FIRST MID BANCSHARES, INC. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ 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	37-1103704
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)

1421 Charleston Avenue
Mattoon, Illinois	61938
(Address of principal executive offices)	(Zip code)

(217) 234-7454

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	FMBH	NASDAQ Global Market

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 ☐		Accelerated filer ☒
Non-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 is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

As of November 4, 2021 18,088,455 common shares, $4.00 par value, were outstanding.

PART I

ITEM 1. FINANCIAL STATEMENTS

First Mid Bancshares, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)	September 30, 2021			December 31, 2020
Assets
Cash and due from banks:
Non-interest bearing	$	107,811		$	75,152
Interest bearing		236,048			340,821
Federal funds sold		1,347			1,308
Cash and cash equivalents		345,206			417,281
Certificates of deposit		2,695			2,695
Investment securities:
Available-for-sale, at fair value		1,346,966			879,240
Held-to-maturity, at amortized cost (estimated fair value of $7,057 and $5,119 at September 30, 2021 and December 31, 2020, respectively)		7,026			5,016
Equity securities, at fair value		348			218
Loans held for sale		1,897			1,924
Loans		3,945,872			3,136,495
Less allowance for credit losses		(53,983	)		(41,910	)
Net loans		3,891,889			3,094,585
Interest receivable		22,057			19,287
Other real estate owned		5,625			2,489
Premises and equipment, net		81,823			58,206
Goodwill		111,853			104,992
Intangible assets, net		30,803			23,128
Bank owned life insurance		131,547			68,955
Right of use lease assets		16,120			17,209
Other assets		47,504			31,123
Total assets	$	6,043,359		$	4,726,348
Liabilities and stockholders’ equity
Deposits:
Non-interest bearing	$	1,242,950		$	936,926
Interest bearing		3,745,612			2,755,858
Total deposits		4,988,562			3,692,784
Securities sold under agreements to repurchase		149,891			206,937
Interest payable		2,569			2,345
FHLB borrowings		112,641			93,969
Junior subordinated debentures, net		19,153			19,027
Subordinated debt, net		94,363			94,253
Lease liabilities		16,315			17,351
Other liabilities		32,640			31,454
Total liabilities		5,416,134			4,158,120
Stockholders’ equity:
Common stock, $4 par value; authorized 30,000,000 shares; issued 18,703,817 and 17,361,898 shares in 2021 and 2020, respectively; outstanding 18,083,126 and 16,741,207 shares in 2021 and 2020 respectively		76,815			71,449
Additional paid-in capital		340,118			297,806
Retained earnings		221,295			197,726
Deferred compensation		2,125			2,980
Accumulated other comprehensive income		5,633			17,095
Less treasury stock at cost, 620,691 shares in 2021 and 2020		(18,761	)		(18,828	)
Total stockholders’ equity		627,225			568,228
Total liabilities and stockholders’ equity	$	6,043,359		$	4,726,348

See accompanying notes to unaudited condensed consolidated financial statements.

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Income (unaudited)

(In thousands, except per share data)

	Three months ended September 30,				Nine months ended September 30,
(In thousands, except per share data)	2021		2020		2021		2020
Interest income:
Interest and fees on loans	$	43,292	$	32,151	$	119,973	$	93,560
Interest on investment securities		5,835		4,074		16,416		12,740
Interest on certificates of deposit investments		14		17		42		69
Interest on federal funds sold		—		1		—		3
Interest on deposits with other financial institutions		122		52		283		199
Total interest income		49,263		36,295		136,714		106,571
Interest expense:
Interest on deposits		2,234		3,168		6,980		10,134
Interest on securities sold under agreements to repurchase		52		68		179		420
Interest on FHLB borrowings		359		395		1,178		1,480
Interest on other borrowings		—		—		—		26
Interest on junior subordinated debentures		137		—		416		—
Interest on subordinated debentures		985		147		2,954		539
Total interest expense		3,767		3,778		11,707		12,599
Net interest income		45,496		32,517		125,007		93,972
Provision for loan losses		1,103		3,883		12,679		15,500
Net interest income after provision for loan losses		44,393		28,634		112,328		78,472
Other income:
Wealth management revenues		4,204		3,468		14,146		10,921
Insurance commissions		3,932		3,291		14,777		14,000
Service charges		1,838		1,446		4,741		4,335
Securities gains, net		11		95		88		913
Mortgage banking income		1,477		1,661		4,577		3,205
ATM / debit card revenue		3,060		2,367		8,900		6,593
Bank owned life insurance		813		434		2,211		1,293
Other		1,024		816		2,952		2,713
Total other income		16,359		13,578		52,392		43,973
Other expense:
Salaries and employee benefits		21,092		15,346		69,487		47,301
Net occupancy and equipment expense		5,382		4,363		15,834		12,746
Net other real estate owned expense		1,507		110		3,551		62
FDIC insurance		268		469		1,198		851
Amortization of intangible assets		1,414		1,277		3,929		3,862
Stationery and supplies		299		262		850		805
Legal and professional		1,878		1,320		4,919		4,207
ATM / debit card		618		730		2,530		1,609
Marketing and donations		679		387		1,688		1,182
Other		3,184		2,663		15,948		8,131
Total other expense		36,321		26,927		119,934		80,756
Income before income taxes		24,431		15,285		44,786		41,689
Income taxes		6,105		3,720		10,130		9,988
Net income	$	18,326	$	11,565	$	34,656	$	31,701
Per share data:
Basic net income per common share	$	1.01	$	0.69	$	1.94	$	1.90
Diluted net income per common share		1.01		0.69		1.94		1.89
Cash dividends declared per common share		0.220		—		0.630		0.400

See accompanying notes to unaudited condensed consolidated financial statements.

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2021			2020			2021			2020
Net income	$	18,326		$	11,565		$	34,656		$	31,701
Other comprehensive income (loss)
Unrealized gains (losses) on available-for-sale securities, net of taxes of $1,282 and $21 for three months ended September 30, 2021 and 2020, respectively and $4,655 and ($3,778) for nine months ended September 30, 2021 and 2020, respectively.		(3,140	)		(52	)		(11,400	)		9,250
Amortized holding losses on held-to-maturity securities transferred from available-for- sale, net of taxes of $0 and ($3) for three months ended September 30, 2021 and 2020, respectively and $0 and ($13) for nine months ended September 30, 2021 and 2020, respectively.		—			8			—			32
Less: reclassification adjustment for realized gains included in net income, net of taxes of $3 and $28 for three months ended September 30, 2021 and 2020, respectively and $26 and $265 for nine months ended September 30, 2021 and 2020, respectively.		(8	)		(67	)		(62	)		(648	)
Other comprehensive income (loss), net of taxes		(3,148	)		(111	)		(11,462	)		8,634
Comprehensive income	$	15,178		$	11,454		$	23,194		$	40,335

See accompanying notes to unaudited condensed consolidated financial statements.

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the three months ended September 30, 2021 and 2020

(In thousands)	Common Stock		Additional Paid-In- Capital			Retained Earnings			Deferred Compensation		Accumulated Other Comprehensive Income			Treasury Stock			Total
June 30, 2021	$	76,797	$	340,452		$	206,934		$	1,742	$	8,781		$	(18,640	)	$	616,066
Net income		—		—			18,326			—		—			—			18,326
Other comprehensive loss, net tax		—		—			—			—		(3,148	)		—			(3,148	)
Cash dividends on common stock (.220/share)		—		—			(3,965	)		—		—			—			(3,965	)
Issuance of 1 common shares pursuant to the dividend reinvestment plan		—		1			—			—		—			—			1
Issuance of 1,952 common shares pursuant to the deferred compensation plan		7		71			—			—		—			—			78
Issuance of 25,000 common shares pursuant to the acquisition of BBM & Associates, Inc., net proceeds		—		—			—			—		—			—			—
Issuance costs pursuant to the acquisition of Delta Bancshares Company		—		(144	)		—			—		—			—			(144	)
Issuance of 2,700 common shares pursuant to the employee stock purchase plan		11		93			—			—		—			—			104
Deferred compensation		—		—			—			121		—			(121	)		—
Tax benefit related to deferred compensation distributions		—		(355	)		—			—		—			—			(355	)
Vested restricted shares/units compensation expense		—		—			—			262		—			—			262
September 30, 2021	$	76,815	$	340,118		$	221,295		$	2,125	$	5,633		$	(18,761	)	$	627,225

June 30, 2020	$	71,370	$	297,392		$	179,435		$	2,364	$	17,105		$	(18,393	)	$	549,273
Net income		—		—			11,565			—		—			—			11,565
Other comprehensive income, net tax		—		—			—			—		(111	)		—			(111	)
Issuance of 3,494 common shares pursuant to the employee stock purchase plan		14		68			—			—		—			—			82
Deferred compensation		—		—			—			70		—			(70	)		—
Vested restricted shares/units compensation expense		—		—			—			200		—			—			200
September 30, 2020	$	71,384	$	297,460		$	191,000		$	2,634	$	16,994		$	(18,463	)	$	561,009

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the nine months ended September 30, 2021

(In thousands)	Common Stock		Additional Paid-In- Capital			Retained Earnings			Deferred Compensation			Accumulated Other Comprehensive Income			Treasury Stock			Total
December 31, 2020	$	71,449	$	297,806		$	197,726		$	2,980		$	17,095		$	(18,828	)	$	568,228
Net income		—		—			34,656			—			—			—			34,656
Other comprehensive loss, net tax		—		—			—			—			(11,462	)		—			(11,462	)
Cash dividends on common stock (.630/share)		—		—			(11,087	)		—			—			—			(11,087	)
Issuance of 8,615 common shares pursuant to the dividend reinvestment plan		32		301			—			—			—			—			333
Issuance of 7,493 common shares pursuant to deferred compensation plan		30		238			—			—			—			—			268
Issuance of 27,750 restricted shares pursuant to the 2017 stock incentive plan		111		831			—			—			—			—			942
Issuance of 2,375 common shares pursuant to the 2017 stock incentive plan		10		75			—			—			—			—			85
Issuance of 1,262,246 common shares pursuant to acquisition of LINCO Bancshares, Inc., net proceeds		5,049		39,142			—			—			—			—			44,191
Issuance of 25,000 common shares pursuant to the acquisition of BBM & Associates, Inc., net proceeds		100		1,009			—			—			—			—			1,109
Issuance costs pursuant to the acquisition of Delta Bancshares Company		—		(144	)		—			—			—			—			(144	)
Issuance of 8,439 common shares pursuant to the employee stock purchase plan		34		228			—			—			—			—			262
Deferred compensation		—		—			—			(67	)		—			67			—
Grant of restricted units pursuant to 2017 stock incentive plan		—		1,216			—			—			—			—			1,216
Release of restricted units pursuant to 2017 stock incentive plan		—		(584	)		—			—			—			—			(584	)
Vested restricted shares/units compensation expense		—		—			—			(788	)		—			—			(788	)
September 30, 2021	$	76,815	$	340,118		$	221,295		$	2,125		$	5,633		$	(18,761	)	$	627,225

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the nine months ended September 30, 2020

(In thousands)	Common Stock		Additional Paid-In- Capital			Retained Earnings			Deferred Compensation			Accumulated Other Comprehensive Income		Treasury Stock			Total
December 31, 2019	$	71,152	$	295,925		$	166,667		$	2,760		$	8,360	$	(18,255	)	$	526,609
Cumulative change in accounting principal for adoption of ASU 2016-13		—		—			(717	)		—			—		—			(717	)
December 31, 2019 (as adjusted for change in accounting principal)		71,152		295,925			165,950			2,760			8,360		(18,255	)		525,892
Net income		—		—			31,701			—			—		—			31,701
Other comprehensive income, net tax		—		—			—			—			8,634		—			8,634
Cash dividends on common stock (.40/share)		—		—			(6,651	)		—			—		—			(6,651	)
Issuance of 13,804 common shares pursuant to the dividend reinvestment plan		54		282			—			—			—		—			336
Issuance of 8,163 common shares pursuant to deferred compensation plan		33		195			—			—			—		—			228
Issuance of 25,200 restricted shares pursuant to the 2017 stock incentive plan		101		767			—			—			—		—			868
Issuance of 11,037 common shares pursuant to the employee stock purchase plan		44		201			—			—			—		—			245
Deferred compensation		—		—			—			208			—		(208	)		—
Tax benefit related to deferred compensation distributions		—		22			—			—			—		—			22
Grant of restricted units pursuant to 2017 stock incentive plan		—		584			—			—			—		—			584
Release of restricted units pursuant to 2017 stock incentive plan		—		(516	)		—			—			—		—			(516	)
Vested restricted shares/units compensation expense		—		—			—			(334	)		—		—			(334	)
September 30, 2020	$	71,384	$	297,460		$	191,000		$	2,634		$	16,994	$	(18,463	)	$	561,009

See accompanying notes to unaudited condensed consolidated financial statements.

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Nine months ended September 30,
(In thousands)	2021			2020
Cash flows from operating activities:
Net income	$	34,656		$	31,701
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		12,679			15,500
Depreciation, amortization and accretion, net		10,131			8,795
Change in cash surrender value of bank owned life insurance		(2,211	)		(1,293	)
Stock-based compensation expense		786			604
Operating lease payments		(2,161	)		(2,092	)
Gain on investment securities, net		(88	)		(913	)
(Gain) loss on sales and write downs of other real estate owned, net		6,870			(427	)
Gain on sale of other assets		(154	)		(26	)
Gain on sale of loans held for sale, net		(3,426	)		(3,484	)
(Increase) decrease in accrued interest receivable		195			(4,651	)
Decrease in accrued interest payable		(519	)		(237	)
Origination of loans held for sale		(113,630	)		(144,814	)
Proceeds from sale of loans held for sale		117,083			145,716
Increase in other investment		(442	)		(101	)
Increase in other assets		(18,326	)		(5,735	)
Increase (decrease) in other liabilities		5,236			(5,479	)
Net cash provided by operating activities		46,679			33,064
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments		245			2,910
Purchases of certificates of deposit investments		(245	)		(980	)
Proceeds from sales of securities available-for-sale		611			3,417
Proceeds from maturities of securities available-for-sale		182,803			292,091
Proceeds from maturities of securities held-to-maturity		—			15,000
Purchases of securities available-for-sale		(552,294	)		(291,282	)
Net (increase) decrease in loans		16,683			(539,867	)
Purchases of premises and equipment		(2,367	)		(2,688	)
Proceeds from sales of other real property owned		8,602			1,777
Investment in banked owned life insurance		(30,000	)		—
Net cash provided by acquisition		27,061			—
Net cash used in investing activities		(348,901	)		(519,622	)
Cash flows from financing activities:
Net increase in deposits		305,368			702,470
Decrease in federal funds purchased		—			(5,000	)
Decrease in repurchase agreements		(57,046	)		(37,764	)
Proceeds from FHLB advances		5,000			19,000
Repayment of FHLB advances		(14,000	)		(39,000	)
Proceeds from short-term debt		—			5,000
Repayment of short-term debt		—			(5,000	)
Proceeds from issuance of common stock		1,724			473
Direct expenses related to capital transactions		(144	)		—
Dividends paid on common stock		(10,755	)		(6,316	)
Net cash provided by financing activities		230,147			633,863
Increase (decrease) in cash and cash equivalents		(72,075	)		147,305
Cash and cash equivalents at beginning of period		417,281			85,080
Cash and cash equivalents at end of period	$	345,206		$	232,385

See accompanying notes to unaudited condensed consolidated financial statements.

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Nine months ended September 30,
(In thousands)	2021		2020
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	11,483	$	13,022
Income taxes		14,306		18,624
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate		237		214
Dividends reinvested in common stock		333		336
Net tax benefit related to option and deferred compensation plans		—		22
Fair value of assets acquired	$	1,170,699
Consideration paid:
Cash paid		103,500
Common stock issued		44,191
Total consideration paid		147,691
Fair value of liabilities assumed	$	1,023,008

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 -- Basis of Accounting and Consolidation

The unaudited condensed consolidated financial statements include the accounts of First Mid Bancshares, Inc. (“Company”) formerly known as First Mid-Illinois Bancshares, Inc., 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. The Company’s wholly owned subsidiary, Providence Bank, was merged into First Mid Bank on May 15, 2021. All significant intercompany balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended September 30, 2021 and 2020, and all such adjustments are of a normal recurring nature. Certain amounts in the prior year’s consolidated financial statements may have been reclassified to conform to the September 30, 2021 presentation and there was no impact on net income or stockholders’ equity. The results of the interim period ended September 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021. The Company operates as a one-segment entity for financial reporting purposes. The 2020 year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and related footnote disclosures although the Company believes that the disclosures made are adequate to make the information not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on Form 10-K.

COVID-19

The COVID-19 outbreak is an unprecedented event that provides significant economic uncertainty for a broad spectrum of industries. The Company is focused on supporting its customers, communities and employees during this unique operating environment. Throughout this document, the Company describes the impact COVID-19 is having, actions taken as a result of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation.

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 (“Merger Sub”), entered into an Agreement and Plan of Merger (the “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 “Merger”).

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $10.00 per share, of Delta issued and outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by Delta) will be converted into and become 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 payable by the Company at the closing of the Merger to Delta’s shareholders and option holders is approximately $15.2 million in cash and 2,282,511 shares of Company common stock. Delta’s outstanding stock options will fully vest upon consummation of the Merger, and all outstanding Delta options that are unexercised prior to the effective time of the Merger will be cashed out.

It is anticipated that Delta’s wholly owned bank subsidiary, Jefferson Bank and Trust Company (“Jefferson Bank”), will be merged with and into First Mid Bank at a date following completion of the Merger. At the time of the bank merger, Jefferson Bank’s banking offices will become branches of First Mid Bank. As of September 30, 2021, Jefferson Bank had total consolidated assets of approximately $668 million, loans of approximately, $448 million and total deposits of approximately $511 million.

The Merger is anticipated to be completed in the fourth quarter of 2021 and is subject to the approval of the appropriate regulatory authorities and the shareholders of Delta. The shareholders of Delta voted in favor of the Merger on October 28, 2021.

Subordinated Debt Offering

On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”).

The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the Company and the Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes are unsecured, subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding October 15, 2025, the Notes will bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 383 basis points, or such other rate as determined pursuant to the Supplemental Indenture, provided that in no event shall the applicable floating interest rate be less than zero per annum.

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.

Website

The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission (“SEC”) can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC.

General Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.

2020 Loan Purchase

On April 21, 2020, First Mid Bank completed an acquisition of loans in the St. Louis Metro market totaling $183,000,000. There were no loans purchased with deteriorated credit. First Mid Bank also assumed $60,000,000 of related customer deposits

2021 Loan Purchase

On September 10, 2021, First Mid Bank completed an acquisition of loans in the St. Louis Metro market totaling $208,000,000. There were no loans purchased with deteriorated credit. First Mid Bank also assumed $215,000,000 of related customer deposits and recorded a core deposit intangible asset of approximately $4,848,000 that is being amortized on an accelerated basis over ten years.

Stock Plans

At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the First Mid-Illinois Bancshares, Inc. 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.

Following the stockholders’ approval at the 2021 annual meeting of the Company, a maximum of 399,983 shares of common stock may be issued under the SI Plan. There have been no stock options awarded under any Company plan since 2008. The Company has awarded 27,750 and 25,200 shares of restricted stock during 2021 and 2020, respectively, and 35,400 and 16,950 restricted stock units during 2021 and 2020, respectively.

Employee Stock Purchase Plan

At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code.

A maximum of 600,000 shares of common stock may be issued under the ESPP. As of September 30, 2021 and 2020, 8,439 shares and 11,037 shares, respectively, were issued pursuant to the ESPP.

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 operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today's insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,300,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company's consolidated financial statements and its federal income return.

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.

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 subsidiary, First Mid Wealth Management Company. Fees are billed in arrears based upon the preceding period account balance. Revenue from farm management services is recorded when the service is complete, for example when crops are sold.

Brokerage commissions. Revenue is recorded at the beginning of each quarter through billing to customers based on the account asset size on the last day of the previous quarter. If a withdrawal of funds takes place, a prorated refund may occur; this is reflected within the same quarter as the original billing occurred. All performance obligations are met within the same quarter that the revenue is recorded.

Insurance commissions. The Company’s insurance agency subsidiary, First Mid Insurance, receives commissions on premiums of new and renewed business policies. First Mid Insurance records commission revenue on direct bill policies as the cash is received. For agency bill policies, First Mid Insurance retains its commission portion of the customer premium payment and remits the balance to the carrier. In both cases, the entire performance obligation is held by the carriers.

Service charges on deposits. The Company generates revenue from fees charged for deposit account maintenance, overdrafts, wire transfers, and check fees. The revenue related to deposit fees is recognized at the time the performance obligation is satisfied.

ATM/debit card revenue. The Company generates revenue through service charges on the use of its ATM machines and interchange income from the use of Company issued credit and debit cards. The revenue is recognized at the time the service is used and the performance obligation is satisfied.

Other income. Treasury management fees and lock box fees are received and recorded after the service performance obligation is completed. Merchant bank card fees are received from various vendors; however, the performance obligation is with the vendors. The Company records gains on the sale of loans and the sale of OREO properties after the transactions are complete and transfer of ownership has occurred.

As each of the Company’s facilities is in markets with similar economies, no disaggregation of revenue is necessary.

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income included in stockholders’ equity as of September 30, 2021 and December 31, 2020 are as follows (in thousands):

	Unrealized Gain (Loss) on Securities
September 30, 2021
Net unrealized gains on securities available-for-sale	$	7,934
Tax expense		(2,301	)
Balance at September 30, 2021	$	5,633

December 31, 2020
Net unrealized gains on securities available-for-sale	$	24,077
Tax expense		(6,982	)
Balance at December 31, 2020	$	17,095

Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the three and nine months ended September 30, 2021 and 2020, were as follows (in thousands):

	Amounts Reclassified from Other Comprehensive Income
	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020			Affected Line Item in the Statements of Income
Realized gains on available-for-sale securities	$	11		$	95		$	88		$	913		Securities gains, net
Tax effect		(3	)		(28	)		(26	)		(265	)	Income taxes
Total reclassifications out of accumulated other comprehensive income	$	8		$	67		$	62		$	648		Net reclassified amount

See “Note 3 – Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities.

Adoption of New Accounting Guidance

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 revises disclosure requirements, it did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”). In June 2016, FASB issued ASU 2016-13. The provisions of ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for sale debt securities. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

Management formed an internal, cross functional committee in 2017 to evaluate implementation steps and assess the impact ASU 2016-13 would have on the Company’s consolidated financial statements. The committee assigned roles and responsibilities, key tasks to complete, and established a general time-line for implementation. The Company also engaged an outside consultant to assist with the methodology review and data validation, as well as other key aspects of implementing the standard. The committee met periodically to discuss the latest developments and ensure progress was being made. In addition, the committee kept current on evolving interpretations and industry practices related to ASU 2016-13. The committee evaluated and validated data resources and different loss methodologies. Key implementation activities for 2019 included finalization of models, establishing processes and controls, development of supporting analytics and documentation, policies and disclosure, and implementing parallel processing.

The Company adopted ASU 2016-13 using the modified retrospective method for financial assets measured at amortized cost-effective January 1, 2020. Results for the periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of approximately $717,000 upon adoption of ASU 2016-13. The transition adjustment included an increase to the allowance for credit losses on loans of $1.7 million and an increase to the allowance for credit losses on off-balance sheet credit exposure of $69,000. There was no allowance for credit losses recorded for held-to- maturity debt securities. The transition adjustment included corresponding increases in deferred tax assets.

The Company adopted ASU 2016-13 using the prospective transition approach for financial assets considered purchased credit deteriorated ("PCD") that were previously classified as purchase credit impaired ("PCI") and accounted for under ASC 310-30 effective January 1, 2020. In accordance with the standard, the Company did not reassess whether the PCI assets met the criteria of PCD assets as of the adoption date. The amortized cost of the PCD assets were adjusted to reflect the addition of $833,000 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost) will be accreted into interest income at the effective interest rate over the remaining life of the assets.

The following table illustrates the impact of ASU 2016-13 adoption (in thousands):

	January 1, 2020
	As reported		Pre-ASU		Impact of ASU
	under ASU		2016-13		2016-13
	2016-13		Adoption		Adoption
Assets:
Construction and land development	$	1,033	$	1,146	$	(113	)
Agricultural real estate		1,323		1,093		230
1-4 family residential properties		2,142		1,386		756
Commercial real estate		11,739		11,198		541
Agricultural		1,023		1,386		(363	)
Commercial and industrial		9,428		9,273		155
Consumer		1,895		1,429		466
Allowance for credit losses for all loans	$	28,583	$	26,911	$	1,672
Liabilities:
Allowance for credit losses on off-balance sheet exposures	$	69	$	—	$	69

The following table illustrates the impact of ASU 2013-13 adoption for PCD assets previously classified as PCI included in the table above (in thousands):

	January 1, 2020
	As reported		Pre-ASU		Impact of ASU
	under ASU		2016-13		2016-13
	2016-13		Adoption		Adoption
Construction and land development	$	291	$	—	$	291
1-4 family residential properties		48		6		42
Commercial real estate		818		359		459
Commercial and industrial		41		—		41
Allowance for credit losses for PCD loans	$	1,198	$	365	$	833

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 Company’s stock options, unless anti-dilutive.

The components of basic and diluted net income per common share available to common stockholders for the three and nine months ended September 30, 2021 and 2020 were as follows:

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Basic net income per common share
Available to common stockholders:
Net income	$	18,326,000	$	11,565,000	$	34,656,000	$	31,701,000
Weighted average common shares outstanding		18,083,126		16,728,191		17,819,619		16,710,485
Basic earnings per common share	$	1.01	$	0.69	$	1.94	$	1.90

Diluted net income per common share
Available to common stockholders:
Net income applicable to diluted earnings per share	$	18,326,000	$	11,565,000	$	34,656,000	$	31,701,000
Weighted average common shares outstanding		18,083,126		16,728,191		17,819,619		16,710,485
Dilutive potential common shares: restricted stock awarded		53,020		46,908		53,020		46,908
Diluted weighted average common shares outstanding		18,136,146		16,775,099		17,872,639		16,757,393
Diluted earnings per common share	$	1.01	$	0.69	$	1.94	$	1.89

There were no shares excluded when computing diluted earnings per share for the three and nine months ended September 30, 2021 and 2020 because they were anti-dilutive.

Note 3 -- 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 September 30, 2021 and December 31, 2020 were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
September 30, 2021
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	194,162	$	308	$	(2,786	)	$	191,684
Obligations of states and political subdivisions		328,394		11,310		(960	)		338,744
Mortgage-backed securities: GSE residential		783,400		6,300		(7,085	)		782,615
Other securities		33,076		883		(36	)		33,923
Total available-for-sale	$	1,339,032	$	18,801	$	(10,867	)	$	1,346,966
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	5,004	$	31	$	—		$	5,035
Other securities		2,022		—		—			2,022
Total held-to-maturity	$	7,026	$	31	$	—		$	7,057
December 31, 2020
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	127,067	$	790	$	(788	)	$	127,069
Obligations of states and political subdivisions		237,886		11,995		(37	)		249,844
Mortgage-backed securities: GSE residential		479,470		12,038		(160	)		491,348
Other securities		10,740		252		(13	)		10,979
Total available-for-sale	$	855,163	$	25,075	$	(998	)	$	879,240
Held-to-maturity:
U.S. Treasury securities and obligations of U.S government corporations and agencies	$	5,016	$	103	$	—		$	5,119

The Company also had $348,000 and $218,000 of equity securities, at fair value, as of September 30, 2021 and December 31, 2020, respectively. The Company's held-to-maturity securities are government agency-backed securities for which the risk of loss is minimal. As such, as of September 30, 2021, the Company did not record an allowance for credit losses on its held-to-maturity securities.

Realized gains and losses resulting from sales of securities were as follows during the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Three months September 30,					Nine months September 30,
	2021		2020			2021		2020
Gross gains	$	11	$	116		$	88	$	934
Gross losses		—		(21	)		—		(21	)

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 September 30, 2021 and the weighted average yield for each range of maturities (dollars in thousands):

	One year or less			After 1 through 5 years			After 5 through 10 years			After ten years			Total
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	116,855		$	63,561		$	11,268		$	—		$	191,684
Obligations of state and political subdivisions		24,335			82,566			224,078			7,765			338,744
Mortgage-backed securities: GSE residential		17,950			410,157			354,508			—			782,615
Other securities		6,055			24,860			3,008			—			33,923
Total available-for-sale investments	$	165,195		$	581,144		$	592,862		$	7,765		$	1,346,966
Weighted average yield		1.61	%		1.95	%		1.68	%		2.43	%		1.79	%
Full tax-equivalent yield		1.78	%		2.10	%		1.94	%		3.16	%		2.00	%
Held to maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	5,004		$	—		$	—		$	—		$	5,004
Other securities		—									2,022			2,022
Total held-to-maturity	$	5,004		$	—		$	—		$	2,022		$	7,026
Weighted average yield		2.06	%		—	%		—	%		—	%		2.06	%
Full tax-equivalent yield		2.06	%		—	%		—	%		—	%		2.06	%

The weighted average yields are calculated based on 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 September 30, 2021.

Investment securities carried at approximately $740 million and $531 million at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

The following table presents the aging of gross unrealized losses and fair value by investment category as of September 30, 2021 and December 31, 2020 (in thousands):

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2021
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	145,432	$	(2,435	)	$	9,649	$	(351	)	$	155,081	$	(2,786	)
Obligations of states and political subdivisions		87,767		(960	)		—		—			87,767		(960	)
Mortgage-backed securities: GSE residential		508,332		(7,084	)		93		(1	)		508,425		(7,085	)
Other securities		11,057		(36	)		—		—			11,057		(36	)
Total	$	752,588	$	(10,515	)	$	9,742	$	(352	)	$	762,330	$	(10,867	)
December 31, 2020
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	59,211	$	(788	)	$	—	$	—		$	59,211	$	(788	)
Obligations of states and political subdivisions		5,380		(37	)		—		—			5,380		(37	)
Mortgage-backed securities: GSE residential		57,609		(160	)		2,377		—			59,986		(160	)
Other securities		3,977		(13	)		—		—			3,977		(13	)
Total	$	126,177	$	(998	)	$	2,377	$	—		$	128,554	$	(998	)

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At September 30, 2021 and December 31, 2020, there was one available-for-sale security with a fair value of $9,649,000 and unrealized losses of $351,000 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.

Obligations of states and political subdivisions. At September 30, 2021, there were no obligations of states and political subdivisions in a continuous loss position for twelve months or more.

Mortgage-backed Securities: GSE Residential. At September 30, 2021, there were eleven mortgage-backed securities with a fair value of $93,000 and unrealized losses of $1,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2020 there were two mortgage-backed securities with a fair value of $2,377,000 and unrealized losses of $0 in a continuous unrealized loss position for twelve months or more.

Other securities. At September 30, 2021, and December 31, 2020, there were no other securities in a continuous unrealized loss position for twelve months or more.

The Company does not believe any unrealized losses as of September 30, 2021 represents other than temporary impairment ("OTTI"). However, given the uncertainty of the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced, and the resulting loss recognized in the period the other-than-temporary impairment is identified.

Note 4 – Loans and Allowance for Credit Losses

Loans are stated at amortized cost net of an allowance for credit losses. Amortized cost is the unpaid principal net of unearned premiums and discounts, and net deferred origination fees and costs. Deferred loan origination fees are reduced by loan origination costs and are 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 September 30, 2021 and December 31, 2020 follows (in thousands):

	September 30, 2021		December 31, 2020
Construction and land development	$	179,792	$	122,853
Agricultural real estate		278,432		254,662
1-4 family residential properties		412,320		325,480
Multifamily residential properties		306,966		189,265
Commercial real estate		1,583,583		1,176,290
Loans secured by real estate		2,761,093		2,068,550
Agricultural loans		126,473		137,333
Commercial and industrial loans		839,630		741,819
Consumer loans		80,779		78,023
All other loans		143,724		118,196
Total gross loans		3,951,699		3,143,921
Less: loans held for sale		1,897		1,924
		3,949,802		3,141,997
Less:
Net deferred loan fees, premiums and discounts		3,930		5,502
Allowance for credit losses		53,983		41,910
Net loans	$	3,891,889	$	3,094,585

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 $16.5 million and $15.9 million at September 30, 2021 and December 31, 2020, respectively.

Most of the Company’s business activities are with customers located near the Company's branch locations in Illinois, Missouri, and Texas. At September 30, 2021, the Company’s loan portfolio included $405.3 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $285.2 million was concentrated in corn and other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $13.6 million from $391.7 million at December 31, 2020 due to seasonal timing of cash flow requirements. Loans concentrated in corn and other grain farming decreased $23.0 million from $308.2 million at December 31, 2020. The Company's underwriting practices include 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 $121.2 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 $637.5 million of loans to lessors of non-residential buildings, and $509.8 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 and most borrowers are below regulatory thresholds. The Company can occasionally have outstanding balances to one borrower up to but not exceeding the regulatory threshold should underwriting guidelines warrant. Most of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

The Company’s lending can be summarized into the following primary areas:

Commercial Real Estate Loans. Commercial real estate loans are generally comprised of loans to small business entities to purchase or expand structures in which the business operations are housed, loans to owners of real estate who lease space to non-related commercial entities, loans for construction and land development, loans to hotel operators, and loans to owners of multi-family residential structures, such as apartment buildings. Commercial real estate loans are underwritten based on historical and projected cash flows of the borrower and secondarily on the underlying real estate pledged as collateral on the debt. For the various types of commercial real estate loans, minimum criteria have been established within the Company’s loan policy regarding debt service coverage while maximum limits on loan-to-value and amortization periods have been defined. Maximum loan-to-value ratios range from 65% to 80% depending upon the type of real estate collateral, while the desired minimum debt coverage ratio is 1.20x. Amortization periods for commercial real estate loans are generally limited to twenty or twenty five years, depending on the loan-to-value. The Company’s commercial real estate portfolio is 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 most 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. 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 individually evaluated loans separately from non-individually evaluated loans.

Individually Evaluated Loans

The Company individually evaluates certain loans for impairment. In general, these loans have been internally identified via the Company’s loan grading system as credits requiring management’s attention due to underlying problems in the borrower’s business or collateral concerns. This evaluation considers expected future cash flows, the value of collateral and other factors that may impact the borrower’s ability to make payments when due. For loans greater than $250,000, impairment is individually measured each quarter using one of three alternatives: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price, if available; or (3) the fair value of the collateral less costs to sell for collateral dependent loans and loans for which foreclosure is deemed to be probable. A specific allowance is assigned when expected cash flows or collateral are less than the carrying amount of the loan. The carrying value of the loan reflects reductions from prior charge-offs.

Non-Individually Evaluated Loans

Non-individually evaluated loans comprise the vast majority of the Company’s total loan portfolio and include loans in accrual status and those credits not identified as troubled debt restructurings. A small portion of these loans are considered “criticized” due to the risk rating assigned reflecting elevated credit risk due to characteristics, such as a strained cash flow position, associated with the individual borrowers. Criticized loans are those assigned risk ratings of Special Mention, Substandard, or Doubtful.

Beginning January 1, 2020, the allowance for credit losses was estimated using the current expected credit loss model ("CECL"). The Company uses the Loss Rate method to estimate the historical loss rate for all non-individually evaluated loans. Under this method, the allowance for credit losses is measured on a collective (pool) basis for non-individually evaluated 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-individually evaluated loans. Other COVID-19 related impacts considered included revenue losses of businesses required to restrict or cease services, income loss to workers laid off as a result of COVID-19 restrictions, various federal and state government stimulus programs and additional deferral programs offered by First Mid Bank beginning in April 2020. Other events considered include the status of trade agreements with China, scheduled increases in minimum wage and changes to the minimum salary threshold for overtime provisions, current and projected unemployment rates, current and projected grain and oil prices and economies of local markets where customers work and operate.

Within each pool, risk elements are evaluated that have specific impacts to the borrowers within the pool. These, along with the general risks and events, and the specific lending policies and procedures by loan type described above, are analyzed to estimate the qualitative factors used to adjust the historical loss rates.

During the current period, the following assumptions and factors were considered when determining the historical loss rate and any potential adjustments by loan pool.

Construction and Land Development Loans. The average life of the construction and land development segment was determined to be twelve months. Historical losses in this segment remained very low. Current activity in this industry was deemed essential and has continued during COVID-19. While staffing shortages and supply chain disruptions cause risk in this segment, most projects are associated with financially strong borrowers. The qualitative factor for this segment was decreased slightly.

Agricultural Real Estate Loans. The average life of the agricultural real estate segment was determined to be thirty-six months. Historical losses in the segment remain very low. Farmland values have remained steady over an extended period of time and there are no indications that this will change in the next year. There was a slight decrease to the qualitative factor for this segment.

1- 4 Family Residential Properties Loans. The average life of the 1-4 Family Residential segment was determined to be: Residential Real Estate-non-owner occupied, sixty months; Residential Real Estate-owner occupied, sixty months; Home Equity lines of credit, thirty months. COVID-19 has impacted the finances of consumers from layoffs and furloughs resulting from employers that must reduce or suspend operations. Increased risk in this segment includes consumer ability to make mortgage and rent payments. Some of this impact has been offset by governmental actions such as stimulus payments and extended unemployment benefits. First Mid Bank also offered short-term loan payment deferral to borrowers in this segment. The qualitative factors on both non-owner occupied and owner-occupied loans for this segment were decreased slightly.

Commercial Real Estate Loans. The average life of the commercial real estate segment was determined to be thirty-six months. This segment includes the Company's majority of exposure to the hotel industry which has been significantly impacted by COVID-19 events. Other impacted industries in this segment include restaurants and retail establishments. First Mid Bank has implemented deferral programs for borrowers in this segment in order to ease the impact to these borrowers. The qualitative factors on both non-owner occupied and owner-occupied loans for this segment were decreased slightly.

Agricultural Loans. The average life of the agricultural segment was determined to be eighteen months. Losses in this segment are very low and it is believed that borrowers in this segment will benefit from current governmental programs such as PPP and MFP. Many farmers are holding grain from the 2019 operating season and should be able to take advantage of an increase in prices. The qualitative factor of this segment was decreased slightly.

Commercial and Industrial Loans. The average life of the commercial and industrial segment was determined to be twenty-four months. The COVID-19 impacts include forced closures and scaled-back services for many industries within this segment including retailers, restaurants, and video gaming establishments. Some of this risk is offset by government relief programs as well as, First Mid Bank's payment deferral program. The qualitative factor for this segment was decreased slightly.

Consumer Loans. The average life of the consumer segment was determined to be thirty-six months. The financial status of many borrowers has been impacted by COVID-19 events including layoffs and reduced hours. Some of this impact has been offset by government stimulus programs, increased paid leave and increased and extended unemployment benefits, however these benefits are now expiring. Additionally, First Mid Bank has offered a short-term payment deferral program. The qualitative factor for this segment was decreased slightly.

Acquired Loans. Prior to January 1, 2020 loans acquired with evidence of credit deterioration since origination and for which it was probable that all contractually required payments would not be collected were considered purchased credit impaired at the time of acquisition. Purchase credit-impaired ("PCI") loans were accounted for under ASC 310-30, Receivables--Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), and were initially measured at fair value, which included the estimated future credit losses expected to be incurred over the life of the loan.

Accordingly, an allowance for credit losses related to these loans was not carried over and recorded at the acquisition date. The cash flows expected to be collected were estimated using current key assumptions, such as default rates, value of underlying collateral, severity and prepayment speeds.

Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date. Accordingly, on January 1, 2020, the amortized cost basis of the PCD loans were adjusted to reflect the addition of $833,000 to the allowance for credit losses.

For acquired loans not deemed purchased credit deteriorated at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit loss expense. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.

The following table presents the activity in the allowance for credit losses based on portfolio segment for the three and nine months ended September 30, 2021 (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
Three months ended September 30, 2021
Beginning balance	$	1,795	$	1,665		$	2,570	$	25,664		$	906		$	19,842	$	2,155	$	54,597
Provision for credit loss expense		314		(408	)		27		(52	)		(90	)		342		970		1,103
Loans charged off		—		—			45		55			—			1,600		376		2,076
Recoveries collected		—		—			108		23			—			24		204		359
Ending balance	$	2,109	$	1,257		$	2,660	$	25,580		$	816		$	18,608	$	2,953	$	53,983

Nine months ended September 30, 2021
Beginning balance	$	1,666	$	1,084		$	2,322	$	19,660		$	1,526		$	13,485	$	2,167	$	41,910
Initial allowance on loans purchased with credit deterioration		261		44			328		646			—			795		—		2,074
Provision for credit loss expense		205		129			117		5,764			(711	)		5,950		1,225		12,679
Loans charged off		23		—			241		535			—			1,686		1,008		3,493
Recoveries collected		—		—			134		45			1			64		569		813
Ending balance	$	2,109	$	1,257		$	2,660	$	25,580		$	816		$	18,608	$	2,953	$	53,983

The following tables present the activity in the allowance for credit losses based on portfolio segment for the three and nine months ended September 30, 2020 and for the year ended December 31, 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
Three months ended September 30, 2020
Beginning balance (prior to adoption of ASC 326)	$	2,358		$	1,634		$	2,486		$	16,272	$	1,323		$	12,360	$	1,948	$	38,381
Provision for credit loss expense		(139	)		32			(71	)		2,463		(89	)		1,352		335		3,883
Loans charged off		13			—			48			—		—			368		127		556
Recoveries collected		—			—			24			73		—			28		82		207
Ending balance	$	2,206		$	1,666		$	2,391		$	18,808	$	1,234		$	13,372	$	2,238	$	41,915

Nine months ended September 30, 2020
Beginning balance (prior to adoption of ASC 326)	$	1,146		$	1,093		$	1,386		$	11,198	$	1,386		$	9,273	$	1,429	$	26,911
Impact of adopting ASC 326		(113	)		230			756			541		(363	)		155		466		1,672
Provision for credit loss expense		1,186			343			335			7,542		211			5,453		430		15,500
Loans charged off		13			—			313			551		—			1,651		414		2,942
Recoveries collected		—			—			227			78		—			142		327		774
Ending balance	$	2,206		$	1,666		$	2,391		$	18,808	$	1,234		$	13,372	$	2,238	$	41,915

Twelve months ended December 31, 2020
Beginning balance (prior to adoption of ASC 326)	$	1,146		$	1,093		$	1,386		$	11,198	$	1,386		$	9,273	$	1,429	$	26,911
Impact of adopting ASC 326		(113	)		230			756			541		(363	)		155		466		1,672
Provision for credit loss expense		646			(239	)		274			8,581		503			5,869		469		16,103
Loans charged off		13			—			393			829		—			1,991		618		3,844
Recoveries collected		—			—			299			169		—			179		421		1,068
Ending balance	$	1,666		$	1,084		$	2,322		$	19,660	$	1,526		$	13,485	$	2,167	$	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 individually evaluated loans that are considered solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

The following table presents the amortized cost basis of collateral-dependent loans by class of loans that were individually evaluated to determine expected credit losses, and the related allowance for credit losses, as of September 30, 2021 (in thousands):

	Collateral								Allowance
	Real Estate		Business Assets		Other		Total		for Credit Losses
Construction and land development	$	1,407	$	—	$	—	$	1,407	$	233
1-4 family residential properties		5,438		—		—		5,438		245
Multifamily residential properties		1,805		—		—		1,805		—
Commercial real estate		10,830		—		—		10,830		864
Loans secured by real estate		19,480		—		—		19,480		1,342
Commercial and industrial loans		—		2,146		1,067		3,213		1,190
Consumer loans		—		—		10	10			—
Other loans		—		24		—		24		—
Total loans	$	19,480	$	2,170	$	1,077	$	22,727	$	2,532

Credit Quality

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, collateral support, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Company uses the following definitions for risk ratings which are commensurate with a loan considered “criticized”:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current sound-worthiness and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing factors, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered pass rated loans.

The following tables present the credit risk profile of the Company’s loan portfolio on amortized cost basis based on risk rating category and year of origination as of September 30, 2021 (in thousands):

	Term Loans by Origination Year												Revolving
Risk rating	2021		2020		2019		2018		2017		Prior		Loans		Total
September 30, 2021
Construction and land development loans
Pass	$	33,540	$	68,429	$	26,623	$	34,739	$	3,841	$	11,328	$	—	$	178,500
Special mention		112		—		—		—		—		—		—		112
Substandard		—		—		—		915		—		534		—		1,449
Total	$	33,652	$	68,429	$	26,623	$	35,654	$	3,841	$	11,862	$	—	$	180,061
Agricultural real estate loans
Pass	$	62,342	$	65,820	$	30,303	$	36,823	$	13,095	$	57,580	$	—	$	265,963
Special mention		825		259		4,184		417		388		6,010		—		12,083
Substandard		—		—		265		189		57		231		—		742
Total	$	63,167	$	66,079	$	34,752	$	37,429	$	13,540	$	63,821	$	—	$	278,788
1-4 family residential property loans
Pass	$	73,424	$	101,161	$	36,828	$	48,656	$	33,013	$	52,995	$	42,664	$	388,741
Special mention		80		149		1,952		505		2,628		1,054		56		6,424
Substandard		178		570		1,556		1,688		3,662		8,758		988		17,400
Total	$	73,682	$	101,880	$	40,336	$	50,849	$	39,303	$	62,807	$	43,708	$	412,565
Commercial real estate loans
Pass	$	357,285	$	445,335	$	310,825	$	180,042	$	161,629	$	376,631	$	—	$	1,831,747
Special mention		3,369		886		1,198		1,418		10,726		15,251		—		32,848
Substandard		2,380		736		6,525		1,811		4,716		9,403		—		25,571
Total	$	363,034	$	446,957	$	318,548	$	183,271	$	177,071	$	401,285	$	—	$	1,890,166
Agricultural loans
Pass	$	75,148	$	19,930	$	5,582	$	3,653	$	1,074	$	1,480	$	—	$	106,867
Special mention		15,568		436		2,957		155		160		65		—		19,341
Substandard		27		18		—		—		—		281		—		326
Total	$	90,743	$	20,384	$	8,539	$	3,808	$	1,234	$	1,826	$	—	$	126,534
Commercial and industrial loans
Pass	$	152,729	$	184,801	$	166,553	$	77,324	$	3,402	$	384,318	$	—	$	969,127
Special mention		844		542		1,725		568		416		1,155		—		5,250
Substandard		428		711		448		1,588		71		1,968		—		5,214
Total	$	154,001	$	186,054	$	168,726	$	79,480	$	3,889	$	387,441	$	—	$	979,591
Consumer loans
Pass	$	20,854	$	21,547	$	27,317	$	6,633	$	2,640	$	492	$	—	$	79,483
Special mention		21		78		55		10		—		—		—		164
Substandard		98		17		75		51		30		146		—		417
Total	$	20,973	$	21,642	$	27,447	$	6,694	$	2,670	$	638	$	—	$	80,064
Total loans
Pass	$	775,322	$	907,023	$	604,031	$	387,870	$	218,694	$	884,824	$	42,664	$	3,820,428
Special mention		20,819		2,350		12,071		3,073		14,318		23,535		56		76,222
Substandard		3,111		2,052		8,869		6,242		8,536		21,321		988		51,119
Total	$	799,252	$	911,425	$	624,971	$	397,185	$	241,548	$	929,680	$	43,708	$	3,947,769

The following tables present the credit risk profile of the Company’s loan portfolio based on risk rating category as of December 31, 2020 (in thousands):

	Term Loans by Origination Year												Revolving
Risk rating	2020		2019		2018		2017		2016		Prior		Loans		Total
December 31, 2020
Construction and land development loans
Pass	$	41,842	$	40,989	$	31,500	$	2,760	$	871	$	3,822	$	—	$	121,784
Special mention		—		—		—		—		—		—		—		—
Substandard		—		128		—		517		—		50		—		695
Total	$	41,842	$	41,117	$	31,500	$	3,277	$	871	$	3,872	$	—	$	122,479
Agricultural real estate loans
Pass	$	73,630	$	34,412	$	37,839	$	16,138	$	13,559	$	58,291	$	—	$	233,869
Special mention		1,845		3,970		533		469		1,106		11,232		—		19,155
Substandard		—		—		800		208		64		245		—		1,317
Total	$	75,475	$	38,382	$	39,172	$	16,815	$	14,729	$	69,768	$	—	$	254,341
1-4 family residential property loans
Pass	$	81,366	$	29,695	$	38,163	$	23,086	$	26,676	$	62,942	$	40,363	$	302,291
Special mention		192		2,142		523		2,720		247		1,578		293		7,695
Substandard		296		695		1,915		1,859		1,996		7,516		1,499		15,776
Total	$	81,854	$	32,532	$	40,601	$	27,665	$	28,919	$	72,036	$	42,155	$	325,762
Commercial real estate loans
Pass	$	368,750	$	237,119	$	171,591	$	148,283	$	143,400	$	215,616	$	—	$	1,284,759
Special mention		2,469		1,300		6,108		11,262		6,741		16,947		—		44,827
Substandard		1,863		40		7,081		2,022		4,905		18,435		—		34,346
Total	$	373,082	$	238,459	$	184,780	$	161,567	$	155,046	$	250,998	$	—	$	1,363,932
Agricultural loans
Pass	$	83,377	$	15,680	$	5,978	$	1,838	$	635	$	2,856	$	—	$	110,364
Special mention		21,070		4,483		694		224		148		38		—		26,657
Substandard		68		238		25		—		—		—		—		331
Total	$	104,515	$	20,401	$	6,697	$	2,062	$	783	$	2,894	$	—	$	137,352
Commercial and industrial loans
Pass	$	371,683	$	132,148	$	70,497	$	78,890	$	42,439	$	114,904	$	—	$	810,561
Special mention		4,116		32,130		849		489		1,101		730		—		39,415
Substandard		889		2,360		532		1,689		136		969		—		6,575
Total	$	376,688	$	166,638	$	71,878	$	81,068	$	43,676	$	116,603	$	—	$	856,551
Consumer loans
Pass	$	31,609	$	21,384	$	12,084	$	8,279	$	3,150	$	1,022	$	—	$	77,528
Special mention		—		24		24		1		1		—		—		50
Substandard		15		16		111		95		67		120		—		424
Total	$	31,624	$	21,424	$	12,219	$	8,375	$	3,218	$	1,142	$	—	$	78,002
Total loans
Pass	$	1,052,257	$	511,427	$	367,652	$	279,274	$	230,730	$	459,453	$	40,363	$	2,941,156
Special mention		29,692		44,049		8,731		15,165		9,344		30,525		293		137,799
Substandard		3,131		3,477		10,464		6,390		7,168		27,335		1,499		59,464
Total	$	1,085,080	$	558,953	$	386,847	$	300,829	$	247,242	$	517,313	$	42,155	$	3,138,419

The following table presents the Company’s loan portfolio aging analysis at September 30, 2021 and December 31, 2020 (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
September 30, 2021
Construction and land development	$	458	$	9	$	642	$	1,109	$	178,952	$	180,061	$	—
Agricultural real estate		23		—		94		117		278,671		278,788		—
1-4 family residential properties		2,205		865		4,313		7,383		405,182		412,565		—
Multifamily residential properties		—		35		544		579		306,332		306,911		—
Commercial real estate		1,920		1,154		3,354		6,428		1,576,827		1,583,255		—
Loans secured by real estate		4,606		2,063		8,947		15,616		2,745,964		2,761,580		—
Agricultural loans		735		152		588		1,475		125,059		126,534		—
Commercial and industrial loans		550		726		2,367		3,643		832,217		835,860		—
Consumer loans		387		122		136		645		79,419		80,064		—
All other loans		—		—		—		—		143,731		143,731		—
Total loans	$	6,278	$	3,063	$	12,038	$	21,379	$	3,926,390	$	3,947,769	$	—
December 31, 2020
Construction and land development	$	—	$	—	$	128	$	128	$	122,351	$	122,479	$	—
Agricultural real estate		1,198		34		—		1,232		253,109		254,341		—
1-4 family residential properties		1,121		1,105		2,033		4,259		321,503		325,762		—
Multifamily residential properties		—		—		—		—		189,632		189,632		—
Commercial real estate		2,618		341		794		3,753		1,170,547		1,174,300		—
Loans secured by real estate		4,937		1,480		2,955		9,372		2,057,142		2,066,514		—
Agricultural loans		43		—		236		279		137,073		137,352		—
Commercial and industrial loans		2,426		8		1,420		3,854		734,459		738,313		—
Consumer loans		145		50		149		344		77,658		78,002		—
All other loans		—		—		—		—		118,238		118,238		—
Total loans	$	7,551	$	1,538	$	4,760	$	13,849	$	3,124,570	$	3,138,419	$	—

Individually Evaluated Loans

Within all loan portfolio segments, loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Impaired loans, excluding certain troubled debt restructured loans, are placed on nonaccrual status. Impaired loans include nonaccrual loans and loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being modified remain on nonaccrual status until, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. If the restructured loan is on accrual status prior to being modified, the loan is reviewed to determine if the modified loan should remain on accrual status.

The Company’s policy is to discontinue the accrual of interest income on all loans for which principal or interest is ninety days past due. The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Interest on loans determined to be troubled debt restructurings is recognized on an accrual basis in accordance with the restructured terms if the loan is in compliance with the modified terms. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

The amount of interest income recognized by the Company within the periods stated above was due to loans modified in troubled debt restructurings that remain on accrual status.

Non-Accrual Loans

The following table presents the amortized cost basis of loans on nonaccrual status and of nonaccrual loans individually evaluated for which no allowance was recorded as of September 30, 2021 and December 31, 2020 (in thousands). There were no loans past due over eighty-nine days that were still accruing.

	September 30, 2021				December 31, 2020
	Nonaccrual with no Allowance for		Total		Nonaccrual with no Allowance for		Total
	Credit Loss		Nonaccrual		Credit Loss		Nonaccrual
Construction and land development	$	943	$	943	$	162	$	162
Agricultural real estate		338		338		359		359
1-4 family residential properties		7,179		7,232		6,747		6,930
Multifamily residential properties		2,047		2,047		2,181		2,181
Commercial real estate		8,141		8,525		7,345		8,760
Loans secured by real estate		18,648		19,085		16,794		18,392
Agricultural loans		236		236		659		659
Commercial and industrial loans		1,886		3,891		3,677		4,372
Consumer loans		233		233		327		327
All other loans		—		—		—		—
Total loans	$	21,003	$	23,445	$	21,457	$	23,750

Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $407,000 and $1,021,000 for the nine months ended September 30, 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 September 30, 2021 and December 31, 2020 was $7.7 million and $9.5 million, respectively. There was $834,000 and $1 million in specific reserves established with respect to these loans as of September 30, 2021 and December 31, 2020, respectively. As troubled debt restructurings, these loans are included in nonperforming loans. 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.

The following table presents the Company’s recorded balance of troubled debt restructurings at September 30, 2021 and December 31, 2020 (in thousands).

Troubled debt restructurings:	September 30, 2021		December 31, 2020
Construction and land development	$	492	$	—
Agricultural real estate		250		—
1-4 family residential properties		1,507		1,603
Commercial real estate		3,873		5,170
Loans secured by real estate		6,122		6,773
Agricultural loans		384		228
Commercial and industrial loans		1,059		2,389
Consumer loans		118		112
All other loans		24		—
Total	$	7,707	$	9,502
Performing troubled debt restructurings:
Agricultural real estate	$	250	$	—
1-4 family residential properties		887		1,268
Commercial real estate		2,572		3,045
Loans secured by real estate		3,709		4,313
Agricultural loans		156		—
Commercial and industrial loans		335		58
Consumer loans		54		2
All other loans		24		—
Total	$	4,278	$	4,373

The following table presents loans modified as TDRs during the nine months ended September 30, 2021, as a result of various modified loan factors (in thousands). The change in the recorded investment from pre-modification to post- modification was not material.

	September 30, 2021					September 30, 2020
	Number of		Recorded		Type of	Number of		Recorded		Type of
	Modifications		Investment		Modifications	Modifications		Investment		Modifications
Construction and land development		1	$	492	(c)		—	$	—
Agricultural real estate		1		250	(b)		—		—
1-4 family residential properties		2		323	(b)(c)		—		—
Commercial real estate		1		681	(b)		1		296	(b)
Loans secured by real estate		5		1,746			1		296
Agricultural loans		1		156	(b)		2		88	(b)(c)
Commercial and industrial loans		6		287	(b)		4		2,328	(b)
Consumer loans		4		54	(b)		1		11	(b)
Other Loans		1		24	(b)		—		—
Total		17	$	2,267			8	$	2,723

Type of modifications:

(a)

Reduction of stated interest rate of loan

(b)

Change in payment terms

(c)

Extension of maturity date

(d)

Permanent reduction of the recorded investment

A loan is considered to be in payment default once it is 90 days past due under the modified terms. There were no loans modified as troubled debt restructurings during the prior twelve months that experienced defaults for nine months ended September 30, 2021. There were no loans modified as troubled debt restructuring during the prior twelve months that experienced defaults as of December 31, 2020.

The balance of real estate owned includes $5,625,000 and $2,489,000 of foreclosed real estate properties recorded as a result of obtaining physical possession of the property at September 30, 2021 and December 31, 2020, respectively. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure procedures are in process was $550,000 and $713,000 at September 30, 2021 and December 31, 2020, respectively.

Purchased Credit Deteriorated (PCD) Loans

The Company has acquired loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows (in thousands):

	LINCO Acquisition
Purchase price of purchase credit deteriorated loans at acquisition	$	64,647
Allowance for credit losses at acquisition		(2,074	)
Non-credit discount/(premium) at acquisition		(187	)
Fair value of purchased credit deteriorated loans at acquisition	$	62,386

Note 5 -- 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 First Mid Wealth Management Company and First Mid Insurance. The following table presents gross carrying value and accumulated amortization by major intangible asset class as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021				December 31, 2020
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Goodwill not subject to amortization (effective 1/1/02)	$	115,613	$	3,760	$	108,752	$	3,760
Intangibles from branch acquisition		3,015		3,015		3,015		3,015
Core deposit intangibles		39,344		23,181		32,355		20,910
Other intangibles		20,561		6,376		16,389		5,222
	$	178,533	$	36,332	$	160,511	$	32,907

During the second quarter of 2021, goodwill of $1.4 million was recorded for the acquisition of certain assets used by BBM & Associates Inc., in connection with its trucking insurance business. All of this goodwill was assigned to First Mid Insurance.

Goodwill of $9 million was provisionally recorded for the acquisition and merger of LINCO Bancshares, Inc. (“LINCO”) during the first quarter of 2021. All of this goodwill was assigned to the banking segment of the Company. This goodwill was subsequently adjusted to $5.4 million to reflect adjustments made to finalize the purchase accounting.

The following table provides a reconciliation of the purchase price paid for the acquisition of LINCO and the amount of goodwill recorded (in thousands):

Unallocated purchase price				$	12,248
Less purchase accounting adjustments:
Fair value of securities	$	264
Fair value of loans, net		(2,818	)
Fair value of other real estate owned		915
Fair value of premises and equipment		6,360
Fair value of time deposits		(2,081	)
Fair value of FHLB advances		(975	)
Core deposit intangible		2,025
Other assets		3,293
Other liabilities		(184	)
					6,799
				$	5,449

The Company has mortgage servicing rights acquired in previous acquisitions. The following table summarizes the activity pertaining to mortgage servicing rights included in intangible assets as of September 30, 2021, September 30, 2020 and December 31, 2020 (in thousands):

	September 30, 2021			September 30, 2020			December 31, 2020
Beginning balance	$	516		$	1,444		$	1,444
Fair market value adjustment		474			(328	)		(273	)
Mortgage servicing rights amortized		(528	)		(415	)		(593	)
Interest only strip		(7	)		(40	)		(62	)
Ending balance	$	455		$	661		$	516

Total amortization expense for the three and nine months ended September 30, 2021 and 2020 was as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Core deposit intangibles	$	809	$	804	$	2,247	$	2,468
Customer list intangibles		432		326		1,154		979
Mortgage servicing rights		173		147		528		415
	$	1,414	$	1,277	$	3,929	$	3,862

Aggregate amortization expense for the current year and estimated amortization expense for each of the five succeeding years is shown in the table below (in thousands):

Aggregate amortization expense:
For period 01/01/21-9/30/21	$	3,929
Estimated amortization expense:
For period 10/01/21-12/31/21		2,729
For year ended 12/31/22		5,119
For year ended 12/31/23		4,680
For year ended 12/31/24		4,292
For year ended 12/31/25		3,861
For year ended 12/31/26		3,091

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” codified within ASC 350, the Company performed testing of goodwill for impairment as of September 30, 2020 and 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.

Note 6 -- Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase were $149.9 million at September 30, 2021, a decrease of $57.0 million from $206.9 million at December 31, 2020. The decrease during the first nine months of 2021 was primarily due to changes in business cash flow needs. All the transactions have overnight maturities with a weighted average rate of 0.13%.

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.

Collateral pledged by class for repurchase agreements are as follows (in thousands):

	September 30, 2021		December 31, 2020
US Treasury securities and obligations of U.S. government corporations and agencies	$	56,324	$	37,423
Mortgage-backed securities: GSE: residential		93,567		168,480
Miscellaneous		—		1,034
Total	$	149,891	$	206,937

FHLB borrowings, before net premiums of $700,000, were $111.9 million and $94 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 the advances were as follows:

Advance		Term (in years)		Interest Rate	Maturity Date
$	5,000,000		7.0	2.55%	October 1, 2021
	5,000,000		5.0	2.71%	March 21, 2022
	5,000,000		1.0	0.00%	May 31, 2022
	5,000,000		3.0	2.41%	May 31, 2022
	5,000,000		3.0	2.12%	June 7, 2022
	5,000,000		3.0	2.12%	June 7, 2022
	5,000,000		8.0	2.40%	January 9, 2023
	5,000,000		4.0	2.44%	May 30, 2023
	5,000,000		3.5	1.51%	July 31, 2023
	5,000,000		3.5	0.77%	September 11, 2023
	10,000,000		5.0	1.45%	December 31, 2024
	5,000,000		5.0	0.91%	March 10, 2025
	6,940,511		10.0	2.64%	December 23, 2025
	5,000,000		10.0	1.14%	October 3, 2029
	5,000,000		10.0	1.15%	October 3, 2029
	5,000,000		10.0	1.12%	October 3, 2029
	10,000,000		10.0	1.39%	December 31, 2029
	15,000,000		10.0	1.41%	December 31, 2029

Note 7 -- Fair Value of Assets and Liabilities

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 1Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2Valuations 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 3Unobservable 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 independent sources of 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.

Fair value determinations for Level 3 measurements of securities are the responsibility of the Treasury function of the Company. The Company contracts with a pricing specialist to generate fair value estimates on a monthly basis. The Treasury function of the Company challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States, analyzes the changes in fair value and compares these changes to internally developed expectations and monitors these changes for appropriateness.

Derivatives. The fair value of derivatives is based on models using observable market data as of the measurement date and are therefore classified in Level 2 of the valuation hierarchy.

The following table presents the Company’s assets and liabilities 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 September 30, 2021 and December 31, 2020 (in thousands):

	Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2021
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	191,684	$	—	$	191,684	$	—
Obligations of states and political subdivisions		338,744		—		338,128		616
Mortgage-backed securities		782,615		—		782,615		—
Other securities		33,923		—		33,923		—
Total available-for-sale securities		1,346,966		—		1,346,350		616
Equity securities		348		348		—		—
Derivative assets: interest rate swaps		35		—		35		—
Total assets	$	1,347,349	$	348	$	1,346,385	$	616

Derivative liabilities: interest rate swaps	$	899	$	—	$	899	$	—

December 31, 2020
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	127,069	$	—	$	127,069	$	—
Obligations of states and political subdivisions		249,844		—		249,050		794
Mortgage-backed securities		491,348		—		491,348		—
Other securities		10,979		—		10,979		—
Total available-for-sale securities		879,240		—		878,446		794
Equity securities		218		218		193		—
Derivative assets: interest rate swaps		1,399		—		1,399		—
Total assets	$	880,857	$	218	$	880,038	$	794

Derivative liabilities: interest rate swaps	$	2,892	$	—	$	2,892	$	—

The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2021 and 2020 is summarized as follows (in thousands):

	Obligation of State and Political Subdivisions
	Three months ended				Nine months ended
	September 30, 2021		September 30, 2020		September 30, 2021			September 30, 2020
Beginning balance	$	615	$	792	$	794		$	973
Transfers into Level 3		—		—		—			—
Transfers out of Level 3		—		—		—			—
Total gains or losses:
Included in net income		1		1		3			4
Included in other comprehensive income (loss)		—		—		—			—
Purchases, issuances, sales and settlements:
Purchases		—		—		—			—
Issuances		—		—		—			—
Sales		—		—		—			—
Settlements		—		—		(181	)		(184	)
Ending balance	$	616	$	793	$	616		$	793
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	—	$	—	$	—		$	—

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Collateral Dependent Loans. Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment and estimating fair value include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Individually evaluated 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 individually evaluated 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 September 30, 2021 was $16,035,000 and a fair value of $13,682,000 resulting in specific loss exposures of $2,353,000.

When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for credit losses. Losses are recognized in the period an obligation becomes uncollectible. The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future.

Foreclosed Assets Held For Sale. Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned, or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real estate owned as of September 30, 2021 was $5,625,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $1,720,000.

Mortgage Servicing Rights. As of September 30, 2021, mortgage servicing rights had a carrying value of $570,000 and a fair value of $455,000 resulting in a valuation reserve of $115,000. 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 September 30, 2021 and December 31, 2020 (in thousands):

	Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2021
Collateral dependent loans	$	13,682	$	—	$	—	$	13,682
Foreclosed assets held for sale		1,720		—		—		1,720
Mortgage servicing rights		455		—		—		455
December 31, 2020
Collateral dependent loans	$	14,876	$	—	$	—	$	14,876
Foreclosed assets held for sale		290		—		—		290
Mortgage servicing rights		516		—		—		517

Sensitivity of Significant Unobservable Inputs

The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at September 30, 2021.

September 30, 2021	Fair Value		Valuation Technique	Unobservable Inputs	Range	Weighted Average
Collateral dependent loans	$	13,682	Third party valuations	Discount to reflect realizable value	0% - 40%	20%
Foreclosed assets held for sale		1,720	Third party valuations	Discount to reflect realizable value less estimated selling costs	0% - 40%	35%
Mortgage servicing rights		455	Third party valuations	PSA standard prepayment model rate	230 - 438		281

December 31, 2020	Fair Value		Valuation Technique	Unobservable Inputs	Range	Weighted Average
Collateral dependent loans	$	14,876	Third party valuations	Discount to reflect realizable value	0% - 40%	20%
Foreclosed assets held for sale		290	Third party valuations	Discount to reflect realizable value less estimated selling costs	0% - 40%	35%
Mortgage servicing rights		517	Third party valuations	PSA standard prepayment model rate	242 - 441		384

The following tables present estimated fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020 in accordance with ASC 825 (in thousands):

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2021
Financial assets
Cash and due from banks	$	343,859	$	343,859	$	343,859	$	—	$	—
Federal funds sold		1,347		1,347		1,347		—		—
Certificates of deposit investments		2,695		2,695		—		2,695		—
Available-for-sale securities		1,346,966		1,346,966		—		1,346,351		615
Held-to-maturity securities		7,026		7,057		2,022		5,035		—
Equity securities		348		348		348		—		—
Loans held for sale		1,897		1,897		—		1,897		—
Loans net of allowance for credit losses		3,891,889		3,830,149		—		—		3,830,149
Interest receivable		22,057		22,057		—		22,057		—
Federal Reserve Bank stock		13,845		13,845		—		13,845		—
Federal Home Loan Bank stock		6,528		6,528		—		6,528		—
Financial liabilities
Deposits	$	4,988,562	$	4,991,225	$	—	$	4,347,567	$	643,658
Securities sold under agreements to repurchase		149,891		149,896		—		149,896		—
Interest payable		2,569		2,569		—		2,569		—
Federal Home Loan Bank borrowings		112,641		113,205		—		113,205		—
Subordinated debt, net		94,363		94,363				94,363
Junior subordinated debentures, net		19,153		14,528		—		14,528		—

December 31, 2020
Financial assets
Cash and due from banks	$	415,973	$	415,973	$	415,973	$	—	$	—
Federal funds sold		1,308		1,308		1,308		—		—
Certificates of deposit investments		2,695		2,695		—		2,695		—
Available-for-sale securities		879,240		879,240		—		878,446		794
Held-to-maturity securities		5,016		5,119		—		5,119		—
Equity securities		218		218		218		—		—
Loans held for sale		1,924		1,924		—		1,924		—
Loans net of allowance for credit losses		3,094,585		3,056,344		—		—		3,056,344
Interest receivable		19,287		19,287		—		19,287		—
Federal Reserve Bank stock		9,401		9,401		—		9,401		—
Federal Home Loan Bank stock		5,450		5,450		—		5,450		—
Financial liabilities
Deposits	$	3,692,784	$	3,697,105	$	—	$	3,215,715	$	481,390
Securities sold under agreements to repurchase		206,937		206,945		—		206,945		—
Interest payable		2,345		2,345		—		2,345		—
Federal Home Loan Bank borrowings		93,969		96,669		—		96,669		—
Subordinated debt, net		94,253		94,253		—		94,253		—
Junior subordinated debentures, net		19,027		14,604		—		14,604		—

Note 8 – Business Combinations

On September 25, 2020, the Company and Eval Sub Inc., a newly formed Illinois corporation and wholly-owned subsidiary of the Company ("Eval Merger Sub"), entered into an Agreement and Plan of Merger (the "LINCO Merger Agreement") with LINCO Bancshares, Inc., a Missouri corporation ("LINCO"), and the sellers as defined therein, pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business combination whereby Eval Merger Sub merged with and into LINCO, whereupon the separate corporate existence of Merger Sub ceased and LINCO continued as the surviving company and a wholly-owned subsidiary of the Company (the "LINCO Merger"). The LINCO Merger closed on February 22, 2021.

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 paid by the Company at the closing of the LINCO Merger was $103.5 million in cash and 1,262,246 shares of the Company’s common stock. In addition, immediately prior to the closing of the proposed merger, LINCO paid a special dividend to its shareholders in the aggregate amount of $13 million.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations ("ASC 805"),” and accordingly the assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Fair values are subject to refinement for up to one year after the closing date of February 22, 2021 as additional information regarding the closing date fair values become available. The total consideration paid was used to determine the amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets acquired, goodwill of $5.4 million was recorded for the acquisition. Goodwill recorded in the transaction, which reflects the synergies and economies of scale expected from combining operations and the enhanced revenue opportunities from the Company’s service capabilities, is not tax deductible, and was all assigned to the banking segment of the Company.

	Acquired			Fair Value			As Recorded by
(In thousands)	Book Value			Adjustments			Providence Bank
Assets
Cash and due from banks	$	130,561		$	—		$	130,561
Investment securities		119,234			264			119,498
Loans		838,377			(9,401	)		828,976
Allowance for credit losses		(8,656	)		6,583			(2,073	)
Other real estate owned		8,435			915			9,350
Premises and equipment		23,440			6,360			29,800
Goodwill		20,503			(15,054	)		5,449
Core deposit intangible		123			2,025			2,148
Right of use asset		—			794			794
Other assets		43,697			2,499			46,196
Total assets acquired	$	1,175,714		$	(5,015	)	$	1,170,699

Liabilities
Deposits	$	988,329		$	2,081		$	990,410
Securities sold under agreements to repurchase		—			—			—
FHLB advances		26,941			975			27,916
Other borrowings		—			—			—
Lease liability		—			794			794
Other liabilities		4,498			(610	)		3,888
Total liabilities assumed		1,019,768			3,240			1,023,008
Net assets acquired	$	155,946		$	(8,255	)	$	147,691

Consideration paid
Cash							$	103,500
Common stock								44,191
							$	147,691

The Company has recognized approximately $9.0 million, pre-tax, of acquisition costs for the LINCO acquisition. Of this amount, $8.5 million was recognized during the first nine months of 2021. These costs are included in salaries and benefits, legal and professional and other expense. Of the $9.4 million adjustment to loans, $11.1 million is being accreted to interest income over the remaining term of the loans. The remaining $1.7 million was the elimination of deferred fees and unearned discounts previously recorded by Providence Bank. The Company also recorded approximately $2 million directly to the allowance for credit losses for loans identified as PCD. Of the $838 million of loans acquired, approximately $64.6 million was identified as PCD.

The differences between fair value and acquired value of the assumed time deposits of $2.1 million and the assumed FHLB advances of $975,000, are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible assets, with a fair value of $2.1 million, are being amortized on an accelerated basis over its estimated life of 10 years.

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the purchase accounting adjustments and acquisition expenses, had the LINCO acquisition taken place at the beginning of the period (dollars in thousands, except per share data):

	Three months ended September 30, 2021		Three months ended September 30, 2020		Nine months ended September 30, 2021		Nine months ended September 30, 2020
Net interest income	$	45,496	$	43,717	$	131,713	$	127,341
Provision for loan losses		1,103		4,211		12,879		17,379
Non-interest income		16,359		15,439		53,504		48,214
Non-interest expense		36,321		36,100		124,133		113,461
Income before taxes		24,431		18,845		48,205		44,715
Income tax expense (benefit)		6,105		4,753		11,052		10,865
Net income (loss)	$	18,326	$	14,092	$	37,153	$	33,850

Earnings per share
Basic	$	1.01	$	0.78	$	2.08	$	1.88
Diluted		1.01		0.78		2.08		1.88

Basic weighted average shares o/s		18,083,126		17,990,437		17,819,619		17,972,731
Diluted weighted average shares o/s		18,136,146		18,037,345		17,872,639		18,019,639

Note 9 -- Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of September 30, 2021, substantially all the Company's leases are operating leases for real estate property for 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, the Company 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:

An entity need not reassess whether any expired or existing contracts contain leases.

An entity need not reassess the lease classification for any expired or existing leases.

An entity need not reassess initial direct costs for any existing leases.

The Company has 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 to not 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 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):

	September 30, 2021			September 30, 2020			December 31, 2020
Operating lease right-of-use assets	$	16,120		$	16,703		$	17,209
Operating lease liabilities		16,315			16,817			17,351
Weighted-average remaining lease term (in years)		6.7			6.5			7.3
Weighted-average discount rate		2.64	%		2.81	%		2.85	%

Certain of the Company's leases contain options to renew the lease; however, not all renewal options are included in the calculation of lease liabilities as they are not reasonably certain to be exercised. The Company's leases do not contain residual value guarantees or material variable lease payments. The Company does not have any other material restrictions or covenants imposed by leases that would impact the Company's ability to pay dividends or cause the Company to incur additional financial obligations.

Maturities of lease liabilities were as follows (in thousands):

Year ending December 31,
	2021	$	720
	2022		2,679
	2023		2,356
	2024		1,945
	2025		1,632
Thereafter			9,193
Total lease payments			18,525
Less imputed interest			(2,210	)
Total lease liability		$	16,315

The components of lease expense for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
Operating lease cost	$	604		$	762		$	2,052		$	2,207
Short-term lease cost		11			14			96			42
Variable lease cost		373			180			622			376
Total lease cost		988			956			2,770			2,625
Income from subleases		(132	)		(185	)		(452	)		(577	)
Net lease cost	$	856		$	771		$	2,318		$	2,048

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):

		September 30, 2021				September 30, 2020
Operating cash flows from operating leases		$	2,161			$	2,092

Note 10 – Derivatives

The Company utilizes an interest rate swap, designated as a fair value hedge, to mitigate the risk of changing interest rates on the fair value of a fixed rate commercial real estate loan. 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 values of outstanding derivatives designated as hedging instruments as of September 30, 2021 and December 31, 2020 (in thousands):

	Balance Sheet Location	Weighted Average Remaining Maturity (Years)	Notional Amount		Estimated Value
September 30, 2021
Fair value hedges:
Interest rate swap agreements	Other liabilities	7.6 years	$	14,057	$	(899	)

December 31, 2020
Fair value hedges:
Interest rate swap agreements	Other liabilities	8.3 years	$	14,334	$	(2,892	)

The effects of the fair value hedges on the Company's income statement during the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):

		Three months ended September 30,					Nine months ended September 30,
Derivative	Location of Gain (Loss) on Derivatives	2021			2020		2021			2020
Interest rate swap agreements	Interest income on loans	$	(38	)	$	38	$	(629	)	$	(1,218	)

		Three months ended September 30,					Nine months ended September 30,
Derivative	Location of Gain (Loss) on Hedged Items	2021		2020			2021		2020
Interest rate swap agreements	Interest income on loans	$	38	$	(38	)	$	629	$	1,218

As of September 30, 2021, the following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustment for fair value hedges (in thousands):

Line Item in the Balance Sheet in Which

the Hedge Item is Included

Carrying Amount of the

Hedged Asset

Cumulative Amount of Fair Value Hedging

Adjustment Included in the Carrying

Amount of the Hedged Asset

Loans

13,192

864

Derivatives Not Designated as Hedging Instruments

The following amounts represent the notional amounts and gross fair value of derivative contracts not designated as hedging instruments outstanding during the nine months ended September 30, 2021 (dollars in thousands):

September 30, 2021

Balance

Sheet

Location

Weighted

Average

Remaining

Maturity

(Years)

Notional

Amount

Estimated

Value

Interest rate swap agreements

Other assets

6.3

41,333

Interest rate swap agreements

Other liabilities

6.3

41,333

(35

)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries as of, and for the three and nine months ended September 30, 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 document may contain certain forward-looking statements about First Mid and Delta, such as discussions of First Mid’s and Delta’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. First Mid 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 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of First Mid and Delta, 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, among other things, the possibility that any of the anticipated benefits of the proposed transactions between First Mid and Delta will not be realized or will not be realized within the expected time period; the risk that integration of the operations of Delta with First Mid will be materially delayed or will be more costly or difficult than expected; the inability to complete the proposed transactions due to the failure to satisfy conditions to completion of the proposed transactions, including failure to obtain the required regulatory, shareholder and other approvals; the failure of the proposed transactions to close for any other reason; the effect of the announcement of the proposed transactions on customer relationships and operating results; the possibility that the proposed transactions may be more expensive to complete than anticipated, including as a result of unexpected factors or events; changes in interest rates; general economic conditions and those in the market areas of First Mid and Delta; legislative and/or 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 First Mid’s and Delta’s loan or investment portfolios and the valuation of those investment portfolios; demand for loan products; deposit flows; competition, demand for financial services in the market areas of First Mid and Delta; accounting principles, policies and guidelines; the severity, magnitude and duration of the COVID-19 pandemic, the direct and indirect impact of such pandemic, including responses to the pandemic by the U.S., state and local governments, customers' businesses, the disruption of global, national, state and local economies associated with the COVID-19 pandemic, which could affect First Mid’s and Delta’s liquidity and capital positions, impair the ability of First Mid’s and Delta’s borrowers to repay outstanding loans, impair collateral values, and further increase the allowance for credit losses, and the impact of the COVID-19 pandemic on First Mid’s and Delta’s financial results, including possible lost revenue and increased expenses (including cost of capital), as well as possible goodwill impairment charges. Additional information concerning First Mid, including additional factors and risks that could materially affect First Mid’s financial results, are included in First Mid’s filings with the SEC, including its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. Forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

COVID-19 Impact

The COVID-19 outbreak is an unprecedented event that provides significant economic uncertainty for a broad spectrum of industries. The spread of this outbreak has caused significant disruptions in the U.S. economy and some of these impacts will be long lasting. As it continues to evolve it is not clear when or how the pandemic-driven contraction will recover. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Many of the CARES Act provisions, as well as other recent legislative and regulatory efforts, are expected to have a material impact on financial institutions. The Company's strong track record and revenue diversification provide a solid foundation for earnings and capital. The Company is focused on supporting its customers, communities, and employees during this unique operating environment. Following is a description of the impact COVID-19 is having, actions taken because of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation.

Lending operations and accommodations to customers. Beginning in March 2020, First Mid Bank offered a 90-day commercial deferral program, primarily to hotel and restaurant borrowers. Subsequently, additional deferrals were offered on an individual case basis and a broader program was offered to residential and consumer customers. As of September 30, 2021, a total of $7.2 million was deferred through these programs. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.

Beginning April 3, 2020, with the passage of the initial Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company actively participated in assisting existing and new customers with applications for resources through the program. PPP loans have a two to five-year term and earn interest at 1%. The Company believes that most of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2021, the Company has outstanding 544 PPP loans totaling $59.4 million with the SBA. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government and as such do not represent a credit risk.

Employees. The Company has a business continuity plan in place that was executed in March 2020. Approximately half of the Company's workforce has the ability to work remotely with secure connections. In addition, various preventative and personal hygiene measures, in accordance with CDC guidelines have been implemented. To protect and ensure the safety of employees, as well as customers, all branch locations were transitioned to drive-thru use only. Most branch lobbies were re-opened in mid-June and the Company continues to monitor each location. The Company increased the number of available sick days to every employee impacted in anyway by COVID-19 and offered financial assistance for any employee with need.

Asset impairment. The Company does not believe that any impairment exists due to COVID-19 to goodwill and other intangible assets, long-lived assets, mortgage servicing rights ("MSRs"), right of use assets, or available-for-sale investment securities at this time. While certain valuation assumptions and judgements will change to account for COVID-19 related circumstances, the Company does not expect significant changes in methodology used to determine the fair value of assets in accordance with GAAP. It is uncertain whether prolonged effects of COVID-19 will result in future impairment charges related to any of these assets.

Capital and liquidity. The Company's and First Mid Bank's capital levels are higher today than during the Great Recession of 2008. The Company’s current allowance for credit losses could absorb net charge offs greater than the total of all net charge offs over the last 20 years. The Company’s aggregate net charge offs over the last 20 years through September 30, 2021, were $35.2 million. Current capital levels also support the Company's recent loan stress testing of the most vulnerable industry sectors impacted by COVID-19.

The Company maintains access to multiple sources of liquidity. Currently, the Company's total liquidity sources could provide $2.1 billion of total available capacity as of September 30, 2021.

Management's outlook. The Company's current financial position is strong and the fundamental earning capabilities of its currently existing operations is solid. Due to the uncertain economic outlook related to the COVID-19 crisis and the potential for loan losses and other asset impairments, it is anticipated that reserve levels will remain elevated compared to recent historical trends. All processes, procedures and internal controls are expected to continue as outlined in existing applicable policies despite remote working status of many employees. While the Company does not currently anticipate any material changes or deficiencies to its capital or liquidity sources, uncertainties about duration and overall effects on the economy could result in more adverse effects than expected.

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 which have an impact on the Company’s financial condition and results of operations you should carefully read this entire document.

Net income was $34,656,000 and $31,701,000 for the nine months ended September 30, 2021 and 2020, respectively. Diluted net income per common share was $1.94 and $1.89 for the nine months ended September 30, 2021 and 2020.

The following table shows the Company’s annualized performance ratios for nine months ended September 30, 2021 and 2020, compared to the performance ratios for the year ended December 31, 2020:

	Nine months ended						Year ended
	September 30, 2021			September 30, 2020			December 31, 2020
Return on average assets		0.82	%		1.01	%		1.05	%
Return on average common equity		7.58	%		7.76	%		8.24	%
Average equity to average assets		10.83	%		12.96	%		12.76	%

Total assets were $6.0 billion at September 30, 2021, compared to $4.7 billion as of December 31, 2020. From December 31, 2020 to September 30, 2021, cash and interest-bearing deposits decreased $72.1 million, net loan balances increased $797.3 million and investment securities increased $469.9 million. Net loan balances were $3.89 billion at September 30, 2021 compared to $3.09 billion at December 31, 2020. The increases were primarily due to the acquisition of Providence Bank during the first quarter of 2021 and loans purchased during the third quarter of 2021.

Net interest margin, on a tax equivalent basis, defined as net interest income divided by average interest-earning assets, was 3.25% for the nine months ended September 30, 2021, down from 3.30% for the same period in 2020. This decrease was primarily due to lower yields on loans and investments. Net interest income before the provision for loan losses was $125.0 million compared to net interest income of $94.0 million for the same period in 2020. The increase in net interest income was primarily due to the acquisition of Providence Bank during the first quarter of 2021.

Total non-interest income of $52.4 million increased $8.4 million or 19.1% from $44.0 million for the same period last year. The increase in non-interest income resulted primarily from an increase in wealth management revenues, and income from Providence Bank.

Total non-interest expense of $119.9 million increased $39.2 million or 48.5% from $80.8 million for the same period last year. The increase was primarily due to costs related to the acquisition of LINCO during the first quarter of 2021, and expenses from Providence Bank.

Following is a summary of the factors that contributed to the changes in net income (in thousands):

	Change in Net Income
	2021 versus 2020
	Three months ended September 30, 2021			Nine months ended September 30, 2021
Net interest income	$	12,979		$	31,035
Provision for loan losses		2,780			2,821
Other income, including securities transactions		2,781			8,419
Other expenses		(9,394	)		(39,178	)
Income taxes		(2,385	)		(142	)
Decrease in net income	$	6,761		$	2,955

Credit quality is an area of importance to the Company. Total nonperforming loans were $27.7 million at September 30, 2021, compared to $22.4 million at September 30, 2020 and $28.1 million at December 31, 2020. See the discussion under the heading “Loan Quality and Allowance for Loan Losses” for a detailed explanation of these balances. Repossessed asset balances totaled $5.6 million at September 30, 2021 compared to $2.3 million at September 30, 2020 and $2.5 million at December 31, 2020. The increases in nonperforming loans and repossessed assets were due to the acquisition of Providence Bank.

The Company’s provision for loan losses for the nine months ended September 30, 2021 and 2020 was $12,679,000 and $15,500,000, respectively. This provision expense during the first nine months of 2021 included recording an initial provision for credit losses for Providence Bank loans of $11.5 million, offset by lower provision expense for First Mid Bank compared to the same period in 2020 which included adoption of ASC 2016-13. Total loans past due 30 days or more were 0.54% of loans at September 30, 2021 compared to 0.55% at September 30, 2020, and 0.44% of loans at December 31, 2020. The increase in this ratio was primarily due to the increase in loan balances 30-59 days past due. Loans secured by both commercial and residential real estate comprised approximately 70.2% of the loan portfolio as of September 30, 2021 and 65.8% as of December 31, 2020

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 to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at September 30, 2021 and 2020 and December 31, 2020 was 12.53%, 14.52% and 14.63%, respectively. The Company’s total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at September 30, 2021 and 2020, and December 31, 2020 was 15.87%, 15.73% and 18.82%, respectively. The decrease in Tier 1 capital to risk weighted assets ratio from December 31, 2020 was primarily due to the acquisition of LINCO and dividends paid to shareholders, offset by net income added to retained earnings.

On March 27, 2020, the federal banking regulatory agencies, issued an interim final rule which provided an option to delay the estimated impact on regulatory capital of ASU 2016-13, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13 as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 ("CECL adjustments") will be delayed for two years. After two years, the cumulative amount of these adjustments will be phased out of the regulatory capital calculation over a three-year period, with 75% of the adjustments included in year three, 50% of the adjustments included in year four and 25% of the adjustments included in year five. After five years, the temporary delay of ASU 2016-13 adoption will be fully reversed. The Company has elected this option.

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 the discussion under the heading “Liquidity” for a full listing of 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 September 30, 2021 and 2020, were $1,034 million and $659 million, respectively.

Federal Deposit Insurance Corporation Insurance Coverage. As FDIC-insured institutions, First Mid Bank is required to pay deposit insurance premium assessments to the FDIC. Several requirements with respect to the FDIC insurance system have affected results, including insurance assessment rates.

On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent. Because the reserve ratio exceeded 1.35 percent, two deposit insurance assessment changes occurred under the FDIC regulations:

•	Surcharges on large banks (total consolidated assets of less than $10 billion) ended; the last surcharge on large banks was collected on December 28, 2018.

•	Small banks (total consolidated assets of less than $10 billion) were awarded assessment credits for the portion of their assets that contributed to the growth in the reserve ratio from 1.15 percent to 1.35 percent, to be applied when the reserve ratio is at least 1.38 percent.

On August 20, 2019, the FDIC Board approved a Notice of Proposed Rulemaking which amended the Small Bank Credits regulation to permit credit usage when the reserve ratio is at least 1.35 percent (rather than 1.38 percent). Additionally, after eight quarters of credit usage, the FDIC would remit the remaining full nominal value to each bank. Eligible banks were notified in January 24, 2019 with preliminary estimate of their share of small bank assessment credits. First Mid Bank's Small Bank Credit was $931,853. A portion of the credit was applied to the second and third quarter assessments paid in 2019 and the fourth quarter assessment paid in 2020. The remaining credit of approximately $163,700 was applied to the Company's assessment for the first quarter of 2020.

The Company expensed $1,198,000 and $851,000 for the assessment during the first nine months of 2021 and 2020, respectively. The increase in 2021 expense was due to a remaining small bank credit utilized during the first quarter of 2020 and growth in deposit balances.

Critical Accounting Policies and Use of Significant Estimates

The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Company’s consolidated financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements included in the Company’s 2020 Annual Report on Form 10-K. 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 and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which was codified into ASC 320. Securities classified as held-to-maturity are recorded at 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 (loss).

Allowance for Credit Losses - Held-to-Maturity Securities. Currently all the Company's held-to-maturity securities are government agency-backed securities for which the risk of loss is minimal. Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities.

Loans. Loans are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase discounts and premiums, fair value hedge accounting adjustments and deferred loan fees and costs. Accrued interest is reported separately and is included in interest receivable in the consolidated balance sheets.

Allowance for Credit Losses - Loans. The Company believes the allowance for credit losses for loans is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. The allowance for credit losses for loans represents the best estimate of losses inherent in the existing loan portfolio. An estimate of potential losses inherent in the loan portfolio are determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, the Company uses relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

The allowance for credit losses is measured on a collective (pool) basis for non-individually evaluated 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 individually evaluated 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 loan 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 the 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 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 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 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 as of September 30, 2020 as part of the goodwill impairment test and no impairment was identified.

As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the consolidated balance sheets. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually.

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.

SFAS No. 157, “Fair Value Measurements”, which was codified into ASC 820, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date.

The three levels are defined as follows:

•	Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•	Level 3 — inputs that are unobservable and significant to the fair value measurement.

At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 7 – Fair Value of Assets and Liabilities.

Results of Consolidated Operations

Net Interest Income

The largest source of 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% for 2021 and 2020 was used. 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 $1,876,000 and $1,623,000 for 2021 and 2020, respectively were 3.21% and 3.24% at September 30, 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 for the three and nine months ended September 30, 2021 and 2020 in the following table (dollars in thousands):

	Three months ended September 30, 2021								Three months ended September 30, 2020
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
Assets
Interest-bearing deposits with other financial institutions	$	277,844		$	122		0.17	%	$	147,930		$	52		0.14	%
Federal funds sold		1,341			—		—	%		1,291			1		—	%
Certificates of deposit		2,453			13		2.10	%		3,188			17		2.25	%
Investment securities:
Taxable		976,817			3,961		1.62	%		542,821			2,639		1.94	%
Tax-exempt (1)		312,796			2,373		3.03	%		208,937			1,818		3.48	%
Loans net of unearned income (TE) (2)		3,824,988			43,463		4.51	%		3,209,679			32,335		4.01	%
Total earning assets		5,396,239			49,932		3.67	%		4,113,846			36,862		3.56	%
Cash and due from banks		100,475								89,108
Premises and equipment		82,057								58,905
Other assets		344,014								256,464
Allowance for loan losses		(55,373	)							(40,051	)
Total assets	$	5,867,412							$	4,478,272
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	2,336,601		$	1,177		0.20	%	$	1,753,148		$	1,043		0.24	%
Savings deposits		606,129			111		0.07	%		481,128			102		0.08	%
Time deposits		673,833			946		0.56	%		525,266			2,023		1.53	%
Total interest-bearing deposits		3,616,563			2,234		0.25	%		2,759,542			3,168		0.46	%
Securities sold under agreements to repurchase		160,686			52		0.13	%		183,720			68		0.15	%
FHLB advances		112,715			359		1.26	%		98,510			395		1.60	%
Federal funds purchased		—			—		—	%		—			—		—	%
Subordinated Debt		94,338			985		4.14	%
Junior subordinated debt		19,125			137		2.84	%		18,957			147		3.08	%
Other debt		—			—		—	%		—			—		—	%
Total borrowings		386,864			1,533		1.57	%		301,187			610		0.81	%
Total interest-bearing liabilities		4,003,427			3,767		0.37	%		3,060,729			3,778		0.49	%
Non interest-bearing demand deposits		1,179,915					0.29	%		813,404					0.39	%
Other liabilities		56,107								47,350
Stockholders' equity		627,963								556,789
Total liabilities and equity	$	5,867,412							$	4,478,272
Net interest income				$	46,165							$	33,084
Net interest spread							3.30	%							3.07	%
Impact of non interest-bearing funds							0.08	%							0.10	%
TE net yield on interest-bearing assets							3.38	%							3.17	%

	Nine months ended September 30, 2021								Nine months ended September 30, 2020
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
Assets
Interest-bearing deposits with other financial institutions	$	299,360		$	283		0.13	%	$	108,094		$	199		0.24	%
Federal funds sold		1,329			—		0			1,096			3		0
Certificates of deposit		2,612			42		2.16	%		4,132			69		2.25	%
Investment securities:
Taxable		877,306			11,256		1.71	%		533,858			8,729		2.18	%
Tax-exempt (1)		277,379			6,532		3.14	%		186,279			5,078		3.63	%
Loans net of unearned income (TE) (2)		3,726,531			120,477		4.32	%		3,003,488			94,116		4.19	%
Total earning assets		5,184,517			138,590		3.57	%		3,836,947			108,194		3.77	%
Cash and due from banks		92,180								87,515
Premises and equipment		79,328								59,178
Other assets		327,463								254,197
Allowance for loan losses		(52,619	)							(35,435	)
Total assets	$	5,630,869							$	4,202,402
Liabilities and stockholders' equity
Interest-bearing deposits
Demand deposits	$	2,130,511		$	3,090		0.19	%	$	1,494,883		$	2,832		0.25	%
Savings deposits		608,844			370		0.08	%		460,705			319		0.09	%
Time deposits		695,536			3,520		0.68	%		545,530			6,983		1.71	%
Total interest-bearing deposits		3,434,891			6,980		0.27	%		2,501,118			10,134		0.54	%
Securities sold under agreements to repurchase		178,647			179		0.13	%		229,241			420		0.24	%
FHLB advances		109,178			1,178		1.44	%		110,962			1,480		1.78	%
Federal funds purchased		—			—		—	%		701			10		0
Subordinated debt		94,302			2,954		4.19	%		—			—		0.00	%
Junior subordinated debentures		19,084			416		2.91	%		18,915			539		3.81	%
Other debt		—			—		—	%		876			16		0
Total borrowings		401,211			4,727		1.58	%		360,695			2,465		0.91	%
Total interest-bearing liabilities		3,836,102			11,707		0.41	%		2,861,813			12,599		0.59	%
Non interest-bearing demand deposits		1,126,464					0.32	%		747,350					0.47	%
Other liabilities		58,440								48,462
Stockholders' equity		609,863								544,777
Total liabilities and equity	$	5,630,869							$	4,202,402
Net interest income				$	126,883							$	95,595
Net interest spread							3.16	%							3.18	%
Impact of non interest-bearing funds							0.09	%							0.12	%
TE net yield on interest-earning assets							3.25	%							3.30	%

1.	The tax-exempt income is shown on a tax equivalent basis.

2.	Nonaccrual loans and loans held for sale are included in the average balances. Balances are net of unaccreted discount related to loans acquired.

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 three and nine months ended September 30, 2021, compared to the same period in 2020 (in thousands):

	Three months ended September 30, 2021 compared to 2020 Increase / (Decrease)									Nine months ended September 30, 2021 compared to 2020 Increase / (Decrease)
	Total									Total
	Change			Volume (1)			Rate (1)			Change			Volume (1)			Rate (1)
Earning assets:
Interest-bearing deposits	$	70		$	56		$	14		$	84		$	270		$	(186	)
Federal funds sold		(1	)		—			(1	)		(3	)		1			(4	)
Certificates of deposit investments		(4	)		(4	)		—			(27	)		(25	)		(2	)
Investment securities:
Taxable		1,322			3,976			(2,654	)		2,527			5,651			(3,124	)
Tax-exempt (2)		555			812			(257	)		1,454			2,219			(765	)
Loans (2) (3)		11,128			6,743			4,385			26,361			23,351			3,010
Total interest income	$	13,070		$	11,583		$	1,487		$	30,396		$	31,467		$	(1,071	)
Interest-bearing liabilities:
Interest-bearing deposits
Demand deposits	$	134		$	1,024		$	(890	)	$	258		$	1,312		$	(1,054	)
Savings deposits		9			71			(62	)		51			106			(55	)
Time deposits		(1,077	)		2,811			(3,888	)		(3,463	)		2,437			(5,900	)
Securities sold under agreements to repurchase		(16	)		(8	)		(8	)		(241	)		(78	)		(163	)
FHLB advances		(36	)		256			(292	)		(302	)		(24	)		(278	)
Federal funds purchased		—			—			—			(10	)		(5	)		(5	)
Subordinated debt		985			985			—			2,954			2,954			—
Junior subordinated debentures		(10	)		8			(18	)		(123	)		7			(130	)
Other debt		—			—			—			(16	)		(8	)		(8	)
Total interest expense		(11	)		5,147			(5,158	)		(892	)		6,701			(7,593	)
Net interest income	$	13,081		$	6,436		$	6,645		$	31,288		$	24,766		$	6,522

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.	The tax-exempt income is shown on a tax-equivalent basis.

3.	Nonaccrual loans have been included in the average balances.

Tax equivalent net interest income increased $31.3 million, or 32.7%, to $126.9 million for the nine months ended September 30, 2021, from $95.6 million for the same period in 2020. Net interest income increased primarily due to the acquisition of Providence Bank during the first quarter of 2021. The net interest margin decreased primarily due to a lower interest rates on loans and investments.

For the nine months ended September 30, 2021, average earning assets increased $1.3 billion, or 35.1%, and average interest-bearing liabilities increased $974.3 million or 34.0% compared with average balances for the same period in 2020.

The changes in average balances for these periods are shown below:

•	Average interest-bearing deposits with other financial institutions increased $191.3 million or 176.9%.

•	Average federal funds sold increased $0.2 million or 21.3%.

•	Average certificates of deposits investments decreased $1.5 million or 36.8%.

•	Average loans increased by $723.0 million or 24.1%.

•	Average securities increased by $434.5 million or 60.3%.

•	Average interest-bearing customer deposits increased by $933.8 million or 37.3%.

•	Average securities sold under agreements to repurchase decreased by $50.6 million or 22.1%.

•	Average borrowings and other debt increased by $91.1 million or 69.3%.

•Net interest margin decreased to 3.25% for the first nine months of 2021 from 3.30% for the first nine months of 2020.

Provision for Loan Losses

The provision for loan losses for the nine months ended September 30, 2021 and 2020 was $12.7 million and $15.5 million, respectively. The provision expense during the first nine months of 2021included recording an initial provision for credit losses for Providence Bank loans of $11.5 million, offset by lower provision expense for First Mid Bank compared to the same period in 2020 when ASC 2016-13 was adopted. Net charge-offs were $2.68 million for the nine months ended September 30, 2021, compared to net charge offs of $2.2 million for September 30, 2020. Nonperforming loans were $27.7 million and $22.4 million as of September 30, 2021 and 2020, respectively. For information on loan loss experience and nonperforming loans, see discussion under the “Nonperforming Loans” and “Loan Quality and Allowance for Loan Losses” sections below.

Other Income

An important source of the Company’s revenue is other income. The following table sets forth the major components of other income for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Three months September 30, 2021										Nine months September 30, 2021
	2021		2020		$ Change			% Change			2021		2020		$ Change			% Change
Wealth management revenues	$	4,204	$	3,468	$	736			21.2	%	$	14,146	$	10,921	$	3,225			29.5	%
Insurance commissions		3,932		3,291		641			19.5	%		14,777		14,000		777			5.6	%
Service charges		1,838		1,446		392			27.1	%		4,741		4,335		406			9.4	%
Security gains, net		11		95		(84	)		-88.4	%		88		913		(825	)		-90.4	%
Mortgage banking revenue, net		1,477		1,661		(184	)		-11.1	%		4,577		3,205		1,372			42.8	%
ATM / debit card revenue		3,060		2,367		693			29.3	%		8,900		6,593		2,307			35.0	%
Bank owned life insurance		813		434		379			87.3	%		2,211		1,293		918			71.0	%
Other		1,024		816		208			25.5	%		2,952		2,713		239			8.8	%
Total other income	$	16,359	$	13,578	$	2,781			20.5	%	$	52,392	$	43,973	$	8,419			19.1	%

Following are explanations of the changes in these other income categories for the three months ended September 30, 2021 compared to the same period in 2020:

•	Wealth management revenues increased due to increases across all lines of business within Wealth Management.

•	Insurance commissions increased primarily due to an increase in commission and fee income for the period, offset by a decline in contingency income during the first quarter of 2021 compared to the same period last year.

•	Fees from service charges increased during the first nine months of 2021 primarily due to an increase in overdraft fees and transaction account service charges.

•	Gains from the sale of securities during the third quarter of 2021 and 2020 were $11,000 and $95,000, respectively.

•	The decrease in mortgage banking income was due to a decrease in mortgage refinancing activity and fees from loans sold in the secondary market.

•

$42.2 million (representing 286 loans) for the three months ended September 30, 2021.

•

$55.9 million (representing 375 loans) for the three months ended September 30, 2020.

First Mid Bank generally releases the servicing rights on loans sold into the secondary market.

•	Revenue from ATMs and debit cards increased due to an increase in activity during the period and the acquisition of Providence Bank.

•	Bank owned life insurance income increased approximately $379,000 during the third quarter of 2021 compared to the same period in 2020, due to $30 million of additional insurance purchased during the first quarter and $30.3 million added through the acquisition of Providence Bank.

•	Other income increased primarily due to increases in loan and bank card fees from the acquisition of Providence Bank offset by waived fees and a swap upfront fee received in 2020 that did not recur in 2021.

Other Expense

The following table sets forth the major components of other expense for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands):

	Three months September 30,										Nine months September 30,
	2021		2020		$ Change			% Change			2021		2020		$ Change		% Change
Salaries and employee benefits	$	21,092	$	15,346	$	5,746			37.4	%	$	69,487	$	47,301	$	22,186		46.9	%
Net occupancy and equipment expense		5,382		4,363		1,019			23.4	%		15,834		12,746		3,088		24.2	%
Net other real estate owned expense		1,507		110		1,397			1270.0	%		3,551		62		3,489		5627.4	%
FDIC insurance		268		469		(201	)		-42.9	%		1,198		851		347		40.8	%
Amortization of intangible assets		1,414		1,277		137			10.7	%		3,929		3,862		67		1.7	%
Stationery and supplies		299		262		37			14.1	%		850		805		45		5.6	%
Legal and professional		1,878		1,320		558			42.3	%		4,919		4,207		712		16.9	%
Marketing and donations		679		387		292			75.5	%		1,688		1,182		506		42.8	%
ATM/debit card expense		618		730		(112	)		-15.3	%		2,530		1,609		921		57.2	%
Other operating expenses		3,184		2,663		521			19.6	%		15,948		8,131		7,817		96.1	%
Total other expense	$	36,321	$	26,927	$	9,394			34.9	%	$	119,934	$	80,756	$	39,178		48.5	%

Following are explanations for the changes in these other expense categories for the three months ended September 30, 2021 compared to the same period in 2020:

•

The increase in salaries and employee benefits, the largest component of other expense, is primarily due to an increase in incentive compensation and commissions, group insurance expense, share-based compensation expense, increases for merit raises and applicable payroll taxes, and the addition of Providence Bank during the first quarter of 2021. There were 960 and 816 full-time equivalent employees at September 30, 2021 and 2020, respectively.

•	The increase in occupancy and equipment expense was due to increases in depreciation and other property related expenses from the acquisition of Providence Bank and increases in data processing expense.

•	The increase in net other real estate owned expense was primarily due to properties acquired with the acquisition of Providence Bank that were sold at prices lower than recorded book value and properties from branch operations closed during 2021 that were moved to ORE and subsequently written down.

•	Expense for amortization of intangible assets increased due to increases in amortization expense for core deposit intangibles and customer list intangibles for the nine months ended September 30, 2021 compared to 2020, resulting from additional intangibles following acquisitions.

•	The increase in other operating expenses was primarily due to an increase in costs to acquire LINCO and additional expenses from the operation of Providence Bank.

•	On a net basis, all other categories of operating expenses increased slightly during the period compared to last year primarily due to the operation of Providence Bank.

Income Taxes

Total income tax expense amounted to $10,130,300 (22.6% effective tax rate) for the nine months ended September 30, 2021, compared to $10.0 million (24.0% effective tax rate) for the same period in 2020. The decline in effective rate is primarily resulting from an increase in tax exempt income and an increase in significant non-recurring costs.

The Company files U.S. federal and state of Illinois, Indiana, Missouri and Texas income tax returns. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2018.

Analysis of Consolidated Balance Sheets

Securities

The Company’s overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the available-for-sale and held-to-maturity securities as of September 30, 2021 and December 31, 2020 (dollars in thousands)

	September 30, 2021					December 31, 2020
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	199,166		1.23	%	$	132,083		1.25	%
Obligations of states and political subdivisions		328,394		2.47	%		237,886		2.72	%
Mortgage-backed securities: GSE residential		783,400		1.55	%		479,470		1.92	%
Other securities		35,098		4.21	%		10,740		5.22	%
Total securities	$	1,346,058		1.79	%	$	860,179		2.08	%

At September 30, 2021, the Company’s investment portfolio increased by $485.9 million from December 31, 2020 primarily due to securities added with the acquisition of Providence Bank. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed. The table below presents the credit ratings as of September 30, 2021 for certain investment securities (in thousands):

					Average Credit Rating of Fair Value at September 30, 2021 (1)
	Amortized Cost		Estimated Fair Value		AAA		AA +/-		A +/-		BBB +/-		< BBB -		Not rated
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	194,162	$	191,684	$	29,141	$	161,808	$	—	$	—	$	—	$	735
Obligations of state and political subdivisions		328,394		338,744		37,587		246,442		53,554		—		—		1,161
Mortgage-backed securities (2)		783,400		782,615		1,057		—		—		—		—		781,558
Other securities		33,076		33,923		—		—		—		1,006		—		32,917
Total available-for-sale	$	1,339,032	$	1,346,966	$	67,785	$	408,250	$	53,554	$	1,006	$	—	$	816,371
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	5,004	$	5,035	$	—	$	5,035	$	—	$	—	$	—	$	—
Other securities		2,022		2,022												2,022
Total held-to-maturity	$	7,026	$	7,057	$	—	$	5,035	$	—	$	—	$	—	$	2,022
Equity securities:
Federal Agricultural Mtg Corp	$	84	$	348	$	—	$	—	$	—	$	—	$	—	$	348

Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.

Mortgage-backed securities include mortgage-backed securities (MBS) and collateralized mortgage obligation (CMO) issues from the following government sponsored enterprises: FHLMC, FNMA, GNMA and FHLB. While MBS and CMOs are no longer explicitly rated by credit rating agencies, the industry recognizes that they are backed by agencies which have an implied government guarantee.

Loans

The loan portfolio is the largest category of the Company’s earning assets. The following table summarizes the composition of the loan portfolio at amortized cost, including loans held for sale, as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021					December 31, 2020
	Amortized Cost		% Outstanding Loans			Amortized Cost		% Outstanding Loans
Construction and land development	$	180,061		4.6	%	$	122,479		3.9	%
Agricultural real estate		278,788		7.1	%		254,341		8.1	%
1-4 family residential properties		412,565		10.5	%		325,762		10.4	%
Multifamily residential properties		306,911		7.8	%		189,632		6.0	%
Commercial real estate		1,583,255		40.1	%		1,174,300		37.4	%
Loans secured by real estate		2,761,580		70.0	%		2,066,514		65.8	%
Agricultural loans		126,534		3.2	%		137,352		4.4	%
Commercial and industrial loans		835,860		21.2	%		738,313		23.5	%
Consumer loans		80,064		2.0	%		78,002		2.5	%
All other loans		143,731		3.6	%		118,238		3.8	%
Total loans	$	3,947,769		100.0	%	$	3,138,419		100.0	%

Loan balances increased $809.4 million, or 25.8%. The increase included approximately $838 million of loans acquired from Providence Bank and $208 million of acquired loans in the St. Louis market. The increase was offset by payoffs and PPP forgiveness. The balance of real estate loans held for sale, included in the balances shown above, amounted to $1.9 million and $1.9 million as of September 30, 2021 and December 31, 2020, respectively.

Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. The Company does not have any sub-prime mortgages or credit card loans outstanding which are also generally considered to be higher credit risk.

Loans are geographically dispersed in central and southern Illinois, the St. Louis Metro area and central Missouri, and Texas. While these regions have experienced some economic stress during 2021 and 2020, the Company does not consider these locations high risk areas since these regions have not experienced the significant changes in real estate values seen in some other areas in the United States.

The Company does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage of total risk-based capital for the periods shown above. At September 30, 2021 and December 31, 2020, the Company did have industry loan concentrations that exceeded 25% of total risk-based capital in the following industries (dollars in thousands):

	September 30, 2021					December 31, 2020
	Principal balance		% Outstanding Loans			Principal balance		% Outstanding Loans
Other grain farming	$	285,212		7.22	%	$	308,202		9.82	%
Lessors of non-residential buildings		637,523		16.15	%		420,175		13.39	%
Lessors of residential buildings and dwellings		509,772		12.91	%		313,268		9.98	%
Other gambling industries		57,996		1.47	%		119,549		3.81	%
Hotels and motels		121,188		3.07	%		124,755		3.98	%

The concentration of other gambling industries was less than 25% of total risk-based capital as of September 30, 2021 however is shown for comparative purposes. The Company had no further industry loan concentrations in excess of 25% of total risk- based capital.

The following table presents the balance of loans outstanding as of September 30, 2021, by contractual maturities (in thousands):

	Maturity (1)
	One year or less(2)		Over 1 through 5 years		Over 5 years		Total
Construction and land development	$	44,992	$	70,963	$	64,106	$	180,061
Agricultural real estate		20,905		117,203		140,680		278,788
1-4 family residential properties		22,423		96,631		293,511		412,565
Multifamily residential properties		36,891		181,575		88,445		306,911
Commercial real estate		159,181		692,368		731,706		1,583,255
Loans secured by real estate		284,392		1,158,740		1,318,448		2,761,580
Agricultural loans		101,822		21,912		2,800		126,534
Commercial and industrial loans		311,674		330,224		193,962		835,860
Consumer loans		11,740		56,439		11,885		80,064
All other loans		46,307		24,777		72,647		143,731
Total loans	$	755,935	$	1,592,092	$	1,599,742	$	3,947,769

1.	Based upon remaining contractual maturity.

2.	Includes demand loans, past due loans and overdrafts.

As of September 30, 2021, loans with maturities over one year consisted of approximately $2.7 billion in fixed rate loans and approximately $509 million in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding renewals and borrower requests, which are handled on a case-by-case basis.

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.

Restructured loans are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven. Repossessed assets represent property acquired as the result of borrower defaults on loans. These assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure or repossession. Write-downs occurring at foreclosure are charged against the allowance for loan 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 at September 30, 2021 and December 31, 2020 (dollars in thousands):

	September 30, 2021			December 31, 2020
Nonaccrual loans	$	23,445		$	23,750
Restructured loans which are performing in accordance with revised terms		4,278			4,373
Total nonperforming loans		27,723			28,123
Repossessed assets		5,636			2,493
Total nonperforming loans and repossessed assets	$	33,359		$	30,616
Nonperforming loans to loans, before allowance for loan losses		0.70	%		0.90	%
Nonperforming loans and repossessed assets to loans, before allowance for loan losses		0.85	%		0.98	%

The $305,000 decrease in nonaccrual loans during 2021 resulted from the net of $6,351,000 of loans put on nonaccrual status offset by $4,095,000 of loans becoming current or paid-off, $234,000 of loans transferred to other real estate and $2,327,000 of loans charged off. The following table summarizes the composition of nonaccrual loans (dollars in thousands):

	September 30, 2021					December 31, 2020
	Balance		% of Total			Balance		% of Total
Construction and land development	$	943		4.0	%	$	162		0.7	%
Agricultural real estate		338		1.4	%		359		1.5	%
1-4 family residential properties		7,232		30.8	%		6,930		29.2	%
Multifamily residential properties		2,047		8.7	%		2,181		9.2	%
Commercial real estate		8,525		36.4	%		8,760		36.9	%
Loans secured by real estate		19,085		81.4	%		18,392		77.4	%
Agricultural loans		236		1.0	%		659		2.8	%
Commercial and industrial loans		3,891		16.6	%		4,372		18.4	%
Consumer loans		233		1.0	%		327		1.4	%
Total loans	$	23,445		100.0	%	$	23,750		100.0	%

Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $407,000 and $1,021,000 for the nine months ended September 30, 2021 and 2020, respectively.

The $3,143,000 increase in repossessed assets during the first nine months of 2021 resulted from $4,258,000 of additional assets repossessed and $8,060,000 of repossessed assets sold, write downs of seven assets of $423,000, assets added from the acquisition of Providence Bank of approximately $10.9 million, and approximately $3,523,000 of change in fair value premiums and discounts. The following table summarizes the composition of repossessed assets (dollars in thousands):

	September 30, 2021					December 31, 2020
	Balance		% of Total			Balance		% of Total
Construction and land development	$	3,381		60.0	%	$	1,436		57.6	%
1-4 family residential properties		—		0.0	%		71		2.8	%
Commercial real estate		2,244		39.8	%		982		39.4	%
Total real estate		5,625		99.8	%		2,489		99.8	%
Consumer loans		11		0.2	%		4		0.2	%
Total repossessed collateral	$	5,636		100.0	%	$	2,493		100.0	%

Repossessed assets sold during the first nine months of 2021 resulted in net losses of $575,000, of which $576,000 of net losses was related to real estate asset sales and $1,000 of net gains was related to other repossessed assets. Additionally, $2,778,000 of losses were recognized due to write downs of assets. Repossessed assets sold during the same period in 2020 resulted in net gains of $427,000, of which $451,000 of net losses was related to real estate asset sales and $24,000 of net gains was related to other repossessed assets.

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 loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan 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. Factors considered by management in evaluating the overall adequacy of the allowance include a migration analysis of the historical net loan losses by loan segment, 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 consumer’s ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. Management considers the allowance for loan 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 September 30, 2021, the Company’s loan portfolio included $405.3 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $285.2 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $13.6 million from $391.7 million at December 31, 2020 while loans concentrated in other grain farming decreased $23.0 million from $308.2 million at December 31, 2020. While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio. In addition, the Company has $121.2 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 $637.5 million of loans to lessors of non-residential buildings, $509.8 million of loans to lessors of residential buildings and dwellings, and $58.0 million of loans to other gambling industries.

The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the Board of Directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed. Most of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

The Company minimizes credit risk by adhering to sound underwriting and credit review policies. Management and the board of directors of the Company review these policies at least annually. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. The board of directors and management review the status of problem loans each month and formally determine a best estimate of the allowance for loan losses on a quarterly basis. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses.

Analysis of the allowance for credit losses as of September 30, 2021 and 2020, and of changes in the allowance for the three and nine months ended September 30, 2021 and 2020, is as follows (dollars in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
Average loans outstanding, net of unearned income	$	3,873,035		$	3,209,679		$	3,726,531		$	3,003,488
Allowance-prior year end of period		54,597			38,381			41,910			26,911
Adjustment for adoption of ASU 2013-16		—			—			—			1,672
Allowance - beginning of period		54,597			38,381			41,910			28,583
Initial allowance on loans purchased with credit deterioration		—			—			2,074			—
Charge-offs:
Construction and land development		—			13			23			13
1-4 family residential		45			48			241			313
Commercial real estate		55			—			535			551
Agricultural		—			—			—			—
Commercial and industrial		1,600			368			1,686			1,651
Consumer		376			127			1,008			414
Total charge-offs		2,076			556			3,493			2,942
Recoveries:
1-4 family residential		108			24			134			226
Commercial real estate		23			73			45			78
Agricultural		—			—			1			—
Commercial and industrial		24			28			64			143
Consumer		204			82			569			327
Total recoveries		359			207			813			774
Net charge-offs (recoveries)		1,717			349			2,680			2,168
Provision for loan losses		1,103			3,883			12,679			15,500
Allowance-end of period	$	53,983		$	41,915		$	53,983		$	41,915
Ratio of annualized net charge-offs to average loans		0.18	%		0.04	%		0.10	%		0.10	%
Ratio of allowance for credit losses to loans outstanding (at amortized cost)		1.37	%		1.30	%		1.37	%		1.30	%
Ratio of allowance for credit losses to nonperforming loans		195	%		187	%		195	%		187	%

Excluding the fully guaranteed PPP loans, the ratio of allowance for credit losses to loans outstanding was 1.39% as of September 30, 2021. The increase in the allowance for credit losses to nonperforming loans ratio is primarily due to the increase in the allowance for credit losses and a decline in nonperforming loans at September 30, 2021 compared to September 30, 2020. The increase in allowance for credit losses is primarily due to the day one provision required to be recorded in the acquisition of loans with Providence Bank.

During the first nine months of 2021, the Company had net charge-offs of $2,680,000 compared to net charge-offs of $2,168,000 in 2020. During the first nine months of 2021, there was a significant charge-off of one commercial real estate loans of one borrower totaling $480,000 and one commercial loan of one borrower totaling $1,572,000. During the first nine months of 2020, there were significant charge-offs of four commercial real estate loans to three borrowers totaling $482,000 and seven commercial loans to a single borrower totaling $1.4 million.

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 nine months ended September 30, 2021 and 2020 and for the year ended December 31, 2020 (dollars in thousands):

	Nine months ended September 30, 2021					Nine months ended September 30, 2020					Year ended December 31, 2020
	Average Balance		Weighted Average Rate			Average Balance		Weighted Average Rate			Average Balance		Weighted Average Rate
Demand deposits:
Non-interest-bearing	$	1,126,464	—%			$	747,350	—%			$	777,435	—%
Interest-bearing		2,130,511		0.19	%		1,494,883		0.25	%		1,557,264		0.24	%
Savings		608,844		0.08	%		460,705		0.09	%		469,276		0.09	%
Time deposits		695,536		0.68	%		545,530		1.71	%		531,834		1.61	%
Total average deposits	$	4,561,355		0.21	%	$	3,248,468		0.42	%	$	3,335,809		0.38	%

During the first nine months of 2021, the average balance of deposits increased by $1.2 billion from the average balance for the year ended December 31, 2020. Average non-interest-bearing deposits increased by $349.0 million, average interest-bearing balances increased by $573.2 million, savings account balances increased $139.6 million and balances of time deposits increased $163.7 million. These increases were primarily due to deposits added in the acquisition of Providence Bank and deposits assumed related to loans purchased during the third quarter of 2021.

The following table sets forth the high and low month-end balances for the nine months ended September 30, 2021 and 2020 and for the year ended December 31, 2020 (in thousands):

Nine months ended

September 30, 2021

Nine months ended

September 30, 2020

Year ended

December 31, 2020

High month-end balances of total deposits

4,988,562

3,619,836

3,692,784

Low month-end balances of total deposits

3,725,741

2,873,260

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 at September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021		December 31, 2020
3 months or less	$	112,413	$	72,945
Over 3 through 6 months		78,600		49,710
Over 6 through 12 months		86,813		88,682
Over 12 months		78,280		72,070
Total	$	356,106	$	283,407

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 offered as 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 and junior subordinated debentures. Information relating to securities sold under agreements to repurchase and other borrowings as of September 30, 2021 and December 31, 2020 is presented below (dollars in thousands):

	September 30, 2021			December 31, 2020
Securities sold under agreements to repurchase	$	149,891		$	206,937
Federal Home Loan Bank advances:
Fixed term – due in one year or less		30,180			18,984
Fixed term – due after one year		82,461			74,985
Other borrowings:
Fed funds		—			—
Subordinated debt		94,363			94,253
Junior subordinated debentures		19,153			19,027
Total	$	376,048		$	414,186
Average interest rate at end of period		1.60	%		0.81	%

Maximum outstanding at any month-end:
Securities sold under agreements to repurchase	$	212,503		$	350,288
Federal Home Loan Bank advances:
FHLB – overnight		—			—
Fixed term – due in one year or less		30,180			66,000
Fixed term – due after one year		97,877			74,895
Other borrowings:
Federal funds purchased		—			8,000
Debt due in one year or less		—			5,000
Debt due after one year		—			—
Subordinated debt		94,363			94,256
Junior subordinated debentures		19,153			19,027

Averages for the period (YTD):
Securities sold under agreements to repurchase	$	178,647		$	219,298
Federal Home Loan Bank advances:
FHLB – overnight		—			1,831
Fixed term – due in one year or less		22,176			24,858
Fixed term – due after one year		87,002			79,999
Other borrowings:
Federal funds purchased		—			525
Loans due in one year or less		—			656
Loans due after one year		—			—
Subordinated debt		94,302			22,403
Junior subordinated debentures		19,084			18,936
Total	$	401,211		$	370,338
Average interest rate during the period		1.57	%		1.07	%

Securities sold under agreements to repurchase decreased $57.0 million during the first nine months of 2021 primarily due to the cash flow needs of various customers. FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. At September 30, 2021 the fixed term advances, before net premiums of $700,000, consisted of $111.9 million as follows:

Advance		Term (in years)		Interest Rate	Maturity Date
$	5,000,000		7.0	2.55%	October 1, 2021
	5,000,000		5.0	2.71%	March 21, 2022
	5,000,000		1.0	0.00%	May 31, 2022
	5,000,000		3.0	2.41%	May 31, 2022
	5,000,000		3.0	2.12%	June 7, 2022
	5,000,000		3.0	2.12%	June 7, 2022
	5,000,000		8.0	2.40%	January 9, 2023
	5,000,000		4.0	2.44%	May 30, 2023
	5,000,000		3.5	1.51%	July 31, 2023
	5,000,000		3.5	0.77%	September 11, 2023
	10,000,000		5.0	1.45%	December 31, 2024
	5,000,000		5.0	0.91%	March 10, 2025
	6,940,511		10.0	2.64%	December 23, 2025
	5,000,000		10.0	1.14%	October 3, 2029
	5,000,000		10.0	1.15%	October 3, 2029
	5,000,000		10.0	1.12%	October 3, 2029
	10,000,000		10.0	1.39%	December 31, 2029
	15,000,000		10.0	1.41%	December 31, 2029

The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $15 million. There was no balance on this line of credit as of September 30, 2021. This loan was renewed on April 9, 2021 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by the stock of First Mid Bank. The Company and First Mid Bank were in compliance with the existing covenants at September 30, 2021 and 2020, and December 31, 2020.

On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the Company and the Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes are unsecured, subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding October 15, 2025, the Notes will bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 383 basis points, or such other rate as determined pursuant to the Supplemental Indenture, provided that in no event shall the applicable floating interest rate be less than zero per annum.

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, 1.18% and 1.82% at September 30, 2021 and December 31, 2020, respectively).

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 (1.97% and 2.07% at September 30, 2021 and December 31, 2020, respectively) and resets quarterly.

On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First BancTrust Corporation. The $6,000,000 of trust preferred securities and an additional $186,000 additional investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (1.82% and 2.44% at September 30, 2021 and December 31, 2020, respectively) and resets quarterly.

The trust preferred securities issued by Trust II, CLST I and FBTCST I are included as Tier 1 capital of the Company for regulatory capital purposes. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1 capital for regulatory purposes. The final rule provided a five-year transition period, ending September 30, 2010, for application of the revised quantitative limits. On March 17, 2009, the Federal Reserve Board adopted an additional final rule that delayed the effective date of the new limits on inclusion of trust preferred securities in the calculation of Tier 1 capital until March 31, 2012. The application of the revised quantitative limits did not and is not expected to have a significant impact on its calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized. The Dodd-Frank Act, signed into law July 21, 2010, removes trust preferred securities as a permitted component of a holding company’s Tier 1 capital after a three-year phase-in period beginning January 1, 2013 for larger holding companies. For holding companies with less than $15 billion in consolidated assets, existing issues of trust preferred securities are grandfathered and not subject to this new restriction.

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 certain 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.” The rules permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets (such as the Company) 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. 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. On June 25, 2020, the agencies announced that certain restrictions under the Volcker Rule applicable to large banking entities will be eased commencing October 1, 2020.

Interest Rate Sensitivity

The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of interest-bearing assets differ significantly from the maturity or repricing characteristics of interest- bearing liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company’s asset liability management committee (ALCO) oversees the interest rate sensitivity position and directs the overall allocation of funds.

In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as “static GAP” analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet. The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at September 30, 2021 (dollars in thousands):

	Rate Sensitive Within
	1 years			1-2 years			2-3 years			3-4 years			4-5 years			Thereafter			Total		Fair Value
Interest-earning assets:
Federal funds sold and other interest-bearing deposits	$	237,395		$	—		$	—		$	—		$	—		$	—		$	237,395	$	237,395
Certificates of deposit investments		1,715			980			—		—				—		—				2,695		2,695
Taxable investment securities		204,358			176,757			196,061			91,053			65,009			287,663			1,020,901		1,020,932
Nontaxable investment securities		34,967			16,091			11,548			18,389			27,194			225,250			333,439		333,439
Loans		1,629,579			505,704			464,265			548,113			532,970			267,138			3,947,769		3,886,029
Total	$	2,108,014		$	699,532		$	671,874		$	657,555		$	625,173		$	780,051		$	5,542,199	$	5,480,490
Interest-bearing liabilities:
Savings and NOW accounts	$	515,836		$	176,508		$	176,508		$	176,508		$	176,508		$	806,897		$	2,028,765	$	2,028,765
Money market accounts		767,934			43,165			43,165			43,165			43,165			135,258			1,075,852		1,075,852
Other time deposits		487,827			92,046			26,824			15,546			18,687			65			640,995		643,658
Short-term borrowings/debt		149,891			—			—			—			—			—			149,891		149,896
Long-term borrowings/debt		49,333			20,158			—			15,000			101,666			40,000			226,157		222,096
Total	$	1,970,821		$	331,877		$	246,497		$	250,219		$	340,026		$	982,220		$	4,121,660	$	4,120,267
Rate sensitive assets – rate sensitive liabilities	$	137,193		$	367,655		$	425,377		$	407,336		$	285,147		$	(202,169	)	$	1,420,539
Cumulative GAP		137,193			504,848			930,225			1,337,561			1,622,708			1,420,539
Cumulative amounts as % of total Rate sensitive assets		2.5	%		6.6	%		7.7	%		7.3	%		5.1	%		-3.6	%
Cumulative Ratio		2.5	%		9.1	%		16.8	%		24.1	%		29.3	%		25.6	%

The static GAP analysis shows that at September 30, 2021, the Company was asset sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future decreases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis. The Company’s ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank’s historical experience and with known industry trends. ALCO meets at least monthly to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities. The Company is currently experiencing downward pressure on asset yields resulting from the extended period of historically low interest rates and heightened competition for loans. A continuation of this environment could result in a decline in interest income and the net interest margin.

Capital Resources

At September 30, 2021, the Company’s stockholders' equity increased $59.0 million or 10.4%, to $627 million from $568 million as of December 31, 2020. During the first nine months of 2021, net income contributed $34.7 million to equity before the payment of dividends to stockholders. The change in market value of available-for-sale investment securities decreased stockholders' equity by $11.5 million, net of tax. Dividends of $11.1 million were paid during the first nine months of 2021. The acquisition of LINCO also increase stockholders’ equity $44.2 million.

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 follows similar minimum regulatory requirements established for banks by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation, as applicable. 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 regulatory capital standards to ensure capital adequacy require the Company and its subsidiary banks to maintain a minimum capital amounts and ratios (set forth in the table below). Management believes that, as of September 30, 2021 and December 31, 2020, the Company and First Mid Bank met all capital adequacy requirements.

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, the Company has elected the option to delay the estimated impact on regulatory capital of adopting ASU 2016-13, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13, as well as 25% of the quarterly increases in allowance for credit losses subsequent to adoption of ASU 2016-13 will be delayed for two years. After two years, the cumulative amount of these adjustments will be phased out of the regulatory capital calculation over a three-year period, with 75% of the adjustments included in year three, 50% of the adjustments included in year four and 25% of the adjustments included in year five. After five years, the temporary delay of ASU 2016-13 adoption will be fully reversed.

To be categorized as well-capitalized, 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 following table (dollars in thousands):

	Actual					Required Minimum For Capital Adequacy Purposes			To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio	Amount		Ratio
September 30, 2021
Total capital (to risk-weighted assets)
Company	$	658,240		15.87	%	$	435,549	> 10.50%	N/A		N/A
First Mid Bank		612,903		14.82			434,177	> 10.50	$	413,502	> 10.00%
Tier 1 capital (to risk-weighted assets)
Company		519,929		12.53			352,587	> 8.50	N/A		N/A
First Mid Bank		568,955		13.76			351,477	> 8.50		330,802	> 8.00
Common equity tier 1 capital (to risk-weighted assets)
Company		500,776		12.07			290,366	> 7.00	N/A		N/A
First Mid Bank		568,955		13.76			289,452	> 7.00		268,776	> 6.50
Tier 1 capital (to average assets)
Company		519,929		12.53			229,863	> 4.00	N/A		N/A
First Mid Bank		568,955		13.76			228,905	> 4.00		286,132	> 5.00

December 31, 2020
Total capital (to risk-weighted assets)
Company	$	589,352		18.82	%	$	328,865	> 10.50%	N/A		N/A
First Mid Bank		446,308		14.30			327,685	> 10.50	$	312,081	> 10.00%
Tier 1 capital (to risk-weighted assets)
Company		458,325		14.63			266,224	> 8.50	N/A		N/A
First Mid Bank		409,534		13.12			265,269	> 8.50		249,665	> 8.00
Common equity tier 1 capital (to risk-weighted assets)
Company		439,299		14.03			219,243	> 7.00	N/A		N/A
First Mid Bank		409,534		13.12			218,457	> 7.00		202,853	> 6.50
Tier 1 capital (to average assets)
Company		458,325		10.22			179,302	> 4.00	N/A		N/A
First Mid Bank		409,534		9.18			178,497	> 4.00		223,121	> 5.00

The Company's risk-weighted assets, capital, and capital ratios for September 30, 2021 are computed in accordance with Basel III capital rules which were effective January 1, 2015. See heading "Basel III" in the Overview section of this report for a more detailed description of the Basel III rules. As of September 30, 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.

Stock Plans

Participants may purchase Company stock under the following four plans of the Company: The Deferred Compensation Plan, the First Retirement and Savings Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan. For more detailed information on these plans, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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.

Following the stockholders’ approval at the 2021 annual meeting of the Company, a maximum of 399,983 shares of common stock may be issued under the SI Plan. The Company awarded 27,750 and 25,200 restricted stock awards during 2021 and 2020, respectively and 35,400 and 16,950 as stock unit awards during 2021 and 2020, respectively.

Employee Stock Purchase 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 the quarter, the Company repurchased no shares. The Company has approximately $4.7 million in remaining capacity under its existing repurchase program.

Although the Company adopted the repurchase plan, the Company may make discretionary repurchases in the open market or in privately negotiated transactions from time to time. The timing, manner, price and amount of any such repurchases will be determined by the Company at its discretion and will depend upon a variety of factors including economic and market conditions, price, applicable legal requirements and other factors.

Liquidity

Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of the business. Financial obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing. The Company’s liquidity management focuses on the ability to obtain funds economically through assets that may be converted into cash at minimal costs or through other sources. The Company’s other sources of cash include overnight federal fund lines, Federal Home Loan Bank advances, deposits of the State of Illinois, 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 of the Company's liquidity sources include:

•

First Mid Bank has $100 million available in overnight federal fund lines, including $30 million from First Horizon Bank, N.A., $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 September 30, 2021, First Mid Bank met these regulatory requirements.

•

First Mid Bank can borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the Federal Home Loan Bank. Collateral that can be pledged includes one-to-four family residential real estate loans and securities. At September 30, 2021, the excess collateral at the FHLB would support approximately $670 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 September 30, 2021, the Company had a revolving credit agreement in the amount of $15 million with The Northern Trust Company with an outstanding balance of $0 million and $15 million in available funds. This loan was renewed

on April 9, 2021 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by the stock of First Mid Bank, including requirements for operating and capital ratios. The Company and its subsidiary bank were in compliance with the existing covenants at September 30, 2021 and 2020 and December 31, 2020.

Management continues to monitor its expected liquidity requirements carefully, focusing primarily on cash flows from:

•	lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions;

•	deposit activities, including seasonal demand of private and public funds;

•	investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Treasury and government agency securities; and

•	operating activities, including scheduled debt repayments and dividends to stockholders.

The following table summarizes significant contractual obligations and other commitments at September 30, 2021 (in thousands):

			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
Time deposits	$	640,995	$	487,827	$	118,870	$	34,233	$	65
Debt		113,516		—		—		—		113,516
Other borrowing		262,532		180,071		20,158		22,303		40,000
Operating leases		18,531		2,761		4,435		3,226		8,109
Supplemental retirement		1,643		50		100		150		1,343
	$	1,037,217	$	670,709	$	143,563	$	59,912	$	163,033

For the nine months ended September 30, 2021, net cash of $46.7 million was provided by operating activities, $348.9 million was used in investing activities, and $230.1 million was provided by financing activities. In total, cash and cash equivalents decreased by $72.1 million since year-end 2020.

Off-Balance Sheet Arrangements

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 September 30, 2021 and December 31, 2020 were as follows (in thousands):

	September 30, 2021		December 31, 2020
Unused commitments and lines of credit:
Commercial real estate	$	186,305	$	56,309
Commercial operating		541,656		396,345
Home equity		58,296		40,464
Other		236,150		112,327
Total	$	1,022,407	$	605,445
Standby letters of credit	$	11,808	$	10,048

Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded within ninety days. Lines of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long as there is no violation of any condition established in the loan agreement. Both commitments to originate credit and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the lines and some commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties. Standby letters of credit are primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers. The maximum amount of credit that would be extended under letters of credit is equal to the total off-balance sheet contract amount of such instrument. 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.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the market risk faced by the Company since December 31, 2020. For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 4.

CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. Further, there have been no changes in the Company’s internal control over financial reporting during the last fiscal quarter that have materially affected or that are reasonably likely to affect materially the Company’s internal control over financial reporting.

PART II

ITEM 1.

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 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 interest rate risk, liquidity risk, credit risk, operational risk, risks from economic or 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. See the risk factors and “Supervision and Regulation” described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

Period

(a)

Total

Number

of Shares

Purchased

(b)

Average

Price Paid

per Share

(c)

Total

Number

of Shares

Purchased

as Part of

Publicly

Announced

Plans or

Programs

(d)

Approximate

Dollar Value

of Shares

that May

Yet Be

Purchased

Under the

Plans or

Programs

Total

0.00

4,732,000

See heading “Stock Repurchase Program” for more information regarding stock purchases.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that precedes the Signature Page and the exhibits filed.


Exhibit Number		Exhibit Index to Quarterly Report on Form 10-Q Description and Filing or Incorporation Reference

2.1		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)

31.1		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (formatted as Inline XBRL and contained in Exhibits 101)
		*Exhibits omitted pursuant to Item 601(a)(5) of Regulation S-K. Copies of any omitted exhibit will be furnished to the SEC upon request.

SIGNATURES

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.

FIRST MID BANCSHARES, INC.

(Registrant)

Date: November 4, 2021

/s/ Joseph R. Dively

Joseph R. Dively

President and Chief Executive Officer

/s/ Matthew K. Smith

Matthew K. Smith

Chief Financial Officer