since April
2008. She served as Vice President of Operations from February 2000 to April 2008. She served as Controller of the Company and First Mid Bank from 1990 to
February 2000.
Clay M. Dean, age 48, 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 43, 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.
Rhonda Gatons, age 51, has been Execuitve Vice President of the Company since April of 2022 and Director of Human Resources since March 2016. Prior to joining
the Company, she was the Director of Human Resources at Midland States Bank.
David Hiden, age 60, has been Senior Vice President, Chief Information Officer of the Company since July 2018.
Jason Crowder, age 52 has been Senior Vice President and General Counsel of the Company since August 2019. Prior to joining the Company, he was the Corporate
Counsel of Petersen Health Care, Inc., from 2008 to July 2019, and an attorney at Heller, Holmes & Associates from 1996 to 2008.
Jordan Read, age 33, has been Senior Vice President and Chief Risk Officer of First Mid Bank since August 2021. He was Director of Internal Audit of Enterprise Bank
and Trust from 2018 to 2021.
Megan McElwee, age 35, has been Senior Vice President and Chief Credit Officer since January 2022. She served as Vice President and Director of Credit
Administration from 2021 to 2022, Credit Administration Manager from 2017 to 2021, and Credit Officer from 2011 to 2017.
Anya Schuetz, age 48, has been Vice President and Director of Project Management since 2013.
12
ITEM 1A.
RISK FACTORS
Various risks and uncertainties, some of which are difficult to predict and beyond the Company’s control, could negatively impact the Company. As a financial
institution, the Company is exposed to credit risk, interest rate and liquidity risk, operational risk, risks from economic and market conditions, and general business risks
among others. Adverse experience with these or other risks could have a material impact on the Company’s financial condition and results of operations, as well as the
value of its common stock.
Credit Risks
Loan customers or other counterparties may not be able to perform their contractual obligations resulting in a negative impact on the Company’s earnings.
Overall economic conditions affecting businesses and consumers, including the current difficult economic conditions and market disruptions, could impact the
Company’s credit losses. In addition, real estate valuations could also impact the Company’s credit losses as the Company maintains $3.3 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 four industries as of December 31,
2022. A listing of these industries is contained in under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Loans”
herein. A significant change in one of these industries such as a significant decline in agricultural crop prices, could adversely impact the Company’s credit losses.
Deterioration in the real estate market could lead to losses, which could have a material adverse effect on the business, financial condition and results of
operations or the Company. Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans.
Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying
assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. Increases in commercial and consumer delinquency
levels or declines in real estate market values would require increased net charge-offs and increases in the allowance for loan and lease losses, which could have a
material adverse effect on our business, financial condition and results of operations and prospects.
The allowance for credit losses may prove inadequate or be negatively affected by credit risk exposures. The Company’s business depends on the
creditworthiness of its customers. Management periodically reviews the allowance for loan and lease losses for adequacy considering economic conditions and trends,
collateral values, and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. There is no certainty that
the allowance for credit losses will be adequate over time to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market
conditions or events adversely affecting specific customers, industries, or markets. If the credit quality of the customer base materially decreases, if the risk profile of a
market, industry or group of customers changes materially, or if the allowance for credit losses is not adequate, the Company’s business, financial condition, liquidity,
capital, and results of operations could be materially adversely affected.
The Company depends on the accuracy and completeness of information furnished by and on behalf of our customers and counterparties. In deciding
whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including
financial statements, credit reports, and other financial information. The Company may also rely on representations of those customers, counterparties, or other third
parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit
reports, or other financial information could cause the Company to enter into unfavorable transactions, which could have a material adverse effect on financial condition
and results of operations.
Interest Rate and Liquidity Risks
Changes in interest rates may negatively affect our earnings. Changes in market interest rates and prices may adversely affect the Company’s financial condition
or results of operations. The Company’s net interest income, its largest source of revenue, is highly dependent on achieving a positive spread between the interest
earned on loans and investments and the interest paid on deposits and borrowings. Changes in interest rates could negatively impact the Company’s ability to attract
deposits, make loans, and achieve a positive spread resulting in compression of the net interest margin.
Declines in the value of securities held in the investment portfolio may negatively affect the Company’s earnings and capital. The value of an investment in
the portfolio could decrease due to changes in market factors. The market value of certain investment securities is volatile and future declines or other-than-temporary
impairments could materially adversely affect the Company’s future earnings and capital. Continued volatility in the market value of certain of the investment securities,
whether caused by changes in market perceptions of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in
significant fluctuations in the value of the securities. This could have a material adverse impact on the Company’s accumulated other comprehensive loss and
shareholders’ equity depending upon the direction of the fluctuations.
Furthermore, future downgrades or defaults in these securities could result in future classifications as other-than-temporarily impaired. The Company has invested in
trust preferred securities issued by financial institutions and insurance companies, corporate securities of financial institutions, and stock in the Federal Home Loan
Bank of Chicago and Federal Reserve Bank of Chicago. Deterioration of the financial stability of the underlying financial institutions for these investments could result in
other-than-temporary impairment charges to the Company and could have a material impact on future earnings. For further discussion of the Company’s investments,
see Note 4 – “Investment Securities.”
The Company may not have sufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit
withdrawals, funding operating costs and for other corporate purposes. This type of liquidity risk arises whenever the maturities of financial instruments included
in assets and liabilities differ. The Company’s liquidity can be affected by a variety of factors, including general economic conditions, market disruption, operational
problems affecting third parties or the Company, unfavorable pricing, competition, the Company’s credit rating and regulatory restrictions. (See “Liquidity” herein for
management’s actions to mitigate this risk.)
13
If the Company were unable to borrow funds through access to capital markets, it may not be able to meet the cash flow requirements of its depositors,
creditors, and borrowers, or the operating cash needed to fund corporate expansion and other corporate activities. As seen starting in the middle of 2007,
significant turmoil and volatility in worldwide financial markets can result in a disruption in the liquidity of financial markets and could directly impact the Company to the
extent it needs to access capital markets to raise funds to support its business and overall liquidity position. These types of situations could affect the cost of such funds
or the Company’s ability to raise such funds. If the Company were unable to access any of these funding sources when needed, it might be unable to meet customers’
needs, which could adversely impact its financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. For further discussion, see the
“Liquidity” section.
Operational Risks
A failure in or breach of the Company's operational or security systems, or those of its third-party service providers, including as a result of cyber-attacks,
could disrupt the Company's business, result in unintentional disclosure or misuse of confidential or proprietary information, damage the Company's
reputation, increase our costs, and cause losses. As a financial institution, the Company's operations rely heavily on the secure processing, storage, and
transmission of confidential and other information on its computer systems and networks. Any failure, interruption or breach in security or operational integrity of these
systems could result in failures or disruptions in the Company's online banking system, customer relationship management, general ledger, deposit and loan servicing
and other systems. The security and integrity of these systems could be threatened by a variety of interruptions or information security breaches, including those
caused by computer hacking, cyber-attacks, electronic fraudulent activity, or attempted theft of financial assets. Management cannot assert that any such failures,
interruption or security breaches will not occur, or if they do occur that they will be adequately addressed. While certain protective policies and procedures are in place,
the nature and sophistication of the threats continue to evolve. The Company may be required to expend significant additional resources in the future to modify and
enhance these protective measures.
Additionally, the Company faces the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate its business
activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, its
operational systems. Any failures, interruptions or security breaches in the Company's information systems could damage its reputation, result in a loss of customer
business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.
If the Company’s stock price declines from levels at December 31, 2022, management will evaluate the goodwill balance for impairment, and if the values of
the business has declined, the Company could recognize an impairment charge for its goodwill. Management performed its annual goodwill impairment
assessment as of September 30, 2022. 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.
14
The Company is subject to Environmental, Social and Governance (“ESG”) risks that could adversely affect its reputation and the market price of its
securities. The Company is subject to a variety of risks arising from ESG matters. ESG matters include climate risk, hiring practices, the diversity of the work force,
and racial and social justice issues involving the Company’s personnel, customers and third parties with whom it otherwise does business. Risks arising from ESG
matters may adversely affect, among other things, reputation and the market price of the Company’s securities. Further, the Company may be exposed to negative
publicity based on the identity and activities of those to whom it lends and with which it otherwise does business and the public’s view of the approach and performance
of its customers and business partners with respect to ESG matters. Any such negative publicity could arise from adverse news coverage in traditional media and
could also spread through the use of social media platforms. The Company’s relationships and reputation with its existing and prospective customers and third parties
with which it does business could be damaged if it were to become the subject of any such negative publicity. This, in turn, could have an adverse effect on the
Company’s ability to attract and retain customers and employees and could have a negative impact on the market price for securities. Investors have begun to
consider the steps taken and resources allocated by financial institutions and other commercial organizations to address ESG matters when making investment and
operational decisions. Certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to the risks
posed by climate change and other ESG matters into their investment theses. These shifts in investing priorities may result in adverse effects on the market price of
the Company’s securities to the extent that investors determine that the Company has not made sufficient progress on ESG matters.
The Company’s business could suffer if it fails to attract and retain skilled people. The Company’s success depends, in large part, on its ability to attract and
retain key people. Competition for the best employees in most of the activities the Company engages in can be intense. The Company may not be able to hire the
best people for key roles or retain them. In addition, the transition to increased work-from-home arrangements, which is likely to survive the COVID-19 pandemic for
many companies, may exacerbate the challenges of attracting and retaining talented and diverse employees as job markets may be less constrained by physical
geography. Our current or future approach to in-office and work-from-home arrangements may not meet the needs or expectations of current or prospective
employees or may not be perceived as favorable compared to the arrangements offered by competitors, which could adversely affect the Company’s ability to attract
and retain employees. The loss of any key personnel or an inability to continue to attract, retain, and motivate key personnel could adversely affect the Company’s
business.
Climate change could have a material negative impact on the Company and customers. The Company’s business, as well as the operations and activities of its
customers, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to the Company and its customers, and
these risks are expected to increase over time. Climate change presents multi-faceted risks, including: operational risk from the physical effects of climate events on
the Company and its customers’ facilities and other assets; credit risk from borrowers with significant exposure to climate risk; transition risks associated with the
transition to a less carbon-dependent economy; and reputational risk from stakeholder concerns about the Company’s practices related to climate change, the
Company’s carbon footprint, and the Company’s business relationships with clients who operate in carbon-intensive industries. Federal and state banking regulators
and supervisory authorities, investors, and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to
climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure
and management of their climate risks and related lending and investment activities Ongoing legislative or regulatory uncertainties and changes regarding climate risk
management and practices may result in higher regulatory, compliance, credit, and reputational risks and costs. The risks associated with climate change are changing
and evolving in an escalating fashion, making them difficult to assess due to limited data and other uncertainties. The Company could experience increased expenses
resulting from strategic planning, litigation, and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny, and
reduced investor and stakeholder confidence due to the Company’s response to climate change and its climate change strategy, which, in turn, could have a material
negative impact on business, results of operations, and financial condition.
Changes in the method pursuant to which the LIBOR and other benchmark rates are determined could adversely impact the Company’s business and
results of operations. Our floating-rate funding, certain hedging transactions and certain of the products that we offer, such as floating-rate loans and mortgages,
determine the applicable interest rate or payment amount by reference to a benchmark rate, such as LIBOR, or to an index, currency, basket, or other financial metric.
LIBOR and certain other benchmark rates are the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the
Chief Executive of the Financial Conduct Authority (“FCA”) announced that the FCA intends to stop persuading or compelling banks to submit rates for the calculation
of LIBOR after 2021. However, the administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings until June 30,
2023 and will cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies have issued guidance strongly encouraging banking
organizations to cease using the U.S. Dollar LIBOR as a reference rate in “new” contracts as soon as practicable and in any event by December 31, 2021. It is not
possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, which rate or rates may become accepted alternatives to LIBOR, or
what the effect of any such changes in views or alternatives may be on the markets for LIBOR-linked financial instruments. While there is no consensus on what rate or
rates may become accepted alternatives to LIBOR, the Alternative Reference Rates Committee, a steering committee comprised of U.S. financial market participants,
selected by the Federal Reserve Bank of New York, started in May 2018 to publish the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR. SOFR
is a broad measure of the cost of overnight borrowings collateralized by Treasury securities that was selected by the Alternative Reference Rate Committee due to the
depth and robustness of the Treasury repurchase market. At this time, it is impossible to predict whether SOFR will become a accepted alternative to LIBOR. The
discontinuation of LIBOR, changes in LIBOR, or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes to our risk
exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of floating-rate funding and, therefore, our exposure to
fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that we own or have issued. In addition, such
uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and
compliance, legal and operational costs and risks associated with client disclosures, discretionary actions taken or negotiation of fallback provisions, systems
disruption, business continuity, and model disruption.
15
Other Business Risks
The ongoing COVID-19 pandemic and the measures intended to prevent its spread have had and may continue to have an adverse effect on the Company's
operations, results of operations and financial condition, and the severity of these adverse effects depend on future developments which are highly
uncertain and difficult to predict. The global health concerns related to COVID-19 and government actions implemented to reduce the spread of the virus have had
an adverse impact on the macroeconomic environment. COVID-19 has significantly increased economic uncertainty and reduced economic activity. The outbreak has
resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down
orders and business limitations and shutdowns. These measures have significantly contributed to rising unemployment and negatively impacted consumer and
business spending. The United States government has taken steps to mitigate some of the more severe anticipated economic effects of the virus, including the
passage of the CARES Act, but there is no assurance that these steps will be effective or achieve the desired positive economic results in a timely fashion. COVID-19
has impacted, and is likely to further adversely impact, the workforce and operations of the Company, and the operations of our borrowers, customers, and business
partners. In particular, we may experience financial losses due to various operational factors impacting us or our borrowers, customers, or business partners, including
but not limited to:
•
•
•
•
•
credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in
the hospitality, energy, retail, and restaurant industries, but across other industries as well;
declines in collateral values;
third party disruptions, including outages at network providers and other suppliers;
increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
These factors may remain prevalent for a significant period and may continue to adversely affect the Company, results of operations and financial condition even after
the COVID-19 outbreak has subsided. The extent to which the coronavirus outbreak impacts the Company’s operations, results of operations and financial condition
will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its
severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the
COVID-19 outbreak has subsided, we may continue to experience adverse impacts to our business as a result of the virus’s global economic impact, including the
availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that
provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and
subject to change. The full extent of the impacts on the Company’s operations or the global economy as a whole is not yet known. However, the effects could have a
material impact on the Company’s results of operations and heighten other of our known risks.
The Company may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing
stockholders. To maintain capital at desired or regulatory-required levels, to replace existing capital, or to complete acquisitions the Company may be required to
issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. The Company may
sell these shares at prices below the current market price of shares, and the sale of these shares may significantly dilute stockholder ownership. The Company could
also issue additional shares in connection with acquisitions of other financial institutions.
If the Company is unable to make favorable acquisitions or successfully integrate our acquisitions, the Company’s growth could be impacted. In the past
several years, the Company has completed acquisitions of banks, bank branches and other businesses. We may continue to make such acquisitions in the future.
When the Company evaluates acquisition opportunities, the Company evaluates whether the target institution has a culture similar to the Company, experienced
management, and the potential to improve the financial performance of the Company. If the Company fails to successfully identify, complete, and integrate favorable
acquisitions, the Company could experience slower growth. Acquiring other banks, bank branches or businesses involves various risks commonly associated with
acquisitions, including, among other things: potential exposure to unknown or contingent liabilities or asset quality issues of the target institution, difficulty and expense
of integrating the operations and personnel of the target institution, potential disruption to the Company (including diversion of management’s time and attention),
difficulty in estimating the value of the target institution, and potential changes in banking or tax laws or regulations that may affect the target institution.
The Company and the banking industry are subject to government regulation, legislation, and policy. Government regulation, legislation and policy affect the
Company and the banking industry as a whole, including the Company’s business and results of operations. The Company’s results of operations could be adversely
affected by changes in how existing regulations are interpreted or applied by government agencies, or by the adoption of new government regulation, legislation, and
policy. These changes may require the Company to invest significant funds and management attention and resources in order to reach compliance. In addition, any
enforcement matters could impact supervisory and CRA ratings, which may restrict or limit the Company’s activities.
The Company operates in a highly competitive industry and market area. The Company faces substantial competition in all areas of its operations from a variety
of different competitors, both within and beyond its principal markets, many of which are larger and may have more financial resources. Such competitors primarily
include national, regional, and internet banks within the various markets in which the Company operates. The Company also faces competition from many other types
of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial
intermediaries. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation.
16
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 deposit operations department of First Mid Bank.
In addition, the Company owns facilities located at 1500 Wabash Avenue, Mattoon, Illinois, and 1420 Wabash Avenue, Mattoon, Illinois, which are used by branch
support operations, and 1100 Broadway Avenue, Mattoon, Illinois which is used by loan operations, and a facility located at 1321 Charleston Avenue, Mattoon, Illinois
which is used by First Mid Wealth Management Company.
The main office of First Mid Bank is located at 1515 Charleston Avenue, Mattoon, Illinois and is owned by First Mid Bank. First Mid Bank also owns a building located at
1520 Charleston Avenue, which is used by First Mid Insurance, and by First Mid Bank for back room operations. First Mid Bank also conducts business through
numerous facilities, owned and leased, located in twenty-four counties throughout Illinois, six throughout Missouri, and one county in Texas. Of the sixty-six other
banking offices operated by First Mid Bank, forty-nine are owned and seventeen are leased from non-affiliated third parties. First Mid Bank also has a loan production
office and an agency finance office in metro Indianapolis.
None of the properties owned by the Company are subject to any major encumbrances. The Company believes these facilities are suitable and adequate to operate its
banking and related business. The net investment of the Company and subsidiaries in real estate and equipment at December 31, 2022 was $90.5 million.
ITEM 3.
LEGAL PROCEEDINGS
From time to time the Company and its subsidiaries may be involved in litigation that the Company believes is a type common to our industry. None of any such
existing claims are believed to be individually material at this time to the Company, although the outcome of any such existing claims cannot be predicted with certainty.
ITEM 4.
MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER OF PURCHASES OF EQUITY
SECURITIES
The Company’s common stock is included for quotation on the NASDAQ Stock Market, LLC under the trading symbol "FMBH".
The Company’s shareholders are entitled to receive dividends as are declared by the Board of Directors, which considered quarterly payment of dividends during 2022.
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 2022:
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
— $
—
10,385
10,385
$
4,543,000
4,543,000
4,066,000
4,066,000
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
per Share
— $
—
10,385
10,385
$
—
—
31.75
31.75
Period
October 1, 2022 – October 31, 2022
November 1, 2022 – November 30, 2022
December 1, 2022 – December 31, 2022
Total
All of the repurchase activity that occurred during 2022 resulted from shares withheld to cover taxes on employee stock vesting. There were no other shares
repurchased during 2022. Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of
approximately $76.7 million of the Company’s common stock.
ITEM 6. [Reserved]
17
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are intended to provide a better understanding of the consolidated financial condition and results of operations of the Company
and its subsidiaries years ended December 31, 2022, 2021, and 2020. This discussion and analysis should be read in conjunction with the consolidated financial
statements, related notes and selected financial data appearing elsewhere in this report.
Forward-Looking Statements
This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new
business results, expansion plans, anticipated expenses, and planned schedules. The Company intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1955. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies, and expectations of the Company, are identified by use of the words “believe,” ”expect,” ”intend,” ”anticipate,”
”estimate,” ”project,” or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results
is subject to many risks and uncertainties, including those described in Item 1A. “Risk Factors” and other sections of the Company’s Annual Report on Form 10-K and
the Company’s other filings with the SEC, and changes in interest rates, general economic conditions and those in the Company’s market area, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios and the valuation of the investment portfolio, the Company’s success in raising capital, demand for loan products, deposit flows,
competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. Furthermore, forward-looking statements
speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any
obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
For the Years Ended December 31, 2022, 2021, and 2020 Overview
This overview of management’s discussion and analysis highlights selected information in this document and may not contain all the information that is important to
you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, you should
carefully read this entire document. These have an impact on the Company’s consolidated financial condition and results of consolidated operations.
Net income was $73.0 million, $51.5 million, and $45.3 million and diluted earnings per share were $3.60, $2.87, and $2.70 for the years ended December 31, 2022,
2021, and 2020, respectively. The following table shows the Company’s annualized performance ratios for the years ended December 31, 2022, 2021, and 2020:
Return on average assets
Return on average common equity
Average common equity to average assets
2022
2021
2020
1.11%
11.38%
9.77%
0.90%
8.38%
10.72%
1.05%
8.24%
12.76%
Total assets at December 31, 2022, 2021, and 2020 were $6.74 billion, $5.99 billion, and $4.73 billion, respectively. Net loan balances increased to $4.77 billion at
December 31, 2022, from $3.94 billion at December 31, 2021, and from $3.10 billion at December 31, 2020. The increase in 2022 was primarily due to approximately
$418.5 million of loans acquired from Jefferson Bank. The increase in 2021 was primarily due to approximately $829 million of loans acquired from Providence Bank
and $208 million of loans purchased from Stifel Bank. Of the increase in 2020, approximately $183 million was loans purchased from Stifel Bank and $168 million was
PPP loans.
Total deposit balances increased to $5.26 billion at December 31, 2022 from $4.96 billion at December 31, 2021 and from $3.69 billion at December 31, 2020. The
increase in 2022 was primarily due to $560 million of deposits acquired from Jefferson Bank. The increase in 2021 was primarily due to $990 million of deposits
acquired from Providence Bank and $219 million of deposits acquired in association with loans purchased from Stifel Bank. The increase in 2020 was primarily due to
approximately $62 million of deposits acquired from Stifel Bank for customer accounts in connection with loans acquired, increases in customers deposits for stimulus
payments and PPP loan proceeds.
Net interest margin (tax effected), defined as net interest income divided by average interest-earning assets, was 3.13% for 2022, 3.21% for 2021 and 3.27% for 2020.
In 2022 the decrease was primarily due to an increase in rates on interest-bearing deposits and borrowings. In 2021 the decrease was primarily due to less accretion
income and a decline in interest rates.
Net interest income increased to $184.3 million in 2022 from $167.8 million in 2021 and $127.4 million in 2020. During 2022, the increase in net interest income was
primarily due to the acquisition of Jefferson Bank. During 2021, the increase in net interest income resulted from growth in earning assets, primarily through
acquisitions offset by growth in interest bearing liabilities with lower interest rates. During 2020, the increase in net interest income was primarily due to growth in
earning assets offset by a decline in interest rates.
Non-interest income increased to $74.7 million in 2022 compared to $69.8 million in 2021 and $59.5 million in 2020. The increase in 2022 was primarily due to growth
in wealth management and insurnace revenues and the acquisition of Jefferson Bank. The increase in 2021 was primarily due to the acquisition of Providence Bank.
The increase in 2020 was primarily due to increases in wealth management revenues, insurance commissions and mortgage banking income.
Non-interest expenses increased to $162.9 million in 2022 compared to $155.6 million in 2021, and $111.1 million in 2020. The increase in 2022 was primarily due to
the acquisition of Jefferson Bank. The increase in 2021 was primarily due to the acquisition of Providence Bank.
18
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
2022 vs 2021
2021 vs 2020
16,526
10,345
4,915
(7,282)
(3,042)
21,462
$
$
40,339
952
10,247
(44,492)
(826)
6,220
$
$
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $19.2 million at December 31, 2022 compared to $22.0 million at
December 31, 2021, and $28.1 million at December 31, 2020. Repossessed Assets balances totaled $4.4 million at December 31, 2022 compared to $5.0 million at
December 31, 2021, and $2.5 million at December 31, 2020. The Company’s provision for loan losses was $4.8 million for 2022, compared to $15.2 million for 2021,
and $16.1 million for 2020. The decrease of provision expense in 2022 and 2021 is primarily due to a decrease in classified loans and improved economic outlook. The
increase in provision in 2020 was due to the adoption of ASU 2016-13 and impacts of COVID-19 on the operations and earnings of borrowers.
The Company’s capital position remains strong and the Company has consistently maintained regulatory capital ratios above the “well-capitalized” standards. The
Company’s Tier 1 capital ratio to risk weighted assets ratio at December 31, 2022, 2021, and 2020 was 12.40%, 12.51%, and 14.63%, respectively. The Company’s
total capital to risk weighted assets ratio at December 31, 2022, 2021, and 2020 was 15.20%, 15.79% and 18.82%, respectively. The decrease in 2022 was primarily
due to the increase in assets following the acquisition of Jefferson Bank. The decrease in these ratios during 2021 was primarily due to the increase in assets following
the acquisition of Providence Bank.
The Company’s liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company maintains
various sources of liquidity to fund its cash needs. See “Liquidity” herein for a full listing of its sources and anticipated significant contractual obligations.
The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These
financial instruments include lines of credit, letters of credit and other commitments to extend credit. The total outstanding commitments at December 31, 2022, 2021,
and 2020 were $1.2 billion, $1.0 billion, and $615.5 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.
19
The allowance for credit losses is measured on a collective (pool) basis for non-impaired loans with similar risk characteristics. Historical credit loss experience
provides the basis for the estimate of expected credit losses. Adjustments to historical loss information are made for relevant factors to each pool including merger &
acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. The Company estimates the appropriate level of
allowance for credit losses for impaired loans by evaluating them separately. A specific allowance is assigned to an impaired loan when expected cash flows or
collateral are less than the carrying amount of the loan.
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period that the Company
is exposed to credit risk via a contractual obligation to extend credit unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses
on off-balance sheet credit exposures is included in other liabilities in the consolidated balance sheets.
Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a
new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value
when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair
value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after
acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to
other noninterest expense.
Mortgage Servicing Rights. The Company has elected to measure mortgage servicing rights under the amortization method. Using this method, servicing rights are
amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each
reporting date. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type.
Impairment is recognized through a valuation reserve, to the extent that fair value is less than the carrying amount of servicing assets. Fair value in excess of the
carrying amount of servicing assets is not recognized.
Deferred Income Tax Assets/Liabilities. The Company’s net deferred income tax asset arises from differences in the dates that items of income and expense enter
into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred
tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of
deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If the Company were to experience net operating losses for
tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.
Additionally, the Company reviews its uncertain tax positions annually. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax
position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount of
judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the largest amount of tax benefit that is
greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax
benefit or increase to tax liability, which could adversely affect future income tax expense.
Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the
Company’s consolidated balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful
lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying
amount may not be recoverable. Core deposit intangible assets were tested for impairment during 2019 as part of the goodwill impairment test and no impairment was
deemed necessary.
As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the balance sheets. Goodwill is evaluated for
impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently
than annually.
Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods.
Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not
actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When
observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration
concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating
these factors can impact the amount of revenue or loss recorded.
ASC 820 establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and
establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three
levels are defined as follows:
•
•
•
Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets
that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — inputs that are unobservable and significant to the fair value measurement.
20
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be
transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of
hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair
value hierarchy can be found in Note 11 – “Disclosures of Fair Values of Financial Instruments.”
Results of Operations
Net Interest Income
The largest source of operating revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on
earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and
mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies
with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds.
Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is
presented on a full tax equivalent (TE) basis in the table that follows. The federal statutory rate in effect of 21% was used for all years. The TE analysis portrays the
income tax benefits associated with the tax-exempt assets. The year-to-date net yield on interest-earning assets excluding the TE adjustments of $3,164,000,
$2,624,000, and $2,223,000 for 2022, 2021, and 2020, respectively, were 3.08%, 3.17%, and 3.20% at December 31, 2022, 2021, and 2020, 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, 2022
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
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
Liabilities and stockholders' equity
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-bearing liabilities
Demand deposits
Other liabilities
Stockholders’ equity
Total liabilities and stockholders' equity
Net interest income
Net interest spread
Impact of non-interest-bearing funds
TE net yield on interest-earning assets
492
113
37
20,595
11,121
186,697
219,055
13,709
570
4,534
18,813
1,795
6,184
9
3,945
868
—
12,801
31,614
$
$
56,517
5,772
1,756
1,053,511
328,832
4,518,566
5,964,954
123,306
88,744
439,545
(58,876)
$ 6,557,673
$ 2,598,480
666,334
655,240
3,920,054
202,242
276,401
481
94,471
19,275
14
592,884
4,512,938
1,356,912
46,811
641,012
$ 6,557,673
357
—
56
15,598
9,264
160,362
185,637
4,258
487
4,292
9,037
231
1,514
—
3,939
541
—
6,225
15,262
0.87% $
1.96%
2.10%
268,523
1,335
2,606
$
1.95%
3.38%
4.13%
3.67%
923,600
299,833
3,778,174
5,274,071
95,902
79,913
333,115
(53,188)
$ 5,729,813
0.53% $ 2,217,281
611,379
0.09%
671,056
0.69%
3,499,716
0.48%
173,762
0.89%
107,518
2.24%
—
1.87%
94,321
4.18%
19,105
4.50%
—%
—
394,706
2.16%
3,894,422
0.70%
1,164,877
56,388
614,126
$ 5,729,813
274
3
84
11,376
7,075
127,552
146,364
3,732
426
8,593
12,751
488
1,851
10
931
682
16
3,978
16,729
0.13% $
0.03%
2.13%
140,470
1,149
3,771
$
1.69%
3.09%
4.24%
3.51%
545,525
200,128
3,046,814
3,937,857
87,194
59,068
255,184
(37,343)
$ 4,301,960
0.19% $ 1,557,264
469,276
0.08%
531,834
0.64%
2,558,374
0.26%
219,298
0.13%
106,688
1.41%
525
—%
22,403
4.18%
18,936
2.83%
656
—%
368,506
1.58%
2,926,880
0.39%
777,435
48,518
549,127
$ 4,301,960
$
187,441
$
170,375
$
129,635
2.97%
0.16%
3.13%
3.12%
0.09%
3.21%
(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
0.19%
0.24%
2.23%
2.09%
3.54%
4.19%
3.72%
0.24%
0.09%
1.62%
0.50%
0.22%
1.73%
1.90%
4.16%
3.60%
2%
1.08%
0.57%
3.15%
0.12%
3.27%
21
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
2022 Compared to 2021
Increase (Decrease)
2021 Compared to 2020
Increase (Decrease)
Total
Change
Volume (1)
Rate (1)
Total
Change
Volume (1)
Rate (1)
$
$
$
135
113
(19)
$
(468)
4
(18)
$
603
109
(1)
$
83
(3)
(28)
$
187
—
(24)
4,997
1,857
26,335
33,418
9,451
83
242
9,776
1,564
4,670
9
6
327
—
6,576
16,352
17,066
$
2,387
939
30,596
33,440
828
35
(99)
764
43
3,397
6
6
5
—
3,457
4,221
29,219
$
2,610
918
(4,261)
(22)
8,623
48
341
9,012
1,521
1,273
3
—
322
—
3,119
12,131
(12,153)
$
4,222
2,189
32,810
39,273
526
61
(4,301)
(3,714)
(257)
(337)
(10)
3,008
(141)
(16)
2,247
(1,467)
40,740
$
6,728
3,171
31,257
41,319
1,397
113
1,849
3,359
(87)
14
(5)
3,004
6
(8)
2,924
6,283
35,036
$
(104)
(3)
(4)
(2,506)
(982)
1,553
(2,046)
(871)
(52)
(6,150)
(7,073)
(170)
(351)
(5)
4
(147)
(8)
(677)
(7,750)
5,704
(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 $17.1 million or 10.0% in 2022 compared to an increase of $40.7 million or 31.4% in 2021. 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 higher interest-bearing liability costs.
In 2022, average earning assets increased by $690.9 million, or 13.1%, and average interest-bearing liabilities increased by $618.5 million or 15.9%. These increases
were primarily due to assets and liabilities acquired from Jefferson Bank. Changes in average balances are shown below:
•
•
•
•
•
•
•
•
Average interest-bearing cash deposits held by the Company decreased $212.0 million or 79.0% in 2022 compared to 2021. In 2021, average interest-
bearing cash deposits held by the Company increased $128.1 million or 91.2% compared to 2020.
Average federal funds sold increased $4.4 million or 332.4% in 2022 compared to 2021. In 2021, average federal funds sold increased $0.2 million or 16.2%
compared to 2020.
Average certificates of deposit investments decreased $0.9 million or 32.6% in 2022 compared to 2021. In 2021, average certificates of deposit investments
decreased $1.2 million or 30.9% compared to 2020.
Average loans increased by $740.4 million or 19.6% in 2022 compared to 2021. In 2021, average loans increased by $731.4 million or 24.0% compared to
2020.
Average securities increased by $158.9 million or 13.0% in 2022 compared to 2021. In 2021, average securities increased by $477.8 million or 64.1%
compared to 2020.
Average interest-bearing deposits increased by $420.3 million or 12.0% in 2022 compared to 2021. In 2021, average deposits increased by $941.3 million
or 36.8% compared to 2020.
Average securities sold under agreements to repurchase increased by $28.5 million or 16.40% in 2022 compared to 2021. In 2021, average securities sold
under agreements to repurchase decreased by $45.5 million or 20.8% compared to 2020.
Average borrowings and other debt increased by $169.7 million or 76.8% in 2022 compared to 2021. In 2021, average borrowings and other debt increased
by $71.7 million or 48.1% compared to 2020.
22
•
Net interest margin decreased to 3.13% compared to 3.21% in 2021 and 3.27% in 2020. Asset yields increased by 16 basis points in 2022, and interest-
bearing liabilities increased by 31 basis points.
Provision for Loan Losses
The provision for loan losses in 2022 was $4.8 million compared to $15.2 million in 2021 and $16.1 million in 2020. Nonperforming loans decreased to $19.2 million at
December 31, 2022 from $22.0 million at December 31, 2021 and $28.1 million at December 31, 2020. The decrease in provision expense in 2022 and 2021 was
primarily due to a decrease in classified loans and improved economic outlook. Net charge-offs were $1.2 million during 2022, $4.5 million during 2021 and $2.8 million
during 2020. For information on loan loss experience and nonperforming loans, see “Nonperforming Loans and Repossessed Assets” and “Loan Quality and Allowance
for credit losses” herein.
Other Income
An important source of the Company’s revenue is derived from other income. The following table sets forth the major components of other income for the last three
years (in thousands):
Change From Prior Year
2022
2021
Wealth management revenues
Insurance commissions
Service charges
Securities gains
Mortgage banking
ATM / debit card revenue
Bank owned life insurance
Other
Total other income
2022
2021
2020
$
%
$
%
$
$
22,492
21,622
9,112
33
1,190
12,422
3,559
4,252
74,682
$
$
20,407
18,927
6,808
124
4,718
11,974
3,039
3,770
69,767
$
$
16,153
17,477
5,862
1,106
5,075
8,962
1,730
3,155
59,520
$
$
2,085
2,695
2,304
(91)
(3,528)
448
520
482
4,915
10.2% $
14.2%
33.8%
-73.4%
-74.8%
3.7%
17.1%
12.8%
7.0% $
4,254
1,450
946
(982)
(357)
3,012
1,309
615
10,247
26.3%
8.3%
16.1%
-88.8%
-7.0%
33.6%
75.7%
19.5%
17.2%
Total non-interest income increased to $74.7 million in 2022 compared to $69.8 million in 2021 and $59.5 million in 2020. The primary reasons for the more significant
year-to-year changes in other income components are as follows:
• Wealth management revenues increased in 2022 due to growth in customer accounts and assets under management as well as rising commodity prices,
which drove higher farm management fee income. The increase in 2021 was primarily due to increases in all business lines. Total assets under
management were $5.3 billion at December 31, 2022 compared to $5.1 billion at December 31, 2021 and $4.5 billion at December 31, 2020.
•
•
•
•
•
•
•
Insurance commissions increased in 2022 primarily due to an increase in commission and contingency income. During 2021 the increase was primarily due
to increases in commission and fee income offset by a decline in contingency income.
Fees from service charges increased in 2022 was primarily due to an increase in overdraft fees and transaction account service charges and the acquisition
of Jefferson Bank. The increase in 2021 was primarily due to the acquisition of Providence Bank.
Net securities gains in 2022 were $33,000 compared to $124,000 in 2021 and $1,106,000 in 2020. Net securities gains were less in 2022 and 2021 due to
less securities being sold during the year.
The decrease in mortgage banking income during 2022 was due to a decline in mortgage refinancing activity and fees from loans sold in the secondary
market. Loans sold balances were as follows:
•
•
•
$62.3 million (representing 422 loans) in 2022
$149.0 million (representing 1,011 loans) in 2021
$196.0 million (representing 1,315 loans) in 2020
First Mid Bank generally releases the servicing rights on loans sold into the secondary market.
Revenue from ATMs and debit cards increased in 2022 primarily due to the acquisition of Jefferson Bank and in 2021 primarily due to the acquisition of
Providence Bank.
Bank owned life insurance increased during 2022 due to $15.8 million of bank owned life insurance added through the acquisition of Jefferson Bank. The
increase in 2021 was due to $30 million of bank owned life insurance added by First Mid Bank and $30.3 million of bank owned life insurance acquired in the
acquisition of Providence Bank.
Other income increased during 2022 primarily due to the acquisition of Jefferson Bank and a gain realized on the termination of derivatives. Other income
increased during 2021 primarily due to the acquisition of Providence Bank offset by a swap upfront fee received in 2020 that did not recur in 2021.
23
Other Expense
The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with
day-to-day operations. The following table sets forth the major components of other expense for the last three years (dollars in thousands):
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
2022
2020
$
2022
98,594
24,257
330
1,805
6,290
1,295
6,996
2,999
4,300
15,995
$ 162,861
$
2021
89,660
21,546
3,866
1,604
5,391
1,161
6,730
3,603
3,116
18,902
$ 155,579
$
2020
66,452
16,708
42
1,309
5,062
1,080
5,427
1,616
2,290
11,101
$ 111,087
$
8,934
2,711
(3,536)
201
899
134
266
(604)
1,184
(2,907)
7,282
$
$
%
10.0% $
12.6%
-91.5%
12.5%
16.7%
11.5%
4.0%
-16.8%
38.0%
-15.4%
4.7% $
$
23,208
4,838
3,824
295
329
81
1,303
1,987
826
7,801
44,492
%
34.9%
29.0%
9104.8%
22.5%
6.5%
7.5%
24.0%
123.0%
36.1%
70.3%
40.1%
Total non-interest expense increased to $162.9 million in 2022 from $155.6 million in 2021 and $111.1 million in 2020. 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 commission,
share-based compensation expense, increases for merit raises and applicable payroll taxes, and the addition of Jefferson Bank, offset by declines in bonus
accrual expense and group insurance expense. The increase in 2021 was due to additional employees from the acquisition of Providence Bank, merit
increases in 2021 for continuing employees and an increase in incentive compensation, commissions, and share-based compensation. There were 1,043
full-time equivalent employees at December 31, 2022, compared to 965 at December 31, 2021, and 824 at December 31, 2020.
Occupancy and equipment expense increased primarily due to increases in depreciation, equipment and other property related expenses from the
acquisition of Jefferson Bank, offset by decreases in data processing expense. The increase in 2021 was primarily due to additional properties added in the
acquisition of Providence Bank and increases in expense for software and data processing.
Net other real estate owned expense decreased in 2022 primarily due to more properties sold at a net gain compared to properties sold at a net loss or
written down during 2021. The increase in 2021 was primarily due to properties added in the acquisition of Providence Bank that were sold at prices lower
than recorded book value and properties from branch operations that were closed during 2021 and moved to ORE and subsequently written down.
FDIC insurance expense increased due to the additional assets added with the acquisition of Jefferson Bank. The increase in 2021 was due to the
additional assets added with the acquisition of Providence Bank offset by lower assessment rates.
Amortization of other intangibles increased during 2022 primarily due to additional core deposit intangibles added from the acquisition of Jefferson Bank.
The increase in 2021 was primarily due to additional core deposit intangibles added from the acquisition of Providence Bank and deposits added associated
with the Stifel loan purchase.
ATM and debit card expenses increased primarily due to an increase in electronic transactions following the acquisition of Jefferson Bank. The increase
during 2022 was primarily due to an increase in electronic transactions following the acquisition of Providence Bank.
Other operating expenses decreased during 2022 due to less costs to acquire Delta compared to costs to acquire LINCO offset by additional expenses from
the operation of Jefferson Bank. Other operation expenses increased during 2021 primarily due to the acquisition of Providence Bank.
On a net basis, all other categories of operating expenses increased during 2022 primarily due to increased costs associated with the operation of Jefferson
Bank. The increase during 2021 was primarily due to an increase in fees associated with the acquisition of Providence Bank.
Income Taxes
Income tax expense amounted to $18.3 million in 2022 compared to $15.3 million in 2021, and $14.5 million in 2020. Effective tax rates were 20.1% for 2022, 22.9% for
2021, and 24.2% for 2020. 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 2019.
24
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):
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
Amortized
Cost
$
$
252,934
347,409
744,636
90,347
1,435,326
2022
December 31,
2021
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
2020
Weighted
Average
Yield
Amortized
Cost
1.28% $
213,599
1.22% $
132,083
2.31%
1.69%
3.41%
1.87% $
383,991
799,456
32,575
1,429,621
2.40%
1.58%
4.30%
1.80% $
237,886
479,470
10,740
860,179
1.25%
2.72%
1.92%
5.22%
2.08%
At December 31, 2022, the amortized cost of the Company’s investment portfolio increased by $5.7 million from December 31, 2021 primarily due to securities obtained
in the acquisition of Jefferson Bank. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the
adequacy of expected returns relative to the risks assumed.
The table below presents the credit ratings as of December 31, 2022 for certain investment securities (in thousands):
Amortized
Cost
Estimated
Fair Value
AAA
AA +/-
A +/-
BBB +/-
< BBB -
Not
Rated
Average Credit Rating of Fair Value at December 31, 2022 (1)
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
Held-to-maturity:
Other securities
Equity securities:
Federal Agricultural Mtg Corp
$
$
252,934
$
220,527
$
25,510
$ 194,274
$
— $
— $
— $
744
347,409
744,636
87,393
$ 1,432,372
287,698
627,880
82,880
$ 1,218,985
2,954
84
$
$
2,954
311
36,436
988
3,000
65,934
206,106
—
10,071
$ 410,451
$
44,757
—
28,595
73,352
$
—
—
4,600
4,600
$
400
—
626,892
—
—
36,613
— $ 664,649
— $
— $
— $
— $
— $
2,954
— $
— $
— $
— $
— $
311
$
$
$
(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.
25
Loans
The loan portfolio (net of unearned interest) is the largest category of the Company’s earning assets. The following table summarizes the composition of the loan
portfolio, including loans held for sale, for the last five years (dollars in thousands):
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
2022
144,264
410,327
440,180
294,346
2,030,011
3,319,128
166,838
1,082,960
97,775
159,511
4,826,212
$
$
% Outstanding
Loans
3.0% $
8.5%
9.1%
6.1%
42.1%
68.8%
3.5%
22.4%
2.0%
3.3%
100.0% $
2021
145,118
279,272
400,313
298,942
1,666,198
2,789,843
151,484
832,008
78,442
143,746
3,995,523
$
$
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
$
$
2019
94,142
240,241
336,427
153,948
995,702
1,820,460
136,124
528,973
83,183
126,607
2,695,347
$
$
2018
50,619
231,700
373,518
184,051
906,850
1,746,738
135,877
557,011
91,516
113,377
2,644,519
Loan balances increased by $830.7 million or 20.8% from December 31, 2021 to December 31, 2022 which included approximately $418.5 million of loans acquired,
before purchase accounting adjustments, from Jefferson Bank. Loan balances increased by $857.1 million or 27.3% from December 31, 2020 to December 31, 2021
of which approximately $829 million were loans acquired from Providence Bank and $208 million were loans purchases from Stifel Bank. The balances of loans sold
into the secondary market were $62.3 million in 2022 compared to $149.0 million in 2021. The balance of real estate loans held for sale, included in the balances
shown above, amounted to $338,000 and $2,748,000 as of December 31, 2022 and 2021, respectively.
Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans
secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such
loans may be influenced to a great extent by conditions in the market or the economy. The Company does not have any sub-prime mortgages or credit card loans
outstanding which are also generally considered to be higher credit risk.
First Mid Bank does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a
percentage of total risk-based capital for the periods shown above. At December 31, 2022 and 2021, First Mid Bank 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 and dwellings
Hotels and motels
December 31, 2022
Principal
balance
% Outstanding
Loans
December 31, 2021
Principal
balance
% Outstanding
Loans
$
445,241
956,120
453,219
209,837
9.23% $
19.81%
9.39%
4.35%
297,394
696,730
468,362
159,410
7.44%
17.44%
11.72%
3.99%
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, 2022, 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
Maturity (1)
37,079
12,103
14,229
16,705
118,619
198,735
128,848
245,615
7,909
30,234
611,341
$
$
58,531
130,561
123,451
218,583
1,016,935
1,548,061
33,365
548,070
62,287
24,439
2,216,222
$
$
48,654
267,663
302,500
59,058
894,457
1,572,332
4,625
289,275
27,579
104,838
1,998,649
$
$
$
$
26
Total
144,264
410,327
440,180
294,346
2,030,011
3,319,128
166,838
1,082,960
97,775
159,511
4,826,212
As of December 31, 2022, loans with maturities over one year consisted of approximately $2.9 billion in fixed rate loans and approximately $1.3 billion in variable rate
loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding renewals and
borrower requests, which are handled on a case-by-case basis.
Nonperforming Loans and Nonperforming Other Assets
Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal
payments; and (c) loans not included in (a) and (b) above which are defined as “troubled debt restructurings”. Repossessed assets include primarily repossessed real
estate and automobiles.
The Company’s policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due. The accrual of interest is
discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are
discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of
principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of
management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal.
Troubled debt restructurings are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower
or either principal or interest has been forgiven. Repossessed assets represent property acquired as the result of borrower defaults on loans. These assets are
recorded at estimated fair value, less estimated selling costs, at the time of foreclosure or repossession. Write-downs occurring at foreclosure are charged against the
allowance for credit losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs for subsequent
declines in value are recorded in non-interest expense in other real estate owned along with other expenses related to maintaining the properties.
The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets (in thousands):
Nonaccrual loans
Troubled debt restructurings which are performing in accordance
with revised terms
Total nonperforming loans
Repossessed assets
Total nonperforming loans and repossessed assets
Nonperforming loans to loans, before allowance for credit losses
Nonperforming loans and repossessed assets to loans, before
allowance for credit losses
$
$
2022
2021
December 31,
2020
2019
2018
15,956
$
18,105
$
23,750
$
25,118
$
27,298
3,214
19,170
4,369
23,539
$
0.40%
0.49%
3,931
22,036
5,019
27,055
$
0.55%
0.68%
4,373
28,123
2,493
30,616
$
0.90%
0.98%
2,700
27,818
3,720
31,538
$
1.03%
1.17%
2,451
29,749
2,595
32,344
1.12%
1.22%
The $2.1 million decrease in nonaccrual loans during 2022 resulted from the net of $5.4 million of loans put on nonaccrual status, offset by $0.4 million of loans
transferred to other real estate owned, $0.3 million of loans charged off and $6.8 million of loans becoming current or paid-off.
The following table summarizes the composition of nonaccrual loans (dollars 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
Total loans
December 31, 2022
December 31, 2021
Balance
% of Total
Balance
% of Total
$
$
14
1,258
4,943
672
7,640
14,527
57
1,098
274
15,956
0.1% $
7.9%
31.0%
4.2%
47.8%
91.0%
0.4%
6.9%
1.7%
100.0% $
25
336
5,252
1,982
7,920
15,515
560
1,851
179
18,105
0.1%
1.9%
29.0%
11.0%
43.7%
85.7%
3.1%
10.2%
1.0%
100.0%
27
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $103,000, $308,000 and $575,000 for the years ended
December 31, 2022, 2021, and 2020, respectively.
The $0.7 million decrease in repossessed assets during 2022 resulted from the net of $.5 million of additional assets repossessed, $1 million of repossessed assets
sold and a $0.2 million of writedowns on existing assets. The following table summarizes the composition of repossessed assets (dollars in thousands):
Construction and land development
1-4 family residential properties
Commercial real estate
Total real estate
Consumer loans
Total repossessed collateral
December 31, 2022
December 31, 2021
Balance
% of Total
Balance
% of Total
$
$
2,763
108
1,390
4,261
108
4,369
63.2% $
2.5%
31.8%
97.5%
2.5%
100.0% $
3,004
12
1,968
4,984
35
5,019
59.9%
0.2%
39.2%
99.3%
0.7%
100.0%
Repossessed assets sold during 2022 resulted in net gains of $36,000 related to real estate asset sales and $2,000 of net losses related to other assets sales. The
Company also recognized $61,000 of deferred gains and recorded $236,000 of write downs on three real estate properties owned.
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,
2022, the Company’s loan portfolio included $577.2 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $445.2 million
was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $146.4 million from $430.8 million at
December 31, 2021 while loans concentrated in other grain farming increased $147.8 million from $297.4 million at December 31, 2021. 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 $209.8 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 $956.1 million of loans to lessors of non-residential buildings and $453.2 million of loans to lessors of residential buildings and dwellings.
The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and
ultimately the Board of Directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the
regulatory thresholds are generally observed. Most of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch
bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In
general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.
28
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
Initial allowance on loans purchased with credit deterioration
Charge-offs:
Construction and 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 and 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
Ratio of annualized net charge-offs to average loans
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
$
$
2022
4,518,566
—
54,655
863
2021
3,778,142
—
41,910
2,074
$
$
2020
3,003,488
1,672
28,583
—
$
2019
2,598,718
—
26,189
—
2018
2,276,500
—
19,977
—
2
—
191
414
93
870
1,380
2,950
100
—
359
385
54
208
613
1,719
1,231
4,806
59,093
0.03%
1.22%
308.3%
$
205
—
371
535
—
3,118
1,405
5,634
—
—
211
60
1
139
743
1,154
4,480
15,151
54,655
0.12%
1.37%
248.0%
$
13
—
393
830
—
1,991
617
3,844
—
—
299
169
—
179
421
1,068
2,776
16,103
41,910
0.09%
1.34%
149.0%
$
—
—
1,477
1,743
24
1,828
1,254
6,326
—
—
91
12
—
155
357
615
5,711
6,433
26,911
0.22%
1.00%
96.7%
$
10
—
1,111
170
93
832
777
2,993
—
—
102
—
—
145
291
538
2,455
8,667
26,189
0.11%
0.99%
88.0%
$
The ratio of the allowance for credit losses to nonperforming loans was 308.3% as of December 31, 2022 compared to 248.0% as of December 31, 2021. The increase
in this ratio is primarily due to a decline in nonperforming loans. Management believes that the overall estimate of the allowance for credit losses appropriately accounts
for probable losses attributable to current exposures.
During 2022, the Company had net charge-offs of $1,231,000 compared to $4,480,000 in 2021. During 2022, there were significant charge-offs of two commercial real
estate loans to one borrower of $271,000 and significant charge-offs of two commercial operating loans to two borrowers of $739,000. During 2021, there were
significant charge-offs of two commercial real estate loans to two borrowers of $661,000 and significant charge-offs of five commercial operating loans to three
borrowers of $2.9 million.
At December 31, 2022, the allowance for credit losses amounted to $59.1 million or 1.22% of total loans. At December 31, 2021, the allowance for credit losses
amounted to $54.7 million or 1.37% 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.
29
The allowance for credit losses, in management's judgment, was allocated as follows to cover probable loan losses (dollars in thousands):
December 31, 2022
December 31, 2021
December 31, 2020
$
Allowance for
credit losses
2,250
1,433
3,742
28,157
585
20,808
2,118
59,093
—
59,093
$
% of loans to
total
loans
Allowance for
credit losses
1,743
1,257
2,330
26,246
983
19,241
2,855
54,655
—
54,655
3.0% $
8.5%
9.1%
48.2%
3.5%
25.7%
2.0%
100.0%
NA
100.0% $
% of loans to
total
loans
Allowance for
credit losses
% of loans to
total
loans
3.6% $
7.0%
10.0%
49.2%
3.8%
24.4%
2.0%
100.0%
NA
100.0% $
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%
December 31, 2019
December 31, 2018
Allowance for
credit losses
% of loans to
total
loans
Allowance for
credit losses
% of loans to
total
loans
$
$
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%
Construction and land development
Agriculture real estate
1-4 family residential
Commercial real estate
Agricultural loans
Commercial and industrial
Consumer
Total allocated
Unallocated
Allowance at end of year
Construction and land development
Agriculture real estate
1-4 family residential
Commercial real estate
Agricultural loans
Commercial and industrial
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, 2022, 2021, and 2020 (dollars in thousands):
Demand deposits:
Non-interest-bearing
Interest-bearing
Savings
Time deposits
Total average deposits
2022
2021
2020
Average
Balance
$ 1,356,912
2,598,480
666,334
655,240
$ 5,276,966
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
—% $ 1,164,877
2,217,281
0.53%
611,379
0.09%
0.69%
671,056
0.36% $ 4,664,593
—% $
777,435
1,557,264
0.19%
469,276
0.08%
0.64%
531,834
0.19% $ 3,335,809
—%
0.24%
0.09%
1.61%
0.38%
The following table sets forth the high and low month-end balances for the years ended December 31, 2022, 2021, and 2020 (in thousands):
High month-end balances of total deposits
Low month-end balances of total deposits
2022
2021
$
5,487,305
4,904,973
$
5,000,084
3,725,741
$
2020
3,692,784
2,873,260
In 2022, the average balance of deposits increased by $612.4 million from 2021. The increase in 2022 was primarily due to deposits added in the acquisition of
Jefferson Bank offset by maturing time deposits. Also from 2021 and 2022, average non-interest bearing deposits increased by $192.0 million, interest-bearing
deposits increased by $381.2 million, savings accounts increased by $55.0 million, and time deposits decreased by $15.8 million. In 2021, the average balance of
deposits increased by $1,328.8 million from 2020. The increase in 2021 was primarily due to approximately $990 million of deposits acquired from Providence Bank
and $219 million of deposits acquired in association with loans purchased from Stifel Bank. Also from 2020 to 2021, average non-interest bearing deposits increased
by $387.4 million, interest-bearing deposits increased by $660.0 million, savings accounts increased by $142.1 million, and time deposits increased by $139.2 million.
30
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
2022
December 31,
2021
$
$
80,856
31,771
127,405
183,597
423,629
$
$
86,790
57,777
82,644
75,568
302,779
$
$
2020
72,945
49,710
88,682
72,070
283,407
The balance of time deposits of $100,000 or more increased $120.9 million from December 31, 2021 to December 31, 2022. The increase was primarily due to time
deposits acquired from Jefferson Bank. The balance of time deposits of $100,000 or more increased $19.4 million from December 31, 2020 to December 31, 2021. The
increase in 2021 was primarily due to time deposits acquired from Providence Bank.
In 2022 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of $319.4
million and $291.4 million in various checking accounts and time deposits as of December 31, 2022 and 2021, respectively. These balances are subject to change
depending upon the cash flow needs of the public entity.
Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. These obligations are collateralized with certain government securities
that are direct obligations of the United States or one of its agencies. These retail repurchase agreements are a cash management service to its corporate customers.
Other borrowings consist of Federal Home Loan Bank (“FHLB”) advances, federal funds purchased, loans (short-term or long-term debt) that the Company has
outstanding, subordinated debt and junior subordinated debentures.
31
Information relating to securities sold under agreements to repurchase and other borrowings as December 31, 2022, 2021, and 2020 is presented below (dollars in
thousands):
Securities sold under agreements to repurchase
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
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
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
Total
Average interest rate during the period
$
$
$
$
$
2022
2021
2020
221,414
$
146,268
$
206,937
65,000
110,040
290,031
94,553
19,364
800,402
2.52%
257,061
10,000
310,000
160,048
290,031
94,553
19,364
—
202,242
481
100,084
94,247
82,070
94,471
19,275
14
592,884
2.16%
$
$
$
$
$
$
—
25,113
61,333
94,400
19,195
346,309
1.78%
212,503
—
—
30,180
97,877
94,400
19,195
—
173,762
—
$
—
22,751
84,766
94,321
19,105
—
18,984
74,985
94,253
19,027
414,186
0.81%
350,288
8,000
—
34,969
104,974
94,256
19,027
5,000
219,298
525
1,831
24,858
79,999
22,403
18,936
—
394,705
$
1.58%
656
370,338
1.07%
Securities sold under agreements to repurchase increased $75.1 million during 2022 primarily due to balances acquired from Jefferson Bank, 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, 2022 FHLB advances totaled $465 million with a weighted-average interest rate of 3.48% and maturities from January 2023 to December 2032. At
December 31, 2021 FHLB advances totaled $86 million with a weighted-average interest rate of 1.66% and maturities from March 2022 to December 2029.
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, 2022. This loan was renewed on April 8, 2022 for one year as a revolving credit agreement with a maximum available balance of $15 million. The
interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of First Mid Bank. The Company and its subsidiary banks were in
compliance with the existing covenants at December 31, 2022 and 2021.
On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the
“Notes”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National
Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the
Company and the Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the
Notes are unsecured, subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding
October 15, 2025, the Notes will bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier
redemption, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 383 basis points, or such other rate as determined pursuant
to the Supplemental Indenture, provided that in no event shall the applicable floating interest rate be less than zero per annum.
The Company may, beginning with the interest payment date of October 15, 2025, and on any interest payment date thereafter, redeem the Notes, in whole or in part,
at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The
Company may also redeem the Notes at any time, including prior to October 15, 2025, at the Company’s option, in whole but not in part, if: (i) a change or prospective
change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event
occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an
investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes
plus any accrued and unpaid interest to but excluding the redemption date. At December 31, 2022, the recorded balance of the subordinated notes was $94,553,000.
32
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 (6.37% and 1.80% at December 31, 2022 and 2021, 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 (6.47% and 2.05% at December 31, 2022 and 2021, 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 (6.62% and 1.90% at December 31, 2022 and 2021, 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 or First Mid
Bank.
Interest Rate Sensitivity
The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of
forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest
rate risk, or sensitivity, arises when the maturity or repricing characteristics of interest-bearing assets differ significantly from the maturity or repricing characteristics of
interest-bearing liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities.
This balance serves to limit the adverse effects of changes in interest rates. The Company’s asset liability management committee (ALCO) oversees the interest rate
sensitivity position and directs the overall allocation of funds.
In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as “static GAP”
analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. 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.
33
The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at December 31, 2022 (dollars in thousands):
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
$
$
$
$
$
$
1 year
1-2 years
2-3 years
Rate Sensitive Within
3-4 years
4-5 years
Thereafter
Total
Fair Value
14,021
980
4,609
(53,820)
1,637,284
1,603,074
513,747
787,564
409,987
221,414
194,404
2,127,116
(524,042)
(524,042)
$
$
$
$
$
$
—
490
98,736
5,277
696,937
801,440
176,242
71,231
200,771
—
60,029
508,273
293,167
(230,875)
$
$
$
$
$
$
—
—
96,837
(658)
655,235
751,414
176,242
71,231
32,568
—
104,555
384,596
366,818
135,943
$
$
$
$
$
$
—
—
81,678
7,362
727,657
816,697
176,242
71,231
15,970
—
—
263,443
553,254
689,197
$
$
$
$
$
$
—
—
104,070
11,291
738,360
853,721
176,242
71,231
47,126
—
150,000
444,599
409,122
1,098,319
$
$
$
$
$
$
— $
—
552,361
314,507
370,739
1,237,607
$
807,267
195,238
357
—
70,000
1,072,862
164,745
1,263,064
$
$
$
14,021
1,470
938,291
283,959
4,826,212
6,063,953
2,025,982
1,267,726
706,779
221,414
578,988
4,800,889
1,263,064
$
$
$
$
14,021
1,470
938,291
283,959
4,460,999
5,698,740
2,025,982
1,267,726
707,526
286,262
499,466
4,786,962
(8.6)%
(8.6)%
4.8%
(3.8)%
6.0%
2.2%
9.1%
11.4%
6.7%
18.1%
2.7%
20.8%
The static GAP analysis shows that at December 31, 2022, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon. This
indicates that future increases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the
exposure to interest rate sensitivity, including static GAP analysis. The Company’s ALCO also uses other financial models to project interest income under various rate
scenarios and prepayment/extension assumptions consistent with First Mid Bank’s historical experience and with known industry trends. ALCO meets at least monthly
to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or
rates of the assets and liabilities.
Capital Resources
At December 31, 2022, the Company’s stockholders' equity had decreased approximately $0.7 million, or 0.1%, to $633.2 million from $633.9 million as of
December 31, 2021. During 2022, net income contributed $73.0 million to equity before the payment of dividends to stockholders of $17.8 million. The change in
market value of available-for-sale investment securities decreased stockholders' equity by $150.7 million, net of tax.
Stock Plans
Deferred Compensation Plan. The Company follows the provisions of the Emerging Issues Task Force Issue No. 97-14, “Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested” (“EITF 97-14”), which was codified into ASC 710-10, for purposes of the First Mid
Bancshares, Inc. Amended and Restated Deferred Compensation Plan (“DCP”). At December 31, 2022, the Company classified the cost basis of its common stock
issued and held in trust in connection with the DCP of approximately $4,799,000 as treasury stock. The Company also classified the cost basis of its related deferred
compensation obligation of approximately $4,799,000 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:
•
•
•
8,378 common shares during 2022
9,513 common shares during 2021, and
12,921 common shares during 2020
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 $17,830,000 in common stock dividends paid during
2022, $0 or 0.0% was reinvested into shares of common stock of the Company through the DRIP. Approximately $0, $333,000 and $680,000 of common stock was
issued through reinvestment of dividends during 2022, 2021, and 2020, respectively. Beginning in mid-2021, shares for dividend reinvestment were purchased in the
open market instead of being issued by the Company.
34
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 2022, 2021, and 2020, the Company awarded 63,150 and 48,575, and
25,950 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 2022, the Company repurchased 10,647 shares (0.05% of common shares) at a total price of approximately $341,000. During 2021, the Company repurchased
7,752 (0.05% of common shares) at a total price of approximately $326,000. All of these shares were a result of shares withheld for taxes on vested employee stock
incentives. As of December 31, 2022, approximately $4.1 million remains available for purchase under the repurchase programs. Treasury stock is further affected by
activity in the DCP.
Employee Stock Purchase Plan. At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid Bancshares, Inc. Employee
Stock Purchase Plan (“ESPP”). The ESPP provides eligible employees with the opportunity to purchase shares of common stock of the Company at a 15% discount
through payroll deductions. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of
600,000 shares of common stock may be issued under the ESPP. As of December 31, 2022, 2021, and 2020, 23,055, 11,748, and 11,037 shares, respectively were
issued pursuant to ESPP.
Capital Ratios
For 2022, the minimum regulatory ratios required for minimum capital adequacy purposes plus the capital buffer are 10.5% for the Total Risk-based capital ratio, 8.5%
for the Tier 1 Risk-based capital ratio, 7.0% for the Common Equity Tier 1 capital ratio, and 4.0% for the Tier 1 Leverage ratio. The Company and First Mid Bank have
capital ratios above the minimum regulatory capital requirements and, as of December 31, 2022, 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, 2022 follows:
First Mid Bancshares, Inc. (Consolidated)
First Mid Bank
Liquidity
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)
15.20%
14.18%
12.40%
13.17%
12.03%
13.17%
9.68%
10.22%
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, 2022, First Mid Bank met these regulatory requirements.
First Mid Bank can borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the
Federal Home Loan Bank. At December 31, 2022, the excess collateral at the FHLB would support approximately $582.1 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, 2022, 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 8, 2022 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, 2022 and 2021.
Management continues to monitor its expected liquidity requirements carefully, focusing primarily on cash flows from:
35
•
•
•
•
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, 2022 (in thousands):
Time deposits
Debt
Other borrowings
Operating leases
Supplemental retirement
Total
706,779
113,917
686,485
17,969
1,798
1,526,948
$
$
$
$
Less than
1 year
1-3 years
3-5 years
More than
5 years
409,987
—
396,454
2,945
50
809,436
$
$
233,339
—
70,031
4,817
100
308,287
$
$
63,096
3,922
150,000
3,917
150
221,085
$
$
357
109,995
70,000
6,290
1,498
188,140
For the year ended December 31, 2022, net cash of $65.8 million was provided from operating activities, $178.7 million was used in investing activities, and $96.7
million was provided by financing activities. In total cash and cash equivalents decreased by $16.2 million from year-end 2021.
For the year ended December 31, 2021, net cash of $69.6 million was provided from operating activities, $482.5 million was used in investing activities, and $164.2
million was provided by financing activities. In total cash and cash equivalents decreased by $248.7 million from year-end 2020.
For the year ended December 31, 2020, net cash of $63.5 million was provided from operating activities, $562.4 million was used in investing activities, and $831.1
million was provided by financing activities. In total cash and cash equivalents increased by $332.2 million from year-end 2019.
For the years ended December 31, 2022 and 2021, the Company also had $10 million of floating rate trust preferred securities outstanding through Trust II, and in
September 2016, the Company acquired $4 million of floating rate trust preferred securities from First Clover Leaf under Clover Leaf Statutory Trust I and on May 1,
2018, the Company acquired $6 million of floating rate trust preferred securities from First BancTrust Corporation. See Note 9 – “Borrowings” for a more detailed
description.
Effects of Inflation
Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on
the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same
magnitude of changes as goods and services, since such prices are affected by inflation. In the current economic environment, liquidity and interest rate adjustments
are features of the Company’s assets and liabilities that are important to the maintenance of acceptable performance levels. The Company attempts to maintain a
balance between monetary assets and monetary liabilities, over time, to offset these potential effects.
36
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, 2022, 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, 2022
Prime rate is 7.50%
Prime rate increase of:
200 basis points to 9.50%
100 basis points to 8.50%
Prime rate decrease of:
100 basis points to 6.50%
200 basis points to 5.50%
Increase (Decrease) In
Net Interest Income
($000)
(%)
Return On
Average Equity
2022=11.38%
$
(331)
36
1,863
2,044
(0.21)%
0.02%
1.17%
1.29%
(0.05)%
0.01%
0.26%
0.28%
The following table shows the same analysis for First Mid Bank performance as of December 31, 2021:
December 31, 2021
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
2021=8.38%
$
4,318
2,136
(3,733)
(8,798)
3.07%
1.52%
(2.65)%
(6.25)%
0.64%
0.32%
(0.56)%
(1.33)%
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, 2022 and 2021 (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, 2022
December 31, 2021
Changes In
Economic Value of Equity
Amount of Change
($000)
Percent of Change (%)
$
$
(30,992)
(13,333)
16,153
17,371
11,491
10,830
(231,797)
(96,739)
(3.0)%
(1.3)%
1.6%
1.7%
1.5%
1.4%
(29.6)%
12.3%
Interest Rates
(basis points)
+200 bp
+100 bp
-200 bp
-100 bp
+200 bp
+100 bp
-200 bp
-100 bp
37
As indicated above, at December 31, 2022, in the event of a sudden and sustained increase in prevailing market interest rates, the EVE would be expected to decrease
if rates increased 100 or 200 basis points. In the event of a sudden and sustained decrease in prevailing market interest rates, the Company's EVE would be expected
to increase. At December 31, 2022, the estimated changes in EVE were inside the Company’s policy guidelines that normally allow for a change in capital of +/-10%
from the base case scenario under a 100 basis point shock and within the guidelines of +/- 20% from the base case scenario under a 200 basis point shock. The
general level of interest rates are at historically low levels and the bank is monitoring its position and the likelihood of further rate changes.
Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan
prepayments and declines in deposit balances, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions
the Company may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the computation of EVE. Actual values may differ from those projections set forth in the table,
should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans, have features that restrict changes
in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in First Mid Bank's portfolio change in future
periods as market rates change. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those
assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase.
38
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Accounting Firm (FORVIS, LLP, Decatur, IL, Auditor Firm ID: 686)
Page
40
41
42
43
46
48
90
39
2022
2021
138,412
6,394
7,627
152,433
1,470
1,218,985
2,954
311
338
4,825,874
(59,093)
4,766,781
28,357
4,261
90,473
140,412
29,485
151,756
15,774
72,254
68,171
6,744,215
1,256,514
4,000,487
5,257,001
221,414
3,346
465,071
19,364
94,553
16,035
34,276
6,111,060
86,366
427,001
289,284
2,064
(151,507)
(20,053)
633,155
6,744,215
$
$
$
$
90,907
76,335
1,360
168,602
2,450
1,421,422
7,030
397
2,748
3,992,775
(54,655)
3,938,120
19,868
4,984
81,484
111,853
29,523
132,375
15,116
7,299
43,311
5,986,582
1,246,673
3,709,813
4,956,486
146,268
1,346
86,446
19,195
94,400
15,322
33,225
5,352,688
76,835
340,419
234,162
2,517
(831)
(19,208)
633,894
5,986,582
$
$
$
$
Consolidated Balance Sheets
December 31, 2022 and 2021
(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 $2,954 and $7,035 at December 31, 2022 and 2021,
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
Deferred tax asset, net
Other assets
Total assets
Liabilities and stockholders’ equity
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Repurchase agreements with customers
Interest payable
FHLB 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 21,091,466 shares in 2022 and 18,708,746
shares in 2021; outstanding 20,452,376 shares in 2022 and 18,080,303 shares in 2021
Additional paid-in capital
Retained earnings
Deferred compensation
Accumulated other comprehensive loss
Less treasury stock at cost, 639,090 shares in 2022 and 628,443 shares in 2021
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
40
Consolidated Statements of Income
For the years ended December 31, 2022, 2021, and 2020
(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
2022
2021
2020
$
185,869
$
159,684
$
126,814
20,595
8,785
37
113
492
215,891
18,813
1,795
6,184
9
868
3,945
31,614
184,277
4,806
179,471
22,492
21,622
9,112
33
1,190
12,422
3,559
4,252
74,682
98,594
24,257
330
1,805
6,290
1,295
6,996
4,300
2,999
15,995
162,861
91,292
18,340
72,952
3.62
3.60
0.90
$
$
15,598
7,318
56
—
357
183,013
9,037
231
1,514
—
541
3,939
15,262
167,751
15,151
152,600
20,407
18,927
6,808
124
4,718
11,974
3,039
3,770
69,767
89,660
21,546
3,866
1,604
5,391
1,161
6,730
3,116
3,603
18,902
155,579
66,788
15,298
51,490
2.88
2.87
0.85
$
$
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
$
$
See accompanying notes to consolidated financial statements.
41
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2022, 2021, and 2020
(In thousands)
Net income
Other comprehensive income (loss)
2022
2021
2020
$
72,952
$
51,490
$
45,270
Unrealized gains (losses) on available-for-sale securities, net of taxes of $61,534, $7,285,
and $(3,873) for the years ended December 31, 2022, 2021 and 2020, respectively
Unamortized holding losses on held to maturity securities transferred from available for sale,
net of taxes of $0, $0, and $(15) for December 31, 2022, 2021 and 2020, respectively
Less: reclassification adjustment for realized gains included in net income net of taxes of
$10, $36, and $321 for the years ended December 31, 2022, 2021 and 2020, respectively
Other comprehensive income (loss), net of taxes
Comprehensive income (loss)
(150,653)
(17,838)
—
—
(23)
(150,676)
(77,724)
$
$
(88)
(17,926)
33,564
$
9,485
35
(785)
8,735
54,005
See accompanying notes to consolidated financial statements.
42
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2022, 2021, and 2020
(In thousands, except share and per share data)
December 31, 2021
Net income
Other comprehensive loss, net of tax
Dividends on common stock ($.90 per share)
Issuance of 8,378 common shares pursuant to
the deferred compensation plan
Issuance of 54,067 restricted common shares
pursuant to the 2017 stock incentive plan
Issuance of 4,950 common shares pursuant to
the 2017 stock incentive plan
Issuance of 23,055 common shares pursuant to
employee stock purchase plan
Issuance of 2,292,270 common shares
pursuant to acquisition of Delta Banshares, Co.,
net proceeds
Issuance costs pursuant to acquisition of Delta
Bancshares Company
Purchase of 10,647 treasury shares
Deferred compensation
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, 2022
Common
Stock
$
76,835
—
—
—
Additional
Paid-In-
Capital
$
340,419
—
—
—
Retained
Earnings
234,162
$
72,952
—
(17,830)
Deferred
Compensation
2,517
$
—
—
—
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
$
$
(831)
—
(150,676)
—
$
(19,208)
—
—
—
Total
633,894
72,952
(150,676)
(17,830)
34
216
20
92
297
2,013
179
621
9,169
83,003
—
—
—
—
—
(29)
—
—
1,529
(1,216)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,037)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(340)
(505)
—
—
331
2,229
199
713
92,172
(29)
(340)
(2,542)
1,529
(1,216)
—
86,366
185
427,001
—
289,284
$
$
$
$
1,584
2,064
$
—
(151,507)
$
—
(20,053)
$
1,769
633,155
See accompanying notes to consolidated financial statements.
43
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2022, 2021, and 2020
(In thousands, except share and per share data)
December 31, 2020
Net income
Other comprehensive loss, net of tax
Dividends on common stock ($.850 per share)
Issuance of 8,616 common shares pursuant to
the dividend reinvestment plan
Issuance of 9,513 common shares pursuant to
the deferred compensation plan
Issuance of 27,750 restricted common shares
pursuant to the 2017 stock incentive plan
Issuance of 2,375 common shares pursuant to
the 2017 stock incentive plan
Issuance of 1,262,246 common shares
pursuant to acquisition of LINCO Bancshares,
Inc., net proceeds
Issuance of 25,000 common shares pursuant to
acquisition of BBM & Associates, Inc., net
proceeds
Issuance costs pursuant to acquisition of Delta
Bancshares Company
Issuance of 11,748 common shares pursuant to
employee stock purchase plan
Purchase of 7,752 treasury shares
Deferred compensation
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, 2021
Common
Stock
$
71,449
—
—
—
Additional
Paid-In-
Capital
$
297,806
—
—
—
Retained
Earnings
197,726
$
51,490
—
(15,054)
Deferred
Compensation
2,980
$
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
17,095
—
(17,926)
—
$
Treasury
Stock
$
$
(18,828)
—
—
—
Total
568,228
51,490
(17,926)
(15,054)
32
38
111
10
301
313
817
75
5,049
39,142
100
1,009
—
46
—
—
—
—
(206)
345
—
—
1,216
(584)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
54
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(326)
(54)
—
—
333
351
928
85
44,191
1,109
(206)
391
(326)
—
1,216
(584)
—
76,835
185
340,419
—
234,162
$
$
$
$
(517)
2,517
$
—
(831)
$
—
(19,208)
$
(332)
633,894
See accompanying notes to consolidated financial statements.
44
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2022, 2021, and 2020
(In thousands, except share and per share data)
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
Common
Stock
Additional
Paid-In-
Capital
$
71,152
$
295,925
Retained
Earnings
166,667
$
Deferred
Compensation
2,760
$
Accumulated
Other
Comprehensive
Income
Treasury
Stock
$
8,360
$
(18,255)
$
Total
526,609
—
—
(717)
71,152
—
—
—
102
52
99
44
—
—
—
—
—
295,925
—
—
—
165,950
45,270
—
(13,494)
578
313
758
201
—
—
22
584
(516)
—
—
—
—
—
—
—
—
—
—
2,760
—
—
—
—
—
—
—
—
360
—
—
—
—
8,360
—
8,735
—
—
(717)
(18,255)
—
—
—
525,892
45,270
8,735
(13,494)
—
—
—
—
—
—
—
—
—
—
—
—
—
(213)
(360)
—
—
—
680
365
857
245
(213)
—
22
584
(516)
—
71,449
(59)
297,806
$
—
197,726
$
$
$
(140)
2,980
$
—
17,095
—
(18,828)
$
(199)
568,228
$
See accompanying notes to consolidated financial statements.
45
Consolidated Statements of Cash Flows
For the years ended December 31, 2022, 2021, and 2020
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2022
2021
2020
$
72,952
$
51,490
$
45,270
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 on write down of premises and equipment
(Gain) loss on sale of other assets
Gains on sale of loans held for sale, net
Deferred income taxes
Decrease (increase) in accrued interest receivable
Increase (decrease) 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 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
Investment in Bank Owned Life Insurance
Net cash provided by acquisition
Net cash used in investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
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
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 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
4,806
15,060
(3,559)
1,802
(3,061)
(33)
97
—
125
(1,159)
(2,232)
(6,717)
1,538
(59,893)
63,462
(1,145)
(19,537)
3,318
65,824
1,225
(245)
36,257
144,734
5,000
(12,754)
(416,204)
(5,020)
996
—
67,323
(178,688)
(259,862)
—
39,623
359,745
(25,856)
—
—
—
1,244
(29)
(340)
(17,830)
96,695
(16,169)
168,602
152,433
$
15,151
14,449
(3,039)
1,304
(2,872)
(124)
5,725
—
(126)
(4,256)
(3,355)
2,384
(1,812)
(149,807)
153,239
(499)
(13,719)
5,463
69,596
490
(245)
611
238,049
—
(692,234)
(32,032)
(3,702)
9,503
(30,000)
27,061
(482,499)
273,292
—
(60,669)
5,000
(40,083)
—
—
—
1,937
(206)
(326)
(14,721)
164,224
(248,679)
417,281
168,602
$
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
$
46
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2022, 2021, and 2020
(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
Fixed assets transferred to other real estate
Initial recognition of right-of-use assets
Initial recognition of lease liabilities
Dividends reinvested in common stock
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
2022
2021
2020
$
$
29,614
22,988
383
—
715
715
—
—
$
$
16,261
18,966
249
3,971
—
—
333
—
16,645
18,624
783
—
—
—
680
22
750,063
$
1,170,699
15,150
92,172
107,322
642,741
$
103,500
44,191
147,691
1,023,008
$
$
$
$
See accompanying notes to consolidated financial statements.
47
First Mid Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
Note 1 – Basis of Accounting and Consolidation
The accompanying consolidated financial statements include the accounts of First Mid Bancshares, Inc. (“Company”) and its wholly owned subsidiaries: First Mid Bank
& Trust, N.A. (“First Mid Bank”), First Mid Wealth Management Company, First Mid Insurance Group, Inc. (“First Mid Insurance”) and First Mid Captive, Inc. All
significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior year’s consolidated financial statements have
been reclassified to conform to the 2022 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.
Acquisitions
Delta Bancshares Company. On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of
the Company (“Delta Merger Sub”), entered into an Agreement and Plan of Merger (the “Delta Merger Agreement”) with Delta Bancshares Company, a Missouri
corporation (“Delta”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a
business combination whereby Delta will merge with and into Delta Merger Sub, whereupon the separate corporate existence of Delta will cease and Delta Merger Sub
will continue as the surviving company and a wholly-owned subsidiary of First Mid (the “Delta Merger”). The Delta Merger was completed on February 14, 2022.
Subject to the terms and conditions of the Delta Merger Agreement, at the effective time of the Delta Merger, each share of common stock, par value $10.00 per share,
of Delta issued and outstanding immediately prior to the effective time of the Delta Merger (other than shares held in treasury by Delta) converted into and became the
right to receive cash and shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required
to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the Delta Merger to
Delta’s shareholders and option holders was approximately $15.2 million in cash and 2,292,270 shares of Company common stock. Delta’s outstanding stock options
vested upon consummation of the Delta Merger, and all outstanding Delta options that were unexercised prior to the effective time of the Delta Merger were cashed
out.
Delta's wholly owned bank subsidiary, Jefferson Bank, was merged with and into First Mid Bank on June 10, 2022. At the time of the bank merger, Jefferson Bank's
banking offices became branches of First Mid Bank.
LINCO Bancshares, Inc. On September 25, 2020, the Company and Eval Sub Inc., a wholly owned subsidiary of the Company ("LINCO Merger Sub"), entered into an
Agreement and Plan of Merger (the "LINCO 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 LINCO Merger Sub merged with and into LINCO, whereupon the separate corporate existence of LINCO Merger Sub ceased and LINCO
continued as the surviving company and a wholly owned subsidiary of the Company (the "LINCO Merger").
Subject to the terms and conditions of the LINCO Merger Agreement, at the effective time of the LINCO Merger, each share of common stock, par value $1.00 per
share, of LINCO issued and outstanding immediately prior to the effective time of the LINCO Merger (other than shares held in treasury by LINCO) was converted into
and 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 LINCO 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 LINCO 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 LINCO merger, LINCO paid a special dividend to its shareholders in the aggregate amount of $13 million.
The LINCO Merger closed on February 22, 2021, and Providence Bank merged into First Mid Bank on May 15, 2021.
Website
The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and
Exchange Commission (“SEC”) can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC.
General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate
resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the
Company.
48
2021 Loan Purchase
During 2021, First Mid Bank completed an acquisition of loans in the St. Louis Metro market totaling $208 million. There were no loans purchased with deteriorated
credit. First Mid Bank also assumed $219 million of related customer deposits and recorded a core deposit intangible asset of approximately $4.9 million that is being
amortized on an accelerated basis over ten years.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company
to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company uses estimates
and employs the judgments of management in determining the amount of its allowance for credit losses and income tax accruals and deferrals, in its fair value
measurements of investment securities, and in the evaluation of impairment of loans, goodwill, investment securities, and premises and equipment. As with any
estimate, actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the
allowance for credit losses. In connection with the determination of the allowance for credit losses, management obtains independent appraisals for significant
properties.
Fair Value Measurements
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are
actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable
market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not
exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model
assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of
revenue or loss recorded.
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be
transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of
hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair
value hierarchy can be found in Note 11 – “Disclosures of Fair Values of Financial Instruments.”
Cash and Cash Equivalents
For purposes of reporting cash flows, cash equivalents include non-interest bearing and interest-bearing cash and due from banks and federal funds sold. Generally,
federal funds are sold for one-day periods.
Certificates of Deposit Investments
Certificates of deposit investments have original maturities of three to five years and are carried at cost.
Investment Securities
The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale in accordance with ASC 320. Securities classified as held-to-
maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when
such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the
quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective
nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial
position, results of operations and cash flows of the Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates
whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change
has occurred and the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related
to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the
impairment is recorded in other comprehensive income.
Loans
Loans are stated at the principal amount outstanding net of unearned discounts, unearned income, and the allowance for credit losses. Unearned income includes
deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximate the
effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding.
The Company’s policy is to discontinue the accrual of interest income on any loan that becomes ninety days past due as to principal or interest or earlier when, in the
opinion of management there is reasonable doubt as to the timely collection of principal or interest. Nonaccrual loans are returned to accrual status when, in the opinion
of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectability of interest or principal.
Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or fair value, taking
into consideration future commitments to sell the loans.
49
Allowance for Credit Losses
The Company believes the allowance for credit losses is the critical accounting policy that requires the most significant judgments and assumptions used in the
preparation of its consolidated financial statements. An estimate of potential losses inherent in the loan portfolio is determined and an allowance for those losses is
established by considering factors including historical loss rates, expected cash flows, and estimated collateral values. In assessing these factors, the Company uses
organizational history and experience with credit decisions and related outcomes. The allowance for credit losses represents the best estimate of losses inherent in the
existing loan portfolio. The allowance for credit losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of
recoveries. The Company evaluates the allowance for credit losses at least quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent
loss evaluations, the allowance for credit losses is adjusted.
The Company estimates the appropriate level of allowance for credit losses by separately evaluating impaired and nonimpaired loans. A specific allowance is assigned
to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a
nonimpaired loan is more subjective. Generally, the allowance assigned to nonimpaired loans is determined by applying historical loss rates to existing loans with
similar risk characteristics, adjusted for qualitative factors including the volume and severity of identified classified loans, changes in economic conditions, changes in
credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets. Because the economic and business
climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is continually assessed and
adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an
immediate adjustment to the allowance for credit losses would be required.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are charged to expense and determined
principally by the straight-line method over the estimated useful lives of the assets. The estimated useful lives for each major depreciable classification of premises and
equipment are as follows:
Buildings and improvements
Leasehold improvements
Furniture and equipment
20 years to 40 years
5 years to 15 years
3 years to 7 years
Goodwill and Intangible Assets
The Company has goodwill from business combinations, identifiable intangible assets assigned to core deposit relationships and customer lists acquired, and intangible
assets arising from the rights to service mortgage loans for others.
Identifiable intangible assets generally arise from branches acquired that the Company accounted for as purchases. Such assets consist of the excess of the purchase
price over the fair value of net assets acquired, with specific amounts assigned to core deposit relationships and customer lists primarily related to insurance agency.
Intangible assets are amortized by the straight-line method over various periods up to fifteen years. Management reviews intangible assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” codified into ASC 350, the Company obtained an independent evaluation
of its goodwill as of June 30, 2020 and also performed its annual testing of goodwill for impairment as of September 30, 2022 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 and carried at cost.
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.
50
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 $2,450,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company's consolidated financial
statements and its federal income return.
Wealth Management Assets
Assets held in fiduciary or agency capacities by First Mid Wealth Management Company are not included in the consolidated balance sheets since such items are not
assets of the Company or its subsidiaries. Fees from trust activities are recorded on a cash basis over the period in which the service is provided. Fees are a function of
the market value of assets managed and administered, the volume of transactions, and fees for other services rendered, as set forth in the underlying client agreement
with the First Mid Wealth Management Company. This revenue recognition involves the use of estimates and assumptions, including components that are calculated
based on asset valuations and transaction volumes. Any out-of-pocket expenses or services not typically covered by the fee schedule for trust activities are charged
directly to the trust account on a gross basis as trust revenue is incurred. First Mid Wealth Management Company managed assets totaling $5.3 billion and $5.1 billion
at December 31, 2022 and 2021, respectively.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
Stock Incentive Awards
At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to
succeed the Company's 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants
and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success
of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants
and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.
A maximum of 149,983 shares of common stock may be issued under the SI Plan. The Company awarded 63,150, 48,575 and 25,950 shares during 2022, 2021, and
2020, 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 15% 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, 2022, 2021, and 2020, 23,055, 11,748 and 11,037 shares,
respectively were issued pursuant to the ESPP.
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2022 substantially all the Company's leases are operating
leases for real estate property for bank branches, ATM locations, and office space. For leases in effect January 1, 2019 and for leases commencing thereafter, the
Company recognizes a lease liability and a right-of-use asset, based on the present value of lease payments over the lease term. The discount rate used in determining
present value was the Company's incremental borrowing rate which is the FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the
commencement date for leases subsequently entered into.
51
Revenue Recognition
Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), establishes a revenue recognition model for reporting information about
the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. Most of the
Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans and investment
securities, and revenue related to mortgage servicing activities, which are subject to other accounting standards. A description of the revenue- generating activities that
are within the scope of ASC 606, and included in other income in the Company’s condensed consolidated statements of income are as follows:
Trust revenues. The Company generates fee income from providing fiduciary services through its trust department. Fees are billed in arrears based upon the
preceding period account balance. Revenue from the farm management department is recorded when service is complete, for example when crops are sold.
Brokerage commissions. The primary brokerage revenue is recorded at the beginning of each quarter through billing to customers based on the account asset size
on the last day of the previous quarter. If a withdrawal of funds takes place, a prorated refund may occur; this is reflected within the same quarter as the original billing
occurred. All performance obligations are met within the same quarter that the revenue is recorded.
Insurance commissions. The Company’s insurance agency subsidiary, First Mid Insurance, receives commissions on premiums of new and renewed business
policies. First Mid Insurance records commission revenue on direct bill policies as the cash is received. For agency bill policies, First Mid Insurance retains its
commission portion of the customer premium payment and remits the balance to the carrier. In both cases, the entire performance obligation is held by the carriers.
Service charges on deposits. The Company generates revenue from fees charged for deposit account maintenance, overdrafts, wire transfers, and check fees. The
revenue related to deposit fees is recognized at the time the performance obligation is satisfied.
ATM/debit card revenue. The Company generates revenue through service charges on the use of its ATM machines and interchange income from the use of
Company issued credit and debit cards. The revenue is recognized at the time the service is used and the performance obligation is satisfied.
Other income. Treasury management fees and lock box fees are received and recorded after the service performance obligation is completed. Merchant bank card
fees are received from various vendors; however, the performance obligation is with the vendors. The Company records gains on the sale of loans and the sale of
OREO properties after the transactions are complete and transfer of ownership has occurred.
As each of the Company’s facilities are located in markets with similar economies, no disaggregation of revenue is necessary.
Adoption of New Accounting Guidance
Accounting Standards Update 2016-02, Leases (Topic 842)("ASU 2016-02"). On February 25, 2016, FASB issued ASU 2016-02 which creates Topic 842, Leases
and supersedes Topic 840, Leases. ASU 2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability
among organizations. Under the new guidance, a lessee is required to record all leases with lease terms of more than 12 months on their balance sheet as lease
liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or
finance, with lease classification determined in a manner similar to existing lease guidance. The new guidance is effective for public companies for fiscal years
beginning on or after December 15, 2018, and for private companies for fiscal years beginning on or after December 15, 2019. The Company adopted the guidance
effective January 1, 2019 and recorded a right of use asset of $14.1 million and a lease liability of $14.1 million.
Accounting Standards Update 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair
Value Measurement (“ASU 2018-13”). In August 2018, FASB issued ASU 2018-13. This ASU eliminates, adds, and modifies certain disclosure requirements for fair
value measurements. Among the changes, an entity will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the
fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value
measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. As ASU 2018-13 only revised disclosure
requirements, it did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU
2016-13”). In June 2016, FASB issued ASU 2016-13. The provisions of ASU 2016-13 require an entity to utilize a new impairment model known as the current
expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the
financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit
losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for- sale debt securities. ASU 2016-13 was
effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.
Management formed an internal, cross functional committee in 2017 to evaluate implementation steps and assess the impact ASU 2016-13 would have on the
Company’s consolidated financial statements. The committee assigned roles and responsibilities, key tasks to complete, and established a general timeline for
implementation. The Company also engaged an outside consultant to assist with the methodology review and data validation, as well as other key aspects of
implementing the standard. The committee met periodically to discuss the latest developments and ensure progress was being made. In addition, the committee kept
current on evolving interpretations and industry practices related to ASU 2016-13. The committee evaluated and validated data resources and different loss
methodologies. Key implementation activities for 2019 included finalization of models, establishing processes and controls, development of supporting analytics and
documentation, policies and disclosure, and implementing parallel processing.
The Company adopted ASU 2016-13 using the modified retrospective method for financial assets measured at amortized cost-effective January 1, 2020. Results for
the periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the previously applicable
accounting standards. The Company recorded a reduction to retained earnings of approximately $717,000 upon adoption of ASU 2016-13. The transition adjustment
52
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 and Land Development
Farm
1-4 Family Residential Properties
Commercial Real Estate
Agricultural
Commercial and 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 2016-13 adoption for PCD assets previously classified as PCI included in the table above (in thousands):
Construction and Land Development
1-4 Family Residential Properties
Commercial Real Estate
Commercial and Industrial
Allowance for credit losses for all loans
Accumulated Other Comprehensive Loss
As reported
under ASU
2016-13
January 1, 2020
Pre-ASU
2016-13
Adoption
Impact of ASU
2016-13
Adoption
$
$
291 $
48
818
41
1,198 $
— $
6
359
—
365 $
291
42
459
41
833
The components of accumulated other comprehensive loss included in stockholders’ equity as of December 31, 2022 and 2021 are as follows (in thousands):
December 31, 2022
Net unrealized losses on securities available-for-sale
Tax benefit
Balance at December 31, 2022
December 31, 2021
Net unrealized losses on securities available-for-sale
Tax benefit
Balance at December 31, 2021
Unrealized Gain
(Loss) on
Securities
$
$
$
$
(213,387)
61,880
(151,507)
(1,170)
339
(831)
53
Amounts reclassified from accumulated other comprehensive loss and the affected line items in the statements of income during the years ended December 31, 2022,
2021, and 2020, were as follows (in thousands):
Amounts Reclassified from Other Comprehensive Income
2021
2022
2020
Realized gains on available-for-sale securities
Total reclassifications out of accumulated other
comprehensive income
$
$
33
(10)
23
$
$
124
(36)
88
$
$
Affected Line Item in the
Statements of Income
Securities gains, net (total
reclassified amount before tax)
Tax expense
1,106
(321)
785
Net reclassified amount
See “Note 4 – Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.
Note 2 -- Earnings Per Share
Basic net income per common share available to common stockholders is calculated as net income less preferred stock dividends divided by the weighted average
number of common shares outstanding. Diluted net income per common share available to common stockholders is computed using the weighted average number of
common shares outstanding, increased by the assumed conversion of the Company’s convertible preferred stock and the Company’s stock options and restricted stock
awarded, unless anti-dilutive.
The components of basic and diluted net income per common share available to common stockholders for the years ended December 31, 2022, 2021, and 2020 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:
Restricted stock awarded
Dilutive potential common shares
Diluted weighted average common shares outstanding
Diluted earnings per common share
2022
2021
2020
72,952,000
20,169,077
3.62
72,952,000
20,169,077
74,558
74,558
20,243,635
3.60
$
$
$
51,490,000
17,886,998
2.88
51,490,000
17,886,998
52,009
52,009
17,939,007
2.87
$
$
$
45,270,000
16,716,880
2.71
45,270,000
16,716,880
45,976
45,976
16,762,856
2.70
$
$
$
There were no shares not considered in computing diluted earnings per share for the years ended December 31, 2022, 2021, and 2020.
54
Note 3 -- Cash and Due from Banks
At December 31, 2022, the Company's cash accounts exceeded federal insurance limits by $35.9 million. There have been no losses on these accounts.
Note 4 -- Investment Securities
The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at
December 31, 2022 and 2021 were as follows (in thousands):
December 31, 2022
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 available-for-sale
Held-to-maturity:
Other securities
Total held-to-maturity
December 31, 2021
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 available-for-sale
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and
agencies
Other securities
Total held-to-maturity
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Fair Value
$
$
$
$
$
$
$
$
252,934
347,409
744,636
87,393
1,432,372
2,954
2,954
208,598
383,991
799,456
30,546
1,422,591
5,001
2,029
7,030
$
$
$
$
$
$
$
$
— $
134
3
6
143
$
— $
— $
(32,407)
(59,845)
(116,759)
(4,519)
(213,530)
$
$
220,527
287,698
627,880
82,880
1,218,985
— $
— $
2,954
2,954
80
12,123
4,292
671
17,166
5
—
5
$
$
$
$
(4,863)
(657)
(12,710)
(105)
(18,335)
$
$
203,815
395,457
791,038
31,112
1,421,422
— $
—
— $
5,006
2,029
7,035
The Company also had $311,000 and $397,000 of equity securities, at fair value, as of December 31, 2022 and 2021, 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, 2022, 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, 2022, 2021, and 2020 (in thousands):
Proceeds from sales
Gross gains
Gross losses
Income tax expense
2022
2021
2020
$
$
36,257
202
(169)
(10)
$
611
124
—
36
9,061
1,132
(26)
321
55
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, 2022 and the weighted average yield for each range of maturities (dollars 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 available-for-sale
Weighted average yield
Full tax equivalent yield
Held-to-maturity:
Other securities
Total held-to-maturity
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
$
$
$
$
161,688
19,446
4,762
20,636
206,532
$
$
1.56%
1.66%
49,187
76,847
97,333
60,533
283,900
$
$
2.44%
2.70%
9,652
190,232
524,164
1,711
725,759
$
$
1.75%
1.92%
— $
— $
—%
—%
— $
— $
—%
—%
— $
— $
—%
—%
— $
1,173
1,621
—
2,794
2.92%
3.44%
2,954
2,954
—%
—%
$
$
$
220,527
287,698
627,880
82,880
1,218,985
1.87%
2.05%
2,954
2,954
—%
—%
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, 2022. Investment securities carried
at approximately $770 million and $590 million at December 31, 2022 and 2021, respectively, were pledged to secure public deposits and repurchase agreements and
for other purposes as permitted or required by law.
The following table presents the aging of gross unrealized losses and fair value by investment category as of December 31, 2022 and 2021 (in thousands):
December 31, 2022
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
December 31, 2021
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
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or more
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
$
$
$
57,007
220,102
165,966
64,676
507,751
48,316
61,535
562,699
7,976
680,526
$
$
$
$
(3,493)
(43,221)
(19,859)
(3,675)
(70,248)
(1,927)
(657)
(11,019)
(105)
(13,708)
$
$
$
$
163,520
45,419
461,446
6,698
677,083
139,846
—
46,504
—
186,350
$
$
$
$
(28,914)
(16,624)
(96,900)
(844)
(143,282)
$
220,527
265,521
627,412
71,374
$ 1,184,834
(2,936)
—
(1,691)
—
(4,627)
$
$
188,162
61,535
609,203
7,976
866,876
$
$
$
$
(32,407)
(59,845)
(116,759)
(4,519)
(213,530)
(4,863)
(657)
(12,710)
(105)
(18,335)
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At December 31, 2022, there were sixteen available-for-sale U.S.
Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $163.5 million and unrealized losses of $28.9 million in a
continuous unrealized loss position for twelve months or more. At December 31, 2021, there were six available-for-sale securities with a fair value of $139.8 million and
unrealized losses of $2.9 million in a continuous unrealized loss position for twelve months or more. There were no held-to-maturity U.S. Treasury securities and
obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more at December 31, 2022 or 2021.
Obligations of states and political subdivisions. At December 31, 2022 there were thirty-six obligations of states and political subdivisions with fair value of $45.4
million and unrealized losses of $16.6 million in a continuous unrealized loss position for twelve months or more. At December 31, 2021, there were no obligations of
states and political subdivisions in a continuous unrealized loss position for twelve months or more.
Mortgage-backed Securities: GSE Residential. At December 31, 2022 there were ninety-one mortgage-backed securities with a fair value of $461.4 million and
unrealized losses of $96.9 million in a continuous unrealized loss position for twelve months or more. At December 31, 2021, there were fifteen mortgage-backed
security with a fair value of $46.5 million and unrealized losses of $1.7 million in a continuous unrealized loss position for twelve months or more.
56
Other securities. At December 31, 2022 there were five other securities with fair value of $6.7 million and unrealized losses of $0.8 million in a continuous unrealized
loss position for twelve months or more. At December 31, 2021 there were no other securities in a continuous unrealized loss position for twelve months or more.
Maturities of investment securities were as follows at December 31, 2022 (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 ten years
Total held-to-maturity
Amortized
Cost
Estimated
Fair Value
$
$
$
$
228,998
203,048
254,473
1,217
687,736
744,636
1,432,372
$
$
— $
2,954
2,954
$
201,770
186,567
201,595
1,173
591,105
627,880
1,218,985
—
2,954
2,954
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, 2022 and
2021 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
2022
2021
144,387
410,790
440,018
295,073
2,036,243
3,326,511
166,695
1,085,004
97,730
159,499
4,835,439
338
4,835,101
9,227
59,093
4,766,781
$
$
145,156
279,001
399,932
298,974
1,666,764
2,789,827
151,344
834,061
78,538
143,738
3,997,508
2,748
3,994,760
1,985
54,655
3,938,120
$
$
Net loans increased $828.7 million as of December 31, 2022 compared to December 31, 2021. Of this increase, approximately $426.4 million were loans acquired from
Jefferson Bank. Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or fair
value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties. Accrued interest on loans, which is
excluded from the amortized cost of the balances above, totaled $23.0 million and $14.7 million at December 31, 2022 and 2021, 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:
57
Commercial Real Estate Loans. Commercial real estate loans are generally comprised of loans to small business entities to purchase or expand structures in which
the business operations are housed, loans to owners of real estate who lease space to non-related commercial entities, loans for construction and land development,
loans to hotel operators, and loans to owners of multi-family residential structures, such as apartment buildings. Commercial real estate loans are underwritten based
on historical and projected cash flows of the borrower and secondarily on the underlying real estate pledged as collateral on the debt. For the various types of
commercial real estate loans, minimum criteria have been established within the Company’s loan policy regarding debt service coverage while maximum limits on loan-
to-value and amortization periods have been defined. Maximum loan- to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while
the desired minimum debt coverage ratio is 1.20x.
Amortization periods for commercial real estate loans are generally limited to twenty years. The Company’s commercial real estate portfolio is well below the thresholds
that would designate a concentration in commercial real estate lending, as established by the federal banking regulators.
Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund accounts
receivable that are secured by business assets other than real estate. These loans are generally written for one year or less. Also, equipment financing is provided to
businesses with these loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years. Commercial loans are often
accompanied by a personal guaranty of the principal owners of a business. Like commercial real estate loans, the underlying cash flow of the business is the primary
consideration in the underwriting process. The financial condition of commercial borrowers is monitored at least annually with the type of financial information required
determined by the size of the relationship. Measures employed by the Company for businesses with higher risk profiles include the use of government-assisted lending
programs through the Small Business Administration and U.S. Department of Agriculture.
Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and harvest
corn and soybeans and term loans to fund the purchase of equipment. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland.
Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on
industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop.
Loan-to-value ratios on loans secured by farmland generally do not exceed 65% and have amortization periods limited to twenty-five years. Federal government-
assistance lending programs through the Farm Service Agency are used to mitigate the level of credit risk when deemed appropriate.
Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties consisting of
one-to-four units and home equity loans and lines of credit. The Company sells the vast majority of its long-term fixed rate residential real estate loans to secondary
market investors. The Company also releases the servicing of these loans upon sale. The Company retains all residential real estate loans with balloon payment
features. Balloon periods are limited to five years. Residential real estate loans are typically underwritten to conform to industry standards including criteria for
maximum debt-to-income and loan-to-value ratios as well as minimum credit scores. Loans secured by first liens on residential real estate held in the portfolio typically
do not exceed 80% of the value of the collateral and have amortization periods of twenty-five years or less. The Company does not originate subprime mortgage loans.
Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an automobile or
other living expenses. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio, employment history, and collateral
coverage. Typically, consumer loans are set up on monthly payments with amortization periods based on the type and age of the collateral.
Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or equipment purchases.
Underwriting guidelines for these loans are consistent with those established for commercial loans with the additional repayment source of the taxing authority of the
municipality.
Allowance for Credit Losses
The allowance for credit losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses expected over the
remaining contractual life of the assets. The provision for credit losses is the charge against current earnings that is determined by the Company as the amount needed
to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit losses, and therefore the provision to be charged to current
earnings, the Company relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The
review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty.
Factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual,
past due and troubled debt restructurings, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices,
lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates. The Company
estimates the appropriate level of allowance for credit losses by evaluating large, impaired loans separately from non-impaired loans.
Individually Evaluated loans
The Company individually evaluates certain loans for impairment. In general, these loans have been internally identified via the Company’s loan grading system as
credits requiring management’s attention due to underlying problems in the borrower’s business or collateral concerns. This evaluation considers expected future cash
flows, the value of collateral and other factors that may impact the borrower’s ability to make payments when due. For loans greater than $250,000, impairment is
individually measured each quarter using one of three alternatives: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate;
(2) the loan’s observable market price, if available; or (3) the fair value of the collateral less costs to sell for collateral dependent loans and loans for which foreclosure is
deemed to be probable. A specific allowance is assigned when expected cash flows or collateral are less than the carrying amount of the loan. The carrying value of
the loan reflects reductions from prior charge-offs.
58
Non-Individually evaluated loans
Non-individually evaluated loans comprise the vast majority of the Company’s total loan portfolio and include loans in accrual status and those credits not identified as
troubled debt restructurings. A small portion of these loans are considered “criticized” due to the risk rating assigned reflecting elevated credit risk due to
characteristics, such as a strained cash flow position, associated with the individual borrowers. Criticized loans are those assigned risk ratings of Special Mention,
Substandard, or Doubtful.
Beginning January 1, 2020, the allowance for credit losses was estimated using the current expected credit loss model ("CECL"). The Company uses the Loss Rate
method to estimate the historical loss rate for all non-individually evaluated loans. Under this method, the allowance for credit losses is measured on a collective (pool)
basis for loans with similar risk characteristics. Historical credit loss experience provides the basis for the estimate of expected credit losses. For each pool, a historical
loss rate is computed based on the average remaining contractual life of the pool. Adjustments to historical loss rates are made using qualitative factors relevant to
each pool including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. In addition, a twelve-month
forecast, using reasonable and supportable future conditions, is prepared that is used to estimate expected changes to existing and historical conditions in the current
period.
The Company also considers specific current economic events occurring globally, in the U.S. and in its local markets. In March 2020, in response to the COVID-19
outbreak, its significant disruptions in the U.S. economy and impacts on local markets, First Mid Bank offered a 90-day commercial deferral program, primarily to hotel
and restaurant borrowers. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.
These deferrals were, however, considered in the factors used to estimate the required allowance for credit losses for non-impaired loans. Other COVID-19 related
impacts considered included revenue losses of businesses required to restrict or cease services, income loss to workers laid off as a result of COVID-19 restrictions,
various federal and state government stimulus programs and additional deferral programs offered by First Mid Bank beginning in April 2020. Other events considered
include the status of trade agreements with China, scheduled increases in minimum wage and changes to the minimum salary threshold for overtime provisions,
current and projected unemployment rates, current and projected grain and oil prices and economies of local markets where customers work and operate.
Within each pool, risk elements are evaluated that have specific impacts to the borrowers within the pool. These, along with the general risks and events, and the
specific lending policies and procedures by loan type described above, are analyzed to estimate the qualitative factors used to adjust the historical loss rates. During
the current period, the following assumptions and factors were considered when determining the historical loss rate and any potential adjustments by loan pool.
During 2022, 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. Historical losses and adversely classifieds in this segment remained very low. Past dues also remained low and stable
compared to last year. Given the increasing uncertainty regarding the potential for a recession, the qualitative factor for this segment was increased slightly.
Agricultural Real Estate Loans. Historical losses in the segment remain very low. Adversely classified balances and past dues improved in 2022. Farmland values
have remained steady over an extended period of time and there are no indications that this will change in the next year. There was a slight decrease to the qualitative
factor for this segment.
1- 4 Family Residential Properties Loans. This loan segment has remained stable throughout the last several years even with the uncertainty created from COVID 19
and the subsequent governmental actions to provide support. Both adversely classifieds and past dues improved during the year. The qualitative factors on both non-
owner occupied and owner-occupied loans for this segment have not changed.
Commercial Real Estate Loans. This is the largest segment of loans in the portfolio and carries the largest balance of allowance for credit losses. For 2022,
adversely classified balances and past dues improved. However, the economic uncertainty increased and drove the qualitative factors on both non-owner occupied
and owner-occupied loans to be increased slightly.
Agricultural Loans. Losses in this segment are very low. Adversely classified balances and past dues decreased. Commodity prices have been elevated and yields
have been strong. The qualitative factor of this segment was decreased slightly.
Commercial and Industrial Loans. This segment carries the second largest balance of allowance for credit losses for the Company. During the year, adversely
classified balances increased, while past dues decreased. Due to the increase in the adversely classifieds and the increased economic uncertainty, the qualitative
factor for this segment was increased slightly.
Consumer Loans. This segment represents the smallest portion of the Company's loan portfolio. During the year, adversely classified loans decreased, while past
dues increased. Due to the increase in past due and the increased economic uncertainty, the qualitative factor for this segment was increased slightly.
Acquired Loans. Prior to January 1, 2020 loans acquired with evidence of credit deterioration since origination and for which it was probable that all contractually
required payments would not be collected were considered purchased credit impaired at the time of acquisition. Purchase credit-impaired ("PCI") loans were accounted
for under ASC 310-30, Receivables--Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), and were initially measured at fair value,
which included the estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans was
not carried over and recorded at the acquisition date. The cash flows expected to be collected were estimated using current key assumptions, such as default rates,
value of underlying collateral, severity and prepayment speeds.
Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination
are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar
risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to
the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the
59
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, 2022, 2021, and 2020 (in thousands):
Construction
and Land
Development
Agricultural
Real Estate
1-4 Family
Residential
Properties
Commercial
Real Estate
Agricultural
Loans
Commercial
and
Industrial
Consumer
Loans
Total
$
1,743
Twelve months ended December 31, 2022
Beginning Balance
Initial allowance on loans
purchased with credit
deterioration
Provision for credit loss
expense
Loans charged off
Recoveries collected
Ending balance
137
2
100
2,250
272
$
$
1,666
Twelve months ended December 31, 2021
Beginning Balance
Initial allowance on loans
purchased with credit
deterioration
Provision for credit loss
expense
Loans charged off
Recoveries collected
Ending balance
21
205
—
1,743
261
$
$
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
646
13
—
1,666
1,146
(113)
$
$
1,257
$
2,330
$
26,246
$
983
$
19,241
$
2,855
$ 54,655
—
176
—
—
1,433
1,084
44
129
—
—
1,257
1,093
230
(239)
—
—
1,084
$
$
$
$
$
3
1,241
191
359
3,742
2,322
328
(160)
371
211
2,330
1,386
756
274
393
299
2,322
$
$
$
$
$
478
1,462
414
385
28,157
19,660
646
6,415
535
60
26,246
11,198
541
8,581
829
169
19,660
$
$
$
$
$
—
(359)
93
54
585
1,526
—
(544)
—
1
983
1,386
(363)
503
—
—
1,526
$
$
$
$
$
94
16
863
2,135
870
208
20,808
13,485
795
7,940
3,118
139
19,241
9,273
155
5,869
1,991
179
13,485
$
$
$
$
$
14
1,380
613
2,118
4,806
2,950
1,719
$ 59,093
2,167
$ 41,910
—
2,074
1,350
1,405
743
2,855
15,151
5,634
1,154
$ 54,655
1,429
466
469
618
421
2,167
$ 26,911
1,672
16,103
3,844
1,068
$ 41,910
$
$
$
$
$
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 time frames 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.
60
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, 2022 (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
Credit Quality
Real Estate
Business
Assets
Other
Total
Collateral
Allowance
for Credit
Losses
$
$
449
—
1,085
660
8,442
10,636
—
196
—
—
10,832
$
$
— $
—
144
—
647
791
—
349
—
—
1,140
$
— $
16
—
—
—
16
—
—
1
—
17
$
449
16
1,229
660
9,089
11,443
—
545
1
—
11,989
$
$
221
—
58
—
459
738
—
—
—
—
738
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.
61
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, 2022 (in thousands):
2022
Risk rating
December 31, 2022
Construction and land development loans
63,846
—
—
63,846
Pass
Special mention
Substandard
Total
$
$
Agricultural real estate loans
Pass
Special mention
Substandard
Total
$
$
171,833
1,123
—
172,956
1-4 family residential property loans
Pass
Special mention
Substandard
Total
Commercial real estate loans
Pass
Special mention
Substandard
Total
Agricultural loans
Pass
Special mention
Substandard
Total
$
$
$
$
$
$
Commercial and industrial loans
Pass
Special mention
Substandard
Total
Consumer loans
Pass
Special mention
Substandard
Total
Total loans
Pass
Special mention
Substandard
Total
$
$
$
$
$
$
94,377
169
1,060
95,606
558,921
2,187
3,783
564,891
137,327
1,178
53
138,558
450,001
469
346
450,816
48,600
—
69
48,669
1,524,905
5,126
5,311
1,535,342
Term Loans by Origination Year
2021
2020
2019
2018
Prior
Revolving
Loans
Total
15,787
—
14
15,801
23,820
1,240
—
25,060
27,580
44
295
27,919
239,564
1,508
873
241,945
3,918
756
46
4,720
63,906
570
35
64,511
7,968
—
43
8,011
382,543
4,118
1,306
387,967
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,210
—
—
1,210
27,573
273
1,383
29,229
30,809
238
2,749
33,796
211,505
952
5,394
217,851
915
66
—
981
61,929
7,280
157
69,366
1,945
5
52
2,002
335,886
8,814
9,735
354,435
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10,601
—
458
11,059
52,799
3,121
1,274
57,194
63,050
1,000
8,079
72,129
453,076
8,503
6,100
467,679
254
109
—
363
247,404
158
633
248,195
5,630
—
6
5,636
832,814
12,891
16,550
862,255
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
—
—
— $
— $
—
—
— $
43,722
—
—
43,722
$
$
143,792
—
472
144,264
401,423
6,247
2,657
410,327
425,232
1,670
13,278
440,180
— $ 2,291,729
15,206
—
—
17,422
— $ 2,324,357
— $
—
—
— $
164,630
2,109
99
166,838
— $ 1,221,486
19,212
—
—
1,773
— $ 1,242,471
— $
—
—
— $
97,332
24
419
97,775
43,722
—
—
43,722
$ 4,745,624
44,468
36,120
$ 4,826,212
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
39,790
—
—
39,790
67,115
—
—
67,115
86,717
218
566
87,501
509,614
1,287
478
511,379
18,783
—
—
18,783
226,038
640
418
227,096
21,088
18
246
21,352
969,145
2,163
1,708
973,016
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
12,558
—
—
12,558
58,283
490
—
58,773
78,977
1
529
79,507
319,049
769
794
320,612
3,433
—
—
3,433
172,208
10,095
184
182,487
12,101
1
3
12,105
656,609
11,356
1,510
669,475
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
62
2021
Risk rating
December 31, 2021
Construction and land development loans
38,656
110
—
38,766
Pass
Special mention
Substandard
Total
$
$
Agricultural real estate loans
Pass
Special mention
Substandard
Total
$
$
1-4 family residential property loans
78,793
872
—
79,665
78,889
234
355
79,478
568,200
3,185
2,007
573,392
105,378
13,725
350
119,453
279,814
613
506
280,933
27,948
68
585
28,601
1,177,678
18,807
3,803
1,200,288
Pass
Special mention
Substandard
Total
Commercial real estate loans
Pass
Special mention
Substandard
Total
Agricultural loans
Pass
Special mention
Substandard
Total
$
$
$
$
$
$
Commercial and industrial loans
Pass
Special mention
Substandard
Total
Consumer loans
Pass
Special mention
Substandard
Total
Total loans
Pass
Special mention
Substandard
Total
$
$
$
$
$
$
Term Loans by Origination Year
2020
2019
2018
2017
Prior
Revolving
Loans
Total
34,358
—
483
34,841
30,203
384
187
30,774
44,248
499
1,302
46,049
174,448
1,295
1,179
176,922
2,822
150
—
2,972
76,022
182
621
76,825
5,505
9
678
6,192
367,606
2,519
4,450
374,575
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,760
—
—
3,760
12,142
69
57
12,268
30,735
2,601
3,458
36,794
150,811
10,609
4,646
166,066
924
13
—
937
22,888
477
24
23,389
4,297
—
43
4,340
225,557
13,769
8,228
247,554
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,433
—
39
9,472
54,808
6,087
1,119
62,014
52,131
1,196
7,250
60,577
304,585
8,632
8,238
321,455
1,316
64
125
1,505
302,962
819
1,433
305,214
1,244
—
1,596
2,840
726,479
16,798
19,800
763,077
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
—
—
— $
— $
—
—
— $
42,800
41
652
43,493
$
$
144,486
110
522
145,118
265,818
11,699
1,755
279,272
378,761
6,505
15,047
400,313
— $ 1,915,351
26,763
—
—
23,026
— $ 1,965,140
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
133,955
17,036
493
151,484
969,050
3,953
2,751
975,754
75,005
169
3,268
78,442
42,800
41
652
43,493
$ 3,882,426
66,235
46,862
$ 3,995,523
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
34,774
—
—
34,774
64,159
259
—
64,418
94,404
—
496
94,900
417,334
1,206
714
419,254
17,903
436
18
18,357
167,662
399
34
168,095
19,033
54
58
19,145
815,269
2,354
1,320
818,943
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
23,505
—
—
23,505
25,713
4,028
392
30,133
35,554
1,934
1,534
39,022
299,973
1,836
6,242
308,051
5,612
2,648
—
8,260
119,702
1,463
133
121,298
16,978
38
308
17,324
527,037
11,947
8,609
547,593
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
63
The following table presents the Company’s loan portfolio aging analysis at December 31, 2022 and 2021 (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
Total
Loans > 90
days and
Accruing
$
$
$
$
20
20
1,706
—
494
2,240
—
716
326
—
3,282
159
—
2,532
—
8,930
11,621
—
381
388
1,854
14,244
$
$
$
$
14
6
1,092
—
205
1,317
53
24
195
—
1,589
199
222
914
—
640
1,975
10
302
47
—
2,334
$
$
$
$
449
1
896
548
3,654
5,548
29
854
278
—
6,709
203
1
2,012
1,676
2,484
6,376
588
1,156
118
—
8,238
$
$
$
$
483
27
3,694
548
4,353
9,105
82
1,594
799
—
11,580
561
223
5,458
1,676
12,054
19,972
598
1,839
553
1,854
24,816
$
$
$
$
143,781
410,300
436,486
293,798
2,025,658
3,310,023
166,756
1,081,366
96,976
159,511
4,814,632
144,557
279,049
394,855
297,266
1,654,144
2,769,871
150,886
830,169
77,889
141,892
3,970,707
$
$
$
$
144,264
410,327
440,180
294,346
2,030,011
3,319,128
166,838
1,082,960
97,775
159,511
4,826,212
145,118
279,272
400,313
298,942
1,666,198
2,789,843
151,484
832,008
78,442
143,746
3,995,523
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
December 31, 2022
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, 2021
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
Individually Evaluated Loans
Within all loan portfolio segments, loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all
amounts due from the borrower in accordance with the contractual terms of the loan. The entire balance of a loan is considered delinquent if the minimum payment
contractually required to be made is not received by the specified due date. Impaired loans, excluding certain troubled debt restructured loans, are placed on
nonaccrual status. Impaired loans include nonaccrual loans and loans modified in troubled debt restructurings where concessions have been granted to borrowers
experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal,
forbearance or other actions intended to maximize collection. It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being
modified remain on nonaccrual status until, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to
the timely collection of interest or principal. If the restructured loan is on accrual status prior to being modified, the loan is reviewed to determine if the modified loan
should remain on accrual status.
The Company’s policy is to discontinue the accrual of interest income on all loans for which principal or interest is ninety days past due. The accrual of interest is
discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are
discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of
principal, and interest income is recorded only after principal recovery is reasonably assured. Interest on loans determined to be troubled debt restructurings is
recognized on an accrual basis in accordance with the restructured terms if the loan is in compliance with the modified terms. Nonaccrual loans are returned to accrual
status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest
or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
The amount of interest income recognized by the Company within the periods stated above was due to loans modified in troubled debt restructurings that remain on
accrual status.
64
Nonaccrual Loans
The following table presents the Company’s recorded balance of nonaccrual loans at December 31, 2022 and December 31, 2021 (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
2022
2021
Nonaccrual
with no
Allowance for
Credit Loss
Nonaccrual
with no
Allowance for
Credit Loss
Nonaccrual
Nonaccrual
$
$
14
1,258
4,532
672
7,640
14,116
57
1,098
274
15,545
$
$
14
1,258
4,943
672
7,640
14,527
57
1,098
274
15,956
$
$
25
237
5,252
1,982
7,554
15,050
560
936
179
16,725
$
$
25
336
5,252
1,982
7,920
15,515
560
1,851
179
18,105
The aggregate principal balances of nonaccrual, past due ninety days or more loans were $16.0 million and $18.1 million at December 31, 2022 and 2021, respectively.
Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $103,000, $308,000 and $921,000 in 2022, 2021, and 2020,
respectively.
Subsequent to adoption of ASU 2016-13 on January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in
credit quality since origination are considered PCD loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar
risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to
the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the
purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the
amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income
on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.
Troubled Debt Restructuring
The balance of troubled debt restructurings ("TDRs") at December 31, 2022 and 2021 was $5.1 million and $5.8 million, respectively. Approximately $0.5 million and
$0.8 million in specific reserves were established with respect to these loans as of December 31, 2022 and 2021, 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, 2022 and 2021 (in thousands).
Troubled debt restructurings:
Agricultural real estate
1-4 family residential properties
Commercial real estate
Loans secured by real estate
Agricultural loans
Commercial and industrial loans
Consumer loans
All other loans
Total
Performing troubled debt restructurings:
Agricultural real estate
1-4 family residential properties
Commercial real estate
Loans secured by real estate
Commercial and industrial loans
Consumer loans
All other loans
Total
2022
2021
351
1,165
2,919
4,435
—
591
38
—
5,064
233
846
1,939
3,018
159
37
—
3,214
$
$
$
$
245
1,353
3,355
4,953
228
479
109
23
5,792
245
882
2,552
3,679
179
50
23
3,931
$
$
$
$
65
The following table presents loans modified as TDRs during the years ended December 31, 2022 and 2021 as a result of various modified loan factors (dollars in
thousands). The change in the recorded investment from pre-modification to post-modification was not material.
Agricultural real estate
1-4 family residential properties
Commercial real estate
Loans secured by real estate
Commercial and industrial loans
Consumer loans
All other loans
Total
December 31, 2022
December 31, 2021
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
2
4
2
8
4
—
—
12
$
$
97
422
196
715
325
—
—
1,040
1
1
1
3
2
4
1
10
$
$
245
183
679
1,107
254
50
23
1,434
A loan is considered to be in payment default once it is ninety days past due under the modified terms. There was two loans modified as troubled debt restructurings
during the prior twelve months that experienced defaults for years ended December 31, 2022 There was one loan modified as troubled debt restructuring during 2021.
At December 31, 2022 and 2021, the balance of real estate owned include $4.3 million and $5.0 million respectively of foreclosed real estate properties recorded as a
result of obtaining physical possession of the property. At December 31, 2022 and 2021, the recorded investment of consumer mortgage loans secured by residential
real estate properties for which formal foreclosure proceeds were in process was $425,000 and $411,000.
Purchased Credit Deteriorated (PCD) Loans
During 2022 and 2021, the Company acquired loans from Delta and LINCO, respectively, for which there was, at acquisition, evidence of more than insignificant
deterioration of credit quality since origination. The carrying amount of those loans is as follows (in thousands):
Delta Acquisition
LINCO Acquisition
Purchase price of purchase credit deteriorated loans at acquisition
Allowance for credit losses at acquisition
Non-credit discount/(premium) at acquisition
Fair value of purchased credit deteriorated loans at acquisition
$
$
18,796 $
(863)
(523)
17,410 $
Note 6 -- Premises and Equipment, Net
Premises and equipment at December 31, 2022 and 2021 consisted of (in thousands):
Land
Buildings and improvements
Furniture and equipment
Leasehold improvements
Construction in progress
Subtotal
Accumulated depreciation and amortization
Total
2022
2021
$
$
27,982
68,345
25,498
4,676
1,538
128,039
37,566
90,473
$
$
Depreciation and amortization expense was $4.9 million, $4.4 million, and $3.8 million for the years ended December 31, 2022, 2021, and 2020, respectively.
64,647
(2,074)
(187)
62,386
22,682
67,225
25,747
4,736
394
120,784
39,300
81,484
66
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, 2022 and 2021 (in thousands):
Goodwill
Intangibles from branch acquisition
Core deposit intangibles
Customer list intangibles
2022
2021
Gross
Carrying
Value
Accumulated
Amortization
Gross
Carrying
Value
Accumulated
Amortization
$
$
144,172
3,015
45,355
20,782
213,324
$
$
3,760
3,015
28,432
8,551
43,758
$
$
115,613
3,015
39,435
20,561
178,624
$
$
3,760
3,015
24,085
6,808
37,668
Goodwill of $28.6 million was recorded for the acquisition and merger of Delta Bancshares Company during the first quarter of 2022. All this goodwill was assigned to
the banking unit of the Company.
During the second quarter of 2021, goodwill of $1.4 million was recorded for the acquisition of certain assets used by BBM & Associates Inc., in connection with its
trucking insurance business. All this goodwill was assigned to First Mid Insurance.
Goodwill of $8.9 million was provisionally recorded for the acquisition and merger of LINCO Bancshares, Inc. (“LINCO”) during the first quarter of 2021. All this goodwill
was assigned to the banking segment of the Company. This goodwill was subsequently adjusted to $5.4 million to reflect adjustments made to finalize the purchase
accounting.
The following table provides a reconciliation of the purchase price paid for the acquisition of Delta and the amount of goodwill recorded (in thousands):
Unallocated purchase price
Less purchase accounting adjustments:
Fair value of securities
Fair value of loans, net
Fair value of premises and equipment
Fair value of time deposits
Fair value of FHLB advances
Core deposit intangible
Other assets
Other liabilities
Resulting goodwill from acquisition
(2,836)
(3,399)
3,508
(1,759)
(75)
5,920
(570)
444
$
$
29,791
1,233
28,558
The unpaid principal balance of mortgage loans serviced for others was $73.6 million and $90.2 million at December 31, 2022 and 2021, respectively. The
following table summarizes the activity pertaining to the mortgage servicing rights included in intangible assets as of December 31, 2022 and 2021 (in
thousands):
December 31,
2022
December 31,
2021
Beginning balance
Valuation recovery
Mortgage servicing rights amortized
I/O strip
Ending balance
$
$
420
108
(200)
3
331
$
$
Total amortization expense for the years ended December 31, 2022, 2021, and 2020 was as follows (in thousands):
Core deposit intangibles
Customer list intangibles
Mortgage servicing rights
2022
2021
2020
$
$
4,347
1,743
200
6,290
$
$
3,176
1,586
629
5,391
$
$
516
544
(629)
(11)
420
3,164
1,305
593
5,062
67
Estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands):
For year ended 12/31/23
For year ended 12/31/24
For year ended 12/31/25
For year ended 12/31/26
For year ended 12/31/27
$
5,878
5,371
4,736
3,835
3,254
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, 2022 and 2021, 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 3.23, 4.12 and 3.60 respectively, at December 31, 2022.
Note 8 – Deposits
As of December 31, 2022 and 2021, deposits consisted of the following (in thousands):
Demand deposits:
Non-interest bearing
Interest-bearing
Savings
Money market
Time deposits
Total deposits
2022
2021
$
$
1,256,514
1,389,283
636,699
1,267,726
706,779
5,257,001
$
$
1,246,673
1,452,765
626,523
1,068,473
562,052
4,956,486
Total interest expense on deposits for the years ended December 31, 2022, 2021, and 2020 was as follows (in thousands):
Interest-bearing demand
Savings
Money market
Time deposits
Total
2022
2021
2020
$
$
4,315
570
9,394
4,534
18,813
$
$
1,547
487
2,711
4,292
9,037
$
$
1,462
426
2,270
8,593
12,751
As of December 31, 2022, 2021, and 2020, 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
2022
2021
2020
$
138,056
$
117,887
$
98,277
The following table shows the amount of maturities for all time deposits as of December 31, 2022 (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
$
$
409,987
200,771
32,568
15,970
47,126
357
706,779
In 2022 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of
approximately $319.4 million and $291.4 million in various checking accounts and time deposits as of December 31, 2022 and 2021, respectively. These
balances are subject to change depending upon the cash flow needs of the public entity.
68
Note 9 -- Repurchase Agreements and Other Borrowings
As of December 31, 2022 and 2021 borrowings consisted of the following (in thousands):
Securities sold under agreements to repurchase
Federal Home Loan Bank-overnight
Federal Home Loan Bank (FHLB) fixed-term advances
Subordinated debt
Junior subordinated debentures
Total
2022
2021
221,414
65,000
400,071
94,553
19,364
800,402
$
$
146,268
—
86,446
94,400
19,195
346,309
$
$
Aggregate annual maturities of FHLB advances and debt (excluding unamortized discounts and premiums) at December 31, 2022 are (in thousands):
2023
2024
2025
2026
2027
Thereafter
Unamortized discount
FHLB
Subordinated
Debt
Jr. Subordinated
Debentures
$
$
175,000
60,000
9,747
150,000
—
70,000
464,747
324
465,071
$
$
— $
—
—
—
—
96,000
96,000
(1,447)
94,553
$
—
—
4,124
—
—
16,496
20,620
(1,256)
19,364
FHLB advances represent borrowings by First Mid Bank to fund loan demand. At December 31, 2022 the advances totaling $464.7 million were as follows:
Advance
$5,000,000
35,000,000
5,000,000
5,000,000
25,000,000
5,000,000
5,000,000
10,000,000
5,000,000
4,746,475
5,000,000
5,000,000
10,000,000
25,000,000
25,000,000
25,000,000
50,000,000
50,000,000
50,000,000
50,000,000
65,000,000
Term (in years)
8.0
0.5
4.0
1.0
0.75
3.5
3.5
5.0
5.0
10.0
10.0
10.0
10.0
1.0
1.5
2.0
4.0
4.0
4.0
10.0
overnight
Interest Rate
2.40%
4.22%
2.44%
2.00%
4.34%
1.51%
0.77%
1.45%
0.91%
2.64%
1.15%
1.12%
1.39%
4.81%
4.69%
4.59%
2.98%
3.49%
3.28%
2.77%
4.31%
Maturity Date
January 9, 2023
March 31, 2023
May 30, 2023
May 31, 2023
June 30, 2023
July 31, 2023
September 11, 2023
December 31, 2024
March 10, 2025
December 23, 2025
October 3, 2029
October 3, 2029
December 31, 2029
November 10, 2023
May 10, 2024
November 8, 2024
December 8, 2027
December 8, 2027
December 8, 2027
December 13, 2032
January 1, 2023
Securities sold under agreements to repurchase were $221.4 million at December 31, 2022, an increase of $75.1 million from $146.3 million at December 31,
2021 primarily due to seasonal cash needs of customers. Securities sold under agreements to repurchase have overnight maturities and a weighted average
rate of 2.30%.
(In thousands)
Securities sold under agreements to repurchase:
Maximum outstanding at any month-end
Average amount outstanding for the year
2022
2021
2020
$
257,061
202,242
$
212,503
173,762
$
350,288
219,298
69
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 and agencies
Mortgage-backed securities: GSE: residential
Total
December 31, 2022
December 31, 2021
$
$
47,775
173,639
221,414
$
$
53,782
92,486
146,268
At December 31, 2022, there was no outstanding loan balance on the revolving credit agreement with The Northern Trust Company. This loan was renewed
on April 8, 2022 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, 2022 and 2021.
On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the
“Notes”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National
Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the
Company and the Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the
Notes are unsecured, subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding
October 15, 2025, the Notes will bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier
redemption, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 383 basis points, or such other rate as determined pursuant
to the Supplemental Indenture, provided that in no event shall the applicable floating interest rate be less than zero per annum.
The Company may, beginning with the interest payment date of October 15, 2025, and on any interest payment date thereafter, redeem the Notes, in whole or in part,
at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The
Company may also redeem the Notes at any time, including prior to October 15, 2025, at the Company’s option, in whole but not in part, if: (i) a change or prospective
change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event
occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an
investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes
plus any accrued and unpaid interest to but excluding the redemption date.
The Company had approximately $1.4 million of costs, including a debt issuance discount of $1.2 million in connection with the debt issuance. This expense is being
amortized to interest expense over the life of the notes. At December 31, 2022, the recorded balance of subordinated notes was $94.6 million.
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 (6.37% and 1.80% at December 31, 2022 and 2021). 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 (6.47% and 2.05% at December 31, 2022 and 2021, 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 (6.62% and 1.90% at December 31, 2022 and 2021, 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
70
21, 2010, removes trust preferred securities as a permitted component of a holding company’s Tier 1 capital after a three-year phase-in period beginning
January 1, 2013 for larger holding companies. For holding companies with less than $15 billion in consolidated assets, existing issues of trust preferred
securities are grandfathered and not subject to this new restriction. Similarly, the final rule implementing the Basel III reforms allows holding companies with
less than $15 billion in consolidated assets as of December 31, 2009 to continue to count toward Tier 1 capital any trust preferred securities issued before May
19, 2010. New issuances of trust preferred securities, however would not count as Tier 1 regulatory capital.
In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt rules that prohibit banks and
their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and
private equity funds). This rule is generally referred to as the “Volcker Rule.” On December 10, 2013, the federal banking agencies issued final rules to
implement the prohibitions required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry
regarding the adverse impact the final rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies
approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred
securities. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion
in assets if (1) the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the offering
proceeds received by the collateralized debt obligation were invested primarily in qualifying trust preferred collateral, and (3) the banking entity’s interests in
the collateralized debt obligation was acquired on or prior to December 10, 2013. Although the Volcker Rule impacts many large banking entities, the
Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company or First Mid Bank.
Note 10 -- Regulatory Capital
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory
requirements established by the Board of Governors of the Federal Reserve System (“Federal Reserve System”), and First Mid Bank follow similar minimum regulatory
requirements established for national banks by the Office of the Comptroller of the Currency (“OCC”). Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Quantitative measures established by each regulatory capital standards to ensure capital adequacy require the Company and its subsidiary bank to maintain a
minimum capital amounts and ratios (set forth in the table below). Management believes that, as of December 31, 2022 and 2021, the Company and First Mid Bank all
capital adequacy requirements.
As of December 31, 2022 and 2021, 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, 2022, there were no conditions or events since the most
recent notification that management believes have changed this categorization.
(Dollars in thousands)
December 31, 2022
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, 2021
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
$
801,966
745,624
15.20% $
14.18%
554,164
552,161
>10.50%
>10.50% $
N/A
525,868
N/A
> 10.00%
654,453
692,664
635,089
692,664
654,453
692,664
12.40%
13.17%
12.03%
13.17%
9.68%
10.22%
448,609
446,987
369,442
368,107
268,875
270,990
> 8.50
> 8.50
> 7.00
> 7.00
> 4.00
> 4.00
N/A
420,694
N/A
341,814
N/A
338,738
N/A
> 8.00
N/A
> 6.50
N/A
> 5.00
$
674,310
624,150
15.79% $
14.67%
448,344
446,711
>10.50%
>10.50% $
N/A
425,439
N/A
> 10.00%
12.51%
13.60%
12.06%
13.60%
9.05%
9.83%
362,945
361,623
298,896
297,807
236,151
235,337
> 8.50
> 8.50
> 7.00
> 7.00
> 4.00
> 4.00
N/A
340,351
N/A
276,535
N/A
294,171
N/A
> 8.00
N/A
> 6.50
N/A
> 5.00
534,277
578,517
515,082
578,517
534,277
578,517
71
The Company's risk-weighted assets, capital and capital ratios for December 31, 2022 and 2021 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, 2022 and 2021, the Company and First Mid Bank had capital ratios above the required minimums for regulatory
capital adequacy, and First Mid Bank had capital ratios that qualified it for treatment as well-capitalized under the regulatory framework for prompt corrective action with
respect to banks.
Note 11 -- Disclosures of Fair Values of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs
that may be used to measure fair value:
Level 1
Level 2
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.
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.
72
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, 2022 and 2021 (in thousands):
December 31, 2022
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, 2021
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
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)
Fair Value
220,527
287,698
627,880
82,880
1,218,985
311
4,253
1,223,549
3,100
203,815
395,457
791,038
31,112
1,421,422
397
809
1,422,628
1,476
$
$
$
$
$
$
— $
—
—
—
—
311
—
311
$
220,527
287,698
627,880
73,630
1,209,735
—
4,253
1,213,988
— $
3,100
— $
—
—
—
—
397
—
397
$
203,815
395,358
791,038
31,112
1,421,323
-
809
1,422,132
— $
1,476
$
$
$
$
$
$
—
—
—
9,250
9,250
—
—
9,250
—
—
99
—
—
99
—
—
99
—
$
$
$
$
$
$
73
The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2022 and 2021 is
summarized as follows (in thousands):
Obligations of
State and
Political
Subdivisions
Other
Total
December 31, 2022
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
December 31, 2021
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
$
$
99 $
—
—
—
—
—
—
—
(99)
— $
— $
794 $
—
—
3
—
—
—
—
(698)
99 $
— $
— $
9,250
—
—
—
—
—
—
—
9,250 $
— $
— $
—
—
—
—
—
—
—
—
— $
— $
99
9,250
—
—
—
—
—
—
(99)
9,250
—
794
—
—
3
—
—
—
—
(698)
99
—
Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance
sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Collateral Dependent Loans
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable
methods for determining the amount of impairment and estimating fair value include using the fair value of the collateral for collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a
current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of
the fair value hierarchy when impairment is determined using the fair value method.
Management establishes a specific allowance for loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a
change in specific allowance has occurred as of December 31, 2022 was $3.3 million and a fair value of $2.5 million resulting in specific loss exposures of $0.8 million.
As of December 31, 2021, the total carrying amount of loans for which a change specific allowance has occurred was $8.0 million. These loans had a fair value of $6.8
million which resulted in specific loss exposures of $1.2 million.
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.
74
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, 2022 was $4.3 million. Other real estate owned included in the total carrying amount
and measured at fair value on a nonrecurring basis during the period amounted to $0. The total carrying amount of other real estate owned as of December 31, 2021
was $5.0 million. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $2.1
million.
Mortgage Servicing Rights
As of December 31, 2022, mortgage servicing rights had a carrying value of $0 and a fair value of $0 resulting in a valuation reserve of $0. As of December 31, 2021,
mortgage servicing rights had a carrying value of $468,000 and a fair value of $420,000 resulting in a valuation reserve of $48,000. 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, 2022 and 2021 (in thousands):
December 31, 2022
Collateral dependent loans
Foreclosed assets held for sale
December 31, 2021
Collateral dependent loans
Foreclosed assets held for sale
Mortgage servicing rights
Sensitivity of Significant Unobservable Inputs
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Significant
Other
Identical Assets Observable Inputs
Fair Value
(Level 1)
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
2,548
—
6,750
2,068
420
— $
—
— $
—
—
— $
—
— $
—
—
2,548
—
6,750
2,068
420
The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at December 31, 2022.
Collateral dependent loans
$
Foreclosed assets held for sale
Mortgage servicing rights
Fair Value
Valuation
(in thousands)
Technique
Unobservable Inputs
Range (Weighted
Average)
2,548
—
#REF!
Third party
valuations
Third party
valuations
Third party
valuations
Discount to reflect realizable value
Discount to reflect realizable value
less estimated selling costs
PSA standard prepayment model
rate
0% - 40% (20%)
0% - 40% (35%)
128 -437 (137)
The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at December 31, 2021.
Collateral dependent loans
Foreclosed assets held for sale
Mortgage servicing rights
Fair Value
Valuation
(in thousands)
$
6,750
Technique
Third party valuations
2,068
420
Third party valuations
Third party valuations
Unobservable Inputs
Discount to reflect realizable value
Discount to reflect realizable value less
estimated selling costs
PSA standard prepayment model rate
Range (Weighted
Average)
0% - 40% (20%)
0% - 40% (35%)
205 -513 (273)
75
The following tables present estimated fair values of the Company’s financial instruments at December 31, 2022 and 2021 (in thousands):
December 31, 2022
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
Subordinated debentures
Junior subordinated debentures
December 31, 2021
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
Subordinated debentures
Junior subordinated debentures
Note 12 -- Deferred Compensation Plan
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
$
$
$
$
$
$
$
$
144,806
7,627
1,470
1,218,986
2,954
311
338
4,766,781
28,357
17,050
18,440
5,257,001
221,414
3,346
465,071
94,553
19,364
167,242
1,360
2,450
1,421,422
7,030
397
2,748
3,938,120
19,868
13,845
6,484
4,956,486
146,268
1,346
86,446
94,400
19,195
$
$
$
$
144,806
7,627
1,470
1,218,986
2,954
311
338
4,460,661
28,357
17,050
18,440
5,257,748
221,260
3,346
459,327
87,977
17,164
167,242
1,360
2,450
1,421,422
7,034
397
2,748
3,889,870
19,868
13,845
6,484
4,956,738
146,274
1,346
86,248
94,400
15,012
$
144,806
7,627
—
—
2,954
311
—
—
—
—
—
— $
—
1,470
1,209,736
—
—
338
—
28,357
17,050
18,440
$
— $
—
—
—
—
—
4,550,222
221,260
3,346
459,327
87,977
17,164
$
167,242
1,360
—
—
2,029
397
—
—
—
—
—
— $
—
2,450
1,421,323
5,005
—
2,748
—
19,868
13,845
6,484
$
— $
—
—
—
—
—
4,394,434
146,274
1,346
86,248
94,400
15,012
—
—
—
9,250
—
—
—
4,460,661
—
—
—
707,526
—
—
—
—
—
—
—
—
99
—
—
—
3,889,870
—
—
—
562,304
—
—
—
—
—
The Company follows the provisions of ASC 710, for purposes of the First Mid Bancshares, Inc. Amended and Restated Deferred Compensation Plan (“DCP”). At
December 31, 2022, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $4,799,000 as
treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $4,799,000 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 2022 and 2021, the Company issued 8,378 common shares and 9,513 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, 2022 and 2021.
76
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 63,150, 48,575 and 25,950 shares (under the 2017 Stock Incentive Plan) during 2022, 2021, and 2020, 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, 2022, 2021, and
2020 (in thousands):
Stock and stock unit awards:
Pre-tax compensation expense
Income tax benefit
Total share-based compensation expense, net of income taxes
2022
2021
2020
$
$
1,874
(394)
1,480
$
$
1,304
(274)
1,030
$
$
774
(163)
611
The following table summarizes non-vested stock and stock unit activity for the years ended December 31, 2022, 2021, and 2020:
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
Fair value of shares vested
2022
2021
2020
Shares
62,040
63,150
(40,759)
(2,383)
82,048
Weighted-avg
Grant-date
Fair Value
$
$
$
34.27
41.07
38.20
(39.35)
37.41
1,556,870
Weighted-
avg
Grant-date
Fair Value
Shares
42,220
48,575
(28,355)
(400)
62,040
$
$
$
34.62
34.42
35.02
(34.34)
34.27
993,094
Weighted-avg
Grant-date
Fair Value
Shares
37,908
25,950
(21,305)
(333)
42,220
$
$
$
35.49
34.46
35.99
(33.31)
34.62
766,774
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, 2022, 2021, and 2020, there was $2.6 million, $1.7 million, and $1.2 million, respectively, of total unrecognized compensation
cost related to unvested stock and stock unit awards under the SI Plan.
Note 14 -- Retirement Plans
The Company has a defined contribution retirement plan which covers substantially all employees, which provides a Company matching contribution of up to 100% of
the first 3% and 50% of the next 2% of pre-tax contributions made by each participant. Employee contributions are limited to the 402(g) limit of compensation. The total
expense for the plan amounted to $3.9 million, $3.6 million and $2.6 million in 2022, 2021, and 2020, 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 $24,000,
$27,000 and $28,000 in 2022, 2021, and 2020 respectively. The current liability recorded for this agreement was $394,000 and $419,000, as of December 31, 2022
and 2021, respectively.
Note 15 -- Income Taxes
The components of federal and state income tax expense for the years ended December 31, 2022, 2021, and 2020 were as follows (in thousands):
Current
Federal
State
Total current
Deferred
Federal
State
Total deferred
Total
2022
2021
2020
$
$
14,401
6,171
20,572
(2,005)
(227)
(2,232)
18,340
$
$
12,269
6,384
18,653
(2,562)
(793)
(3,355)
15,298
$
$
12,315
7,120
19,435
(3,318)
(1,645)
(4,963)
14,472
77
Recorded income tax expense differs from the expected tax expense (computed by applying the applicable statutory U.S. federal tax rate of 21% to income before
income taxes). The principal reasons for the difference are as follows (in thousands):
Expected income taxes
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
Effect of marginal tax rate
Total
2022
2021
2020
19,172
$
14,025
$
(659)
(2,497)
255
4,695
(2,525)
(101)
18,340
$
(575)
(2,072)
17
4,417
(514)
—
15,298
$
12,546
(363)
(1,758)
45
4,325
(323)
—
14,472
$
$
Tax expense recorded by the Company during 2022 and 2020 did not include any interest or penalties. Tax expense recorded during 2021 included interest of
approximately $2,100. Tax returns filed with the Internal Revenue Service and Illinois Department of Revenue are subject to review by law under a three-year statute of
limitations. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2019.
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, 2022 and 2021
are presented below (in thousands):
2022
2021
Deferred tax assets:
Allowance for credit losses
Available-for-sale investment securities
Deferred compensation
Supplemental retirement
Deferred loan costs
Stock compensation expense
Deferred revenue
Purchase accounting
Acquisition costs
Other
Total gross deferred tax assets
Deferred tax liabilities:
Intangibles amortization
Prepaid expenses
FHLB stock dividend
Deferred expenses
Purchase accounting
Depreciation
Accumulated accretion
Mortgage servicing rights
Other
Available-for-sale investment securities
Total gross deferred tax liabilities
Deferred tax assets, net
$
$
16,248
61,880
4,157
492
302
147
349
795
179
894
85,443
6,398
1,418
22
104
—
4,911
245
91
—
—
13,189
72,254
$
$
12,957
339
4,025
460
—
163
79
443
217
1,139
19,822
107
6,480
985
23
915
3,463
111
118
321
—
12,523
7,299
No valuation allowance related to deferred tax assets was recorded at December 31, 2022 and 2021 as management believes it is more likely than not that the
deferred tax assets will be fully realized.
78
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, 2022. As of
December 31, 2022, approximately $82.3 million was available to be paid as dividends to the Company by First Mid Bank. Notwithstanding the availability of funds for
dividends, however, the OCC may prohibit the payment of any dividends by First Mid Bank if the OCC determines that such payment would constitute an unsafe or
unsound practice.
Note 17 -- Commitments and Contingent Liabilities
First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These
financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements
of credit, interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and
requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial
instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments.
The off-balance sheet financial instruments whose contract amounts represent credit risk at December 31, 2022 and 2021 were as follows (in thousands):
Unused commitments and lines of credit:
Commercial real estate
Commercial operating
Home equity
Other
Total
Standby letters of credit
2022
2021
$
$
$
147,702
655,676
63,570
307,030
1,173,978
10,162
$
$
$
118,190
529,035
59,422
293,339
999,986
14,403
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, 2022 and 2021. 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.
79
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 $169.7 million and $123.6 million at December 31, 2022 and
2021, respectively. Activity during 2022 and 2021 was as follows (in thousands):
Beginning balance
New loans
Loan repayments
Ending balance
2022
2021
123,614
135,464
(89,394)
169,684
$
$
55,125
117,927
(49,438)
123,614
$
$
Deposits from related parties held by First Mid Bank at December 31, 2022 and 2021 totaled $31.2 million and $33.0 million, respectively.
Note 19 -- Business Combinations
On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Delta Merger
Sub”), entered into an Agreement and Plan of Merger (the “Delta Merger Agreement”) with Delta Bancshares Company, a Missouri corporation (“Delta”), pursuant to
which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a business combination whereby Delta
merged with and into Delta Merger Sub, whereupon the separate corporate existence of Delta ceased and Delta Merger Sub continued as the surviving company and a
wholly-owned subsidiary of First Mid (the “Delta Merger”). The Delta Merger was completed on February 14, 2022.
Subject to the terms and conditions of the Delta Merger Agreement, at the effective time of the Delta Merger, each share of common stock, par value $10.00 per share,
of Delta issued and outstanding immediately prior to the effective time of the Delta Merger (other than shares held in treasury by Delta) converted into and became the
right to receive cash and shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required
to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the Delta Merger to
Delta’s shareholders and option holders was approximately $15.15 million in cash and 2,292,270 shares of Company common stock. Delta’s outstanding stock options
vested upon consummation of the Delta Merger, and all outstanding Delta options that were unexercised prior to the effective time of the Delta Merger were cashed
out.
The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations ("ASC 805"),” and accordingly the
assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Fair values are subject to refinement for up to one year after the closing
date of February 14, 2022 as additional information regarding the closing date fair values become available. The total consideration paid was used to determine the
amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets acquired, goodwill of $28.6 million was recorded for the
acquisition. Goodwill recorded in the transaction, which reflects the synergies and economies of scale expected from combining operations and the enhanced revenue
opportunities from the Company’s service capabilities, is not tax deductible, and was all assigned to the banking segment of the Company.
80
Assets
Cash and due from banks
Investment securities
Loans
Allowance for loan losses
Premises and equipment
Goodwill
Core deposit intangible
Bank owned life insurance
Right of use asset
Other assets
Total assets acquired
Liabilities and stockholders' equity
Deposits
Securities sold under agreements to repurchase
FHLB advances
Lease liability
Other liabilities
Total liabilities assumed
Net assets acquired
Consideration paid
Cash
Common stock
Total consideration paid
Acquired Book
Value
Adjustments
As Recorded by
First Mid Bank
$
$
$
$
82,473
184,959
426,433
(5,388)
5,522
14
—
15,822
—
9,061
718,896
558,619
35,523
45,000
—
2,209
641,351
77,545
$
$
$
$
— $
(2,836)
(7,924)
4,525
3,508
28,544
5,920
—
717
(1,287)
31,167
1,759
—
75
717
(1,161)
1,390
29,777
$
$
$
$
$
82,473
182,123
418,509
(863)
9,030
28,558
5,920
15,822
717
7,774
750,063
560,378
35,523
45,075
717
1,048
642,741
107,322
15,150
92,172
107,322
The Company has recognized approximately $2.5 million, pre-tax, of acquisition costs for the Delta Merger. Of this amount, $2.2 million was recognized during 2022.
These costs are included in salaries and benefits, legal and professional and other expense. Of the $7.9 million adjustment to loans, $8.2 million is being accreted to
interest income over the remaining term of the loans. The remaining $300,000 was the elimination of deferred fees and unearned discounts previously recorded by
Jefferson Bank. The Company also recorded approximately $863,000 directly to the allowance for credit losses for loans identified as PCD. Of the $426 million of loans
acquired, approximately $18.8 million was identified as PCD. The differences between fair value and acquired value of the assumed time deposits of $1.8 million and
the assumed FHLB advances of $75,000, are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible asset, with a fair
value of $5.9 million, is being amortized on an accelerated basis over its estimated life of 10 years. The following unaudited pro forma condensed combined financial
information presents the results of operations of the Company, including the effects of the purchase accounting adjustments and acquisition expenses, had the Delta
Merger taken place at the beginning of the period (dollars in thousands, except per share data):
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income available to common stockholders
Earnings per share
Basic
Diluted
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
$
$
$
$
Twelve months ended December 31,
2022
2021
$
$
$
$
187,075
4,806
74,799
165,062
92,006
18,508
73,498
3.64
3.63
20,169,077
20,243,635
147,387
14,679
53,371
132,086
53,993
12,321
41,672
2.07
2.07
20,111,889
20,164,909
On September 25, 2020, the Company and Eval Sub Inc., a newly formed Missouri corporation and wholly owned subsidiary of the Company ("LINCO Merger Sub"),
entered into an Agreement and Plan of Merger (the "LINCO Merger Agreement") with LINCO Bancshares, Inc., a Missouri corporation ("LINCO"), and the sellers as
defined therein, pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business
combination whereby LINCO Merger Sub will merge with and into LINCO, whereupon the separate corporate existence of LINCO Merger Sub will cease and LINCO
will continue as the surviving company and a wholly owned subsidiary of the Company (the "LINCO Merger").
Subject to the terms and conditions of the LINCO Merger Agreement, at the effective time of the LINCO Merger, each share of common stock, par value $1.00 per
share, of LINCO issued and outstanding immediately prior to the effective time of the LINCO Merger (other than shares held in treasury by LINCO) was converted into
and became the right to receive, cash or shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable
taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the
LINCO Merger was $103.5 million in cash and 1,262,246 shares of the Company’s common stock. In addition, immediately prior to the closing of the LINCO merger,
LINCO paid a special dividend to its shareholders in the aggregate amount of $13 million. The LINCO Merger closed on February 22, 2021.
81
The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations ("ASC 805"),” and accordingly the
assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Fair values are subject to refinement for up to one year after the closing
date of February 22, 2021 as additional information regarding the closing date fair values become available. The total consideration paid was used to determine the
amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets acquired, goodwill of $5.4 million was recorded for the
acquisition. Goodwill recorded in the transaction, which reflects the synergies and economies of scale expected from combining operations and the enhanced revenue
opportunities from the Company’s service capabilities, is not tax deductible, and was all assigned to the banking segment of the Company.
Assets
Cash and due from banks
Investment securities
Loans
Allowance for loan losses
Other real estate owned
Premises and equipment
Goodwill
Core deposit intangible
Right of use asset
Other assets
Total assets acquired
Liabilities and stockholders' equity
Deposits
Securities sold under agreements to repurchase
FHLB advances
Other borrowings
Lease liability
Other liabilities
Total liabilities assumed
Net assets acquired
Consideration paid
Cash
Common stock
Total consideration paid
Acquired Book
Value
Adjustments
As Recorded by
First Mid Bank
$
$
$
$
130,561
119,234
838,377
(8,656)
8,435
23,440
20,503
123
—
43,697
1,175,714
988,329
—
26,941
—
—
4,498
1,019,768
155,946
$
$
$
$
— $
264
(9,401)
6,583
915
6,360
(15,054)
2,025
794
2,499
(5,015)
2,081
—
975
—
794
(610)
3,240
(8,255)
$
$
$
$
$
130,561
119,498
828,976
(2,073)
9,350
29,800
5,449
2,148
794
46,196
1,170,699
990,410
—
27,916
—
794
3,888
1,023,008
147,691
103,500
44,191
147,691
The Company recognized approximately $9.1 million, pre-tax, of acquisition costs for the LINCO Merger. Of this amount, $8.6 million was recognized during 2021 and
$.5 million was recognized during 2020. These costs are included in salaries and benefits, legal and professional and other expense. Of the $9.4 million adjustment to
loans, $11.1 million is being accreted to interest income over the remaining term of the loans. The remaining $1.7 million was the elimination of deferred fees and
unearned discounts previously recorded by Providence Bank. The Company also recorded approximately $2 million directly to the allowance for credit losses for loans
identified as PCD. Of the $838 million of loans acquired, approximately $64.6 million was identified as PCD.
The differences between fair value and acquired value of the assumed time deposits of $2.1 million and the assumed FHLB advances of $975,000, are being amortized
to interest expense over the remaining life of the liabilities. The core deposit intangible assets, with a fair value of $2.1 million, are being amortized on an accelerated
basis over its estimated life of 10 years.
The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the purchase
accounting adjustments and acquisition expenses, had the LINCO Merger taken place at the beginning of the period (dollars in thousands, except per share data):
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income available to common stockholders
Earnings per share
Basic
Diluted
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
$
$
$
$
Twelve months ended December 31,
2021
2020
$
$
$
$
173,676
15,351
70,879
159,778
69,426
15,994
53,432
2.99
2.98
17,886,998
17,979,007
169,430
18,242
66,228
152,596
64,820
15,944
48,876
2.72
2.71
17,979,126
18,025,102
82
Note 20 -- Leases
Effective January 1, 2019, the Company adopted ASU 2016-02 Leases (Topic 842). As of December 31, 2022, 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 needs to reassess initial direct costs for any existing leases.
The Company also elected the practical expedient, which may be elected separately or in conjunction with the package noted above, to use hindsight in determining
the lease term and in assessing the right-of-use assets. This expedient must be applied consistently to all leases. Lastly, the Company has elected to use the practical
expedient to include both lease and non-lease components as a single component and account for it as a lease. In addition, the Company has elected not to include
short-term leases (i.e. leases with terms of twelve months or less) or equipment leases (primarily copiers) deemed immaterial, on the consolidated balance sheets.
For leases in effect at January 1, 2019 and for leases commencing thereafter, the Company recognizes a lease liability and a right-of-use asset, based on the present
value of lease payments over the lease term. The discount rate used in determining the present value was the Company's incremental borrowing rate which is the
FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the commencement date for leases subsequently entered into. The following
table contains supplemental balance sheet information related to leases (dollars in thousands):
Operating lease right-of-use assets
Operating lease liabilities
Weighted-average remaining lease term
Weighted-average discount rate
$
2022
2021
$
15,774
16,035
5.8 years
2.67%
15,116
15,322
6.6 years
2.70%
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):
2023
2024
2025
2026
2027
Thereafter
Total minimum lease payments
Less imputed interest
Total lease liability
The components of lease expense for the twelve months ended December 31, 2022 and 2021 were as follows (in thousands):
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
Income from subleases
Net lease cost
2022
3,040
75
720
3,835
(369)
3,466
$
$
Operating Leases
3,035
2,615
2,178
2,067
3,587
4,488
17,970
(1,935)
16,035
2,515
260
871
3,646
(527)
3,119
2021
$
$
$
$
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
2022
2021
$
3,061
$
2,872
83
Note 21 -- Derivatives
The Company utilizes interest rate swaps, designated as fair value hedges, to mitigate the risk of changing interest rates on the fair value of fixed rate loans. For
derivative instruments that are designed and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting loss or gain in the
hedged asset attributable to the hedged risk, is recognized in current earnings.
Derivatives Designated as Hedging Instruments
The following table provides the outstanding notional balances and fair value of outstanding derivatives designated as hedging instruments as of December 31, 2022
and 2021 (in thousands):
Derivative
December 31, 2022
Interest rate swap agreements
December 31, 2021
Interest rate swap agreements
Balance Sheet
Location
Weighted Average
Remaining Maturity
(Years)
Notional
Amount
Estimated
Value
Other liabilities
Other liabilities
6.3
7.3
$
$
13,448
13,900
$
$
(3,100)
(1,476)
The effects of fair value hedges on the Company's income statement during the twelve months ended December 31, 2022 and 2021 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
2022
2022
1,819
(1,819)
$
$
2021
2021
(827)
827
$
$
As of December 31, 2022 and 2021, 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
Carrying Amount of
the Hedged Assets
Cumulative Amount of Fair Value Hedging
Adjustments Included in the Carrying
Amount of the Hedged Assets
December 31, 2022
Loans
December 31, 2021
Loans
Derivatives Not Designated as Hedging Instruments
$
$
12,295
13,234
$
$
(1,153)
667
The following table provides the outstanding notional balances and fair value of outstanding derivatives not designated as hedging instruments as of December 31,
2022 and 2021 (in thousands):
December 31, 2022
Interest rate swap agreements
Interest rate swap agreements
December 31, 2021
Interest rate swap agreements
Interest rate swap agreements
Balance Sheet
Location
Other assets
Other liabilities
Other assets
Other liabilities
Weighted Average
Remaining Maturity
(Years)
Notional
Amount
Estimated
Value
5.0
5.0
6.0
6.0
$
$
39,095
39,095
40,886
40,886
$
$
4,253
(4,253)
809
(809)
84
Note 22 -- Parent Company Only Financial Statements
Presented below are condensed balance sheets, statements of income and cash flows for the Company (in thousands):
First Mid Bancshares, Inc. (Parent Company)
Balance Sheets
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,
2022
2021
24,854
4,955
714,237
5,212
749,258
113,917
2,186
116,103
633,155
749,258
$
$
$
$
28,421
4,377
713,296
4,048
750,142
113,595
2,653
116,248
633,894
750,142
$
$
$
$
First Mid Bancshares, Inc. (Parent Company)
Statements of Income and Comprehensive Income (Loss)
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 (loss)
2022
Years ended December 31,
2021
2020
$
$
34,040
542
34,582
9,221
25,361
2,780
28,141
44,811
72,952
(150,676)
(77,724)
$
$
28,075
9
28,084
9,630
18,454
2,656
21,110
30,380
51,490
(17,926)
33,564
$
$
29,663
43
29,706
4,697
25,009
1,231
26,240
19,030
45,270
8,735
54,005
85
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 (used in) operating activities
Cash flows from investing activities:
Investment in subsidiary
Net cash from business acquisition
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Repayment of short-term debt
Proceeds from short-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 financing activities
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
2022
Years ended December 31,
2021
2020
$
72,952
$
51,490
$
45,270
218
34,040
(44,811)
(208,359)
(146)
(146,106)
—
67,323
67,323
—
—
—
93,415
(340)
(29)
(17,830)
75,216
(3,567)
28,421
24,854
$
350
28,075
(30,380)
(206,880)
1,760
(155,585)
—
30,968
30,968
—
—
—
46,128
(326)
(206)
(14,721)
30,875
(93,742)
122,163
28,421
$
104
29,663
(19,030)
(30,121)
1,349
27,235
(700)
—
(700)
(5,000)
5,000
94,253
610
(213)
—
(12,814)
81,836
108,371
13,792
122,163
$
86
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
First Mid Bancshares, Inc.
Mattoon, Illinois
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of First Mid Bancshares, Inc. (the “Company”) as of December 31, 2022 and 2021,and the related
consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended
December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have 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, 2022, 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 3, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
The financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
Allowance for Credit Losses
As more fully described in Notes 1 and 5 to the consolidated financial statements, the Company estimates the allowance for credit losses (ACL) at a level that is
appropriate to cover estimated credit losses on individually evaluated loans, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio.
The determination of the ACL requires significant judgment reflecting the Company’s best estimate of expected credit losses. Expected credit losses are measured on
a collective (pool) basis using a combination of loss-rate methods when the financial assets share similar risk characteristics. Loans that do not share similar risk
characteristics are evaluated on an individual basis. Historical loss rates reflecting estimated life of loan losses are analyzed and applied to their respective loan
segments comprised of loans not subject to individual evaluation. Historical loss rates are adjusted for significant factors that, in management’s judgment, reflect the
impact of any current conditions on loss recognition, as well as for certain known model limitations. Forecast factors are developed based on information obtained from
external sources, as well as consideration of other internal information, and are included in the ACL model for a reasonable and supportable 12-month forecast period,
with loss factors immediately reverting back to historic loss rates. Management continually reevaluates the other subjective and forecast factors included in its ACL
analysis.
The primary reason for our determination that the ACL is a critical audit matter is that auditing the estimated ACL involved significant judgment and complex review.
Auditing the ACL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s model selections, segmentation,
weighted average life calculations, assessment of economic conditions and other environmental factors, assessment of forecast factors, evaluating the adequacy of
specific allowances associated with individually evaluated loans and assessing the appropriateness of loan grades.
87
Our audit procedures related to the estimated ACL included the following procedures, among others.
•
•
•
•
•
•
•
•
•
•
•
Obtaining an understanding of the Company’s process for establishing the ACL, including model selection and the qualitative and forecast factor
adjustments of the ACL and any limitations of the model
Testing the design and operating effectiveness of internal controls, including those related to technology over the ACL calculation, including data
completeness and accuracy, verification of historical net loss data and calculated net loss rates, the establishment of qualitative and forecast adjustments,
grading and risk classification of loans by segment, including internal independent loan review functions, establishment of reserves on individually evaluated
loans and management’s review controls over the ACL as a whole
Testing of the completeness and accuracy of the information utilized in the calculation of the ACL, including reports used in management review controls
over the ACL
Assessing the relevance and reliability of assumptions and data
Testing clerical and computational accuracy of the formulas within the ACL model
Evaluating how historical losses are determined for each segment
Evaluating segmentation of the loan portfolio for reasonableness based on risk characteristics of the pooled loans
Evaluating the qualitative factor and forecast adjustments, including assessing the basis and reasonableness for the adjustments
Evaluating management’s risk ratings of loans
Evaluating specific reserves on individually analyzed loans
Evaluating overall reasonableness of estimated reserve by considering and comparing past performance of the Company’s loan portfolio, trends in credit
quality of the loan portfolio and trends in the credit quality of peer institutions
We have served as the Company’s auditor since 2005.
FORVIS, LLP
(Formerly, BKD, LLP)
Decatur, Illinois
March 3, 2023
88
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, 2022. 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, 2022, 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, 2022 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, 2022, 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, 2022 has
been audited by BKD, LLP, an independent registered public accounting firm, as stated in their report following.
March 3, 2023
/s/ Joseph R. Dively
Joseph R. Dively
President and Chief Executive Officer
/s/ Matthew K. Smith
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 2022 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
89
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, 2022, 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, 2022, based on criteria established in Internal
Control – Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial
statements of the Company as of December 31, 2022 and 2021, and for each of the three years in the period ended December 31, 2022, and our report dated March
3, 2023 expressed an unqualified opinion on those financial statements.
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 3, 2023
90
ITEM 9B.
OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 10.
The information called for by Item 10 with respect to directors and director nominees is incorpo
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
rated by reference to the Company’s Proxy Statement for the 2023 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 2023 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 2023
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 2023 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 2023 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)
—
—
—
—
$
$
—
—
—
—
297,344 (1)
193,882 (2)
—
491,226
(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 2023 Annual Meeting of
the Company’s shareholders under the caption “Voting Securities and Principal Holders Thereof.”
91
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 2023 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 2023 Annual Meeting of the Company’s shareholders
under the caption “Fees of Independent Auditors.”
PART IV
ITEM 15.
EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) -- Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement schedules of the Company are filed as part of this document under Item 8.
Financial Statements and Supplementary Data:
Consolidated Balance Sheets -- December 31, 2022 and 2021
Consolidated Statements of Income -- For the Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Comprehensive Income -- For the Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Changes in Stockholders’ Equity -- For the Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 2022, 2021, and 2020.
•
•
•
•
•
(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.
92
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
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., Brock Sub LLC and Delta Bancshares Company, dated July 28,
2021 Incorporated by reference to Exhibit 2.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on July 29, 2021.
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.
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.
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.
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.
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
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
Form of 3.95% Fixed-to-Floating Rate Subordinated Note due 2030 (included in Exhibit 4.4)
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 21, 2022.
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.
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.
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 21, 2022.
Employment Agreement between the Company and Bradley L. Beesley
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2022.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
10.16
Sixth Amended and Restated Credit Agreement
93
Exhibit
Number
10.17
10.18
10.19
10.20
10.21
21.1
23.1
31.1
31.2
32.1
32.2
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.
Description and Filing or Incorporation Reference
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.
Third Amendment to the Sixth Amended and Restated Credit Agreement by and between First Mid Bancshares, Inc. and The Northern Trust
Company, dated as of April 9, 2021
Incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on April 12, 2021.
Fourth Amendment to the Sixth Amended and Restated Credit Agreement by and between First Mid Bancshares, Inc. and The Northern
Trust Company, dated as of February 7, 2022
Incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 8, 2022.
Fifth Amendment to the Sixth Amended and Restated Credit Agreement by and between First Mid Bancshares, Inc. and The Northern Trust
Company, dated as of April 8, 2022
Incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on April 11, 2022.
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
Subsidiaries of the Company
(Filed herewith)
Consent of BKD LLP
(Filed herewith)
Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith)
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)
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
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
101 SCH
Inline XBRL Taxonomy Extension Schema Document
101 CAL
Inline XBRL Taxonomy Calculation Linkbase Document
101 DEF
Inline XBRL Taxonomy Definition Linkbase Document
101 LAB
Inline XBRL Taxonomy Label Linkbase Document
101 PRE
Inline XBRL Taxonomy Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document
94
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 3, 2023
/s/ Joseph R. Dively
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 3th day of March 2023, by the following persons on
behalf of the Company and in the capacities listed.
Signature and Title
/s/ Joseph R. Dively
Joseph R. Dively, Chairman of the Board,
President and Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Matthew K. Smith
Matthew K. Smith, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
/s/ Holly B. Adams
Holly B. Adams, Director
/s/ Robert Cook
Robert Cook, Director
/s/ Steven L. Grissom
Steven L. Grissom, Director
/s/ Zachary I. Horn
Zachary I. Horn, Director
/s/ J. Kyle McCurry
J. Kyle McCurry, Director
/s/ Mary J. Westerhold
Mary J. Westerhold, Director
/s/ James Zimmer
James Zimmer, Director
/s/ Giselle A. Marcus
Gisele A. Marcus
95
Subsidiaries of the Company
Exhibit 21.1
First Mid Bank & Trust, N.A. (a national banking association)
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)
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 Statements on Form S-3 and S-8 of First Mid Bancshares, Inc. of our reports
dated March 3, 2023, on our audits of the consolidated financial statements of First Mid Bancshares, Inc. as of December 31, 2022 and 2021
and for each of the three years in the period ended December 31, 2022, and the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2022 which reports appear in the December 31, 2022 annual report on Form 10-K of First Mid Bancshares, Inc.
FORVIS, LLP
(Formerly, BKD, LLP)
Decatur, Illinois
March 3, 2023
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
I, Joseph R. Dively, certify that:
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 3, 2023
By:
/s/ Joseph R. Dively
Joseph R. Dively
President and Chief Executive Officer
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
I, Matthew K. Smith, certify that:
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 3, 2023
By:
/s/ Matthew K. Smith
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, 2022 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 3, 2023
/s/ Joseph R. Dively
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, 2022 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 3, 2023
/s/ Matthew K. Smith
Matthew K. Smith
Chief Financial Officer
This page intentionally left blank
This page intentionally left blank
This page intentionally left blank
First Mid LeadershipTRANSFER, DIVIDEND PAYING, AND DIVIDEND REINVESTMENT PLAN AGENTFor stockholder inquiries or for information concerning payments of the Company’s dividend, or the Dividend Reinvestment Plan, contact: REGULAR MAIL ComputersharePO Box 43006Providence RI 02940-3006STREET ADDRESS FOR OVERNIGHT DELIVERYComputershare150 Royall Street, Suite 101Canton MA 02021312-360-5377 | 877-373-6374www.computershare.com/contactusFORM 10-K A copy of the 2022 Annual Report on Form 10-K with all exhibits filed with the Securities and Exchange Commission (SEC) is available, free of charge, at www.firstmid.com by clicking on “Investor Relations” under “About First Mid.” All periodic and current reports of First Mid Bancshares, Inc. can be accessed through this website as soon as reasonably practicable after these materials are filed with the SEC.A copy may also be obtained by sending a written request to:Mr. Aaron Holt First Mid Bancshares, Inc.1421 Charleston Avenue, PO Box 499Mattoon IL 61938or by email to: aholt@firstmid.comYear-End Market Price of StockFMBH stock price on December 31.$45$40$35$30$25$20$15$10$5$0$42.79$32.08$22.00$18.55$26.00$34.00$38.54$31.92$33.66 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022$35.25This document contains forward looking statements. For a discussion of factors that could cause actual results to differ materially from those contained in such statements, please see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K included herein, and our other filings with the Securities and Exchange Commission.Earnings Per Share (Diluted) and Dividends Per Share ( )$4.00$3.50$3.00$2.50$2.00$1.50$1.00$0.50$0$2.87$1.73$1.85$1.81$2.05$2.13$2.52$2.87$2.70 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022$3.60Year-End Assets (Dollars in Thousands)$7,000,000$6,000,000$5,000,000$4,000,000$3,000,000$2,000,000$1,000,000$0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022First Mid Bancshares, Inc. Assets Trust & Wealth Management Assets Under Management$ 100.00 $ 84.42 $ 95.30 $ 93.60 $ 121.49 $ 93.30$ 100.00 $ 95.62 $ 125.72 $148.85 $191.58 $156.88$ 100.00 $ 85.39 $ 111.10 $ 95.52 $126.19 $108.91* $100 invested on 12/31/17 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Source: S&P Global Market Intelligence © 2023First Mid Bancshares, Inc.S&P 500 IndexS&P U.S. BMI Banks - Midwest Region Index12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22Comparison of Five Year Cumulative Total Return*Among First Mid Bancshares, Inc., the S&P 500 Index, and S&P U.S. BMI Banks - Midwest Region Index12/31/17 12/31/18 12/31/19 12/31/20 12/21/21 12/31/22$200$150$100$ 50JOSEPH R. DIVELY Chairman and Chief Executive OfficerMICHAEL L. TAYLOR Senior Executive Vice President, Chief Operating OfficerMATTHEW K. SMITH Executive Vice President, Chief Financial Officer LAUREL G. ALLENBAUGH Executive Vice President, Chief Operations Officer BRADLEY L. BEESLEY Chief Executive Officer, First Mid Wealth Management Co.CLAY M. DEAN Chief Executive Officer, First Mid Insurance Group, Inc.RHONDA R. GATONS Executive Vice President, Chief Human Resources OfficerHOLLY B. ADAMS Lead Independent DirectorPresident, Howell Asphalt Company President, Howell Paving, Inc.ROBERT S. COOK Managing Partner, TAR CO Investments, LLC JOSEPH R. DIVELY Chairman and Chief Executive Officer, First Mid Bancshares, Inc.STEVEN L. GRISSOM Chief Executive Officer, SKL Investment Group, LLCZACHARY I. HORN President and Founder, Metro Communications Company, Inc.GISELE A. MARCUS Professor of Practice, Olin Business SchoolWashington University in St. LouisJ. KYLE MCCURRY Chair, Nominating and Governance CommitteeChief Operating Officer and General Counsel,Paige Sports EntertainmentMARY J. WESTERHOLD Chair, Audit CommitteeChief Financial Officer, Madison Communications, Inc.JAMES E. ZIMMER Chair, Compensation CommitteeCo-Founder, Moraine Farmland PartnersAMANDA D. LEWIS Executive Vice President, Chief Deposit Services OfficerERIC S. MCRAE Executive Vice President,Chief Lending Officer JASON M. CROWDER Senior Vice President, General CounselDAVID R. HIDEN Senior Vice President, Chief Information OfficerMEGAN E. MCELWEESenior Vice President, Chief Credit OfficerJORDAN D. READ Senior Vice President, Chief Risk OfficerANYA Y. SCHUETZSenior Vice President, Director of Project ManagementExecutive Management TeamBoard of DirectorsANNUAL MEETING OF STOCKHOLDERS The annual meeting of stockholders will be Wednesday, April 26, 2023 at 4:00 p.m. in the lobby of First Mid Bank & Trust, 1515 Charleston Avenue, Mattoon, Illinois.StockholderInformation Corporate
Profile
First Mid Bancshares, Inc. (“First Mid”) is the parent company of
First Mid Bank & Trust, N.A. (“First Mid Bank”), First Mid Wealth
Management Co., and First Mid Insurance Group, Inc.
First Mid is a $6.7 billion community-focused organization that provides a
full-suite of financial services including banking, wealth management, brokerage,
ag services, and insurance through a sizeable network of locations throughout
Illinois, Missouri, and the greater Indianapolis, Indiana and Dallas, Texas
areas. Together, our First Mid team takes great pride in their work and
their ability to serve our customers well over the last 157 years.
More information about First Mid is available on our website at www.firstmid.com.
Our stock is traded in the NASDAQ Stock Market LLC under the ticker symbol “FMBH.”
Focusing on our
STRATEGIC
PRIORITIES
1421 Charleston Avenue | Mattoon IL 61938
www.firstmid.com
2022
Annual Report