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FIRST MID BANCSHARES, INC. - Quarter Report: 2021 March (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 March 31, 2021

Or

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

For the transition period from                               to                               

Commission file number 0-13368

FIRST MID BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

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 May 11, 2021 16,736,442 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)

 

March 31, 2021

 

 

December 31, 2020

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks:

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

78,481

 

 

$

75,152

 

Interest bearing

 

 

329,745

 

 

 

340,821

 

Federal funds sold

 

 

1,321

 

 

 

1,308

 

Cash and cash equivalents

 

 

409,547

 

 

 

417,281

 

Certificates of deposit

 

 

2,695

 

 

 

2,695

 

Investment securities:

 

 

 

 

 

 

 

 

Available-for-sale, at fair value

 

 

1,087,948

 

 

 

879,240

 

Held-to-maturity, at amortized cost (estimated fair value of $7,125 and $5,119 at

   March 31, 2021 and December 31, 2020, respectively)

 

 

7,045

 

 

 

5,016

 

Equity securities, at fair value

 

 

300

 

 

 

218

 

Loans held for sale

 

 

4,693

 

 

 

1,924

 

Loans

 

 

3,938,406

 

 

 

3,136,495

 

Less allowance for credit losses

 

 

(55,418

)

 

 

(41,910

)

Net loans

 

 

3,882,988

 

 

 

3,094,585

 

Interest receivable

 

 

20,218

 

 

 

19,287

 

Other real estate owned

 

 

13,339

 

 

 

2,489

 

Premises and equipment, net

 

 

86,654

 

 

 

58,206

 

Goodwill

 

 

113,948

 

 

 

104,992

 

Intangible assets, net

 

 

24,658

 

 

 

23,128

 

Bank owned life insurance

 

 

124,925

 

 

 

68,955

 

Right of use lease assets

 

 

17,424

 

 

 

17,209

 

Other assets

 

 

40,888

 

 

 

31,123

 

Total assets

 

$

5,837,270

 

 

$

4,726,348

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

1,185,181

 

 

$

936,926

 

Interest bearing

 

 

3,552,512

 

 

 

2,755,858

 

Total deposits

 

 

4,737,693

 

 

 

3,692,784

 

Securities sold under agreements to repurchase

 

 

212,503

 

 

 

206,937

 

Interest payable

 

 

3,214

 

 

 

2,345

 

FHLB borrowings

 

 

116,861

 

 

 

93,969

 

Junior subordinated debentures, net

 

 

19,069

 

 

 

19,027

 

Subordinated debt, net

 

 

94,289

 

 

 

94,253

 

Lease liabilities

 

 

17,578

 

 

 

17,351

 

Other liabilities

 

 

34,179

 

 

 

31,454

 

Total liabilities

 

 

5,235,386

 

 

 

4,158,120

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, $4 par value; authorized 30,000,000 shares; issued 18,662,947 and

   17,361,898 shares in 2021 and 2020, respectively

 

 

76,652

 

 

 

71,449

 

Additional paid-in capital

 

 

338,897

 

 

 

297,806

 

Retained earnings

 

 

198,408

 

 

 

197,726

 

Deferred compensation

 

 

1,597

 

 

 

2,980

 

Accumulated other comprehensive income

 

 

5,087

 

 

 

17,095

 

Less treasury stock at cost, 620,691 shares in 2021 and 2020

 

 

(18,757

)

 

 

(18,828

)

Total stockholders’ equity

 

 

601,884

 

 

 

568,228

 

Total liabilities and stockholders’ equity

 

$

5,837,270

 

 

$

4,726,348

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2

 

 


First Mid Bancshares, Inc.

Condensed Consolidated Statements of Income (unaudited)

(In thousands, except per share data)

 

 

 

Three months ended March 31,

 

(In thousands, except per share data)

 

2021

 

 

2020

 

Interest income:

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

35,886

 

 

$

30,027

 

Interest on investment securities

 

 

4,842

 

 

 

4,589

 

Interest on certificates of deposit investments

 

 

14

 

 

 

31

 

Interest on federal funds sold

 

 

 

 

 

2

 

Interest on deposits with other financial institutions

 

 

74

 

 

 

92

 

Total interest income

 

 

40,816

 

 

 

34,741

 

Interest expense:

 

 

 

 

 

 

 

 

Interest on deposits

 

 

2,484

 

 

 

3,861

 

Interest on securities sold under agreements to repurchase

 

 

70

 

 

 

194

 

Interest on FHLB borrowings

 

 

374

 

 

 

580

 

Interest on other borrowings

 

 

 

 

 

15

 

Interest on junior subordinated debentures

 

 

140

 

 

 

218

 

Interest on subordinated debentures

 

 

984

 

 

 

 

Total interest expense

 

 

4,052

 

 

 

4,868

 

Net interest income

 

 

36,764

 

 

 

29,873

 

Provision for loan losses

 

 

12,136

 

 

 

5,481

 

Net interest income after provision for loan losses

 

 

24,628

 

 

 

24,392

 

Other income:

 

 

 

 

 

 

 

 

Wealth management revenues

 

 

4,926

 

 

 

3,626

 

Insurance commissions

 

 

5,857

 

 

 

6,621

 

Service charges

 

 

1,364

 

 

 

1,778

 

Securities gains, net

 

 

4

 

 

 

531

 

Mortgage banking revenue, net

 

 

1,409

 

 

 

308

 

ATM / debit card revenue

 

 

2,699

 

 

 

1,987

 

Bank owned life insurance

 

 

637

 

 

 

431

 

Other

 

 

853

 

 

 

1,228

 

Total other income

 

 

17,749

 

 

 

16,510

 

Other expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

23,487

 

 

 

16,500

 

Net occupancy and equipment expense

 

 

4,970

 

 

 

4,242

 

Net other real estate owned expense

 

 

78

 

 

 

(46

)

FDIC insurance

 

 

452

 

 

 

93

 

Amortization of intangible assets

 

 

1,220

 

 

 

1,295

 

Stationery and supplies

 

 

316

 

 

 

268

 

Legal and professional

 

 

1,402

 

 

 

1,398

 

ATM / debit card

 

 

838

 

 

 

605

 

Marketing and donations

 

 

502

 

 

 

481

 

Other

 

 

4,335

 

 

 

2,895

 

Total other expense

 

 

37,600

 

 

 

27,731

 

Income before income taxes

 

 

4,777

 

 

 

13,171

 

Income taxes

 

 

668

 

 

 

3,172

 

Net income

 

$

4,109

 

 

$

9,999

 

Per share data:

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.24

 

 

$

0.60

 

Diluted net income per common share

 

 

0.24

 

 

 

0.60

 

Cash dividends declared per common share

 

 

0.205

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3

 

 


First Mid Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

Three months ended March 31,

 

(in thousands)

 

2021

 

 

2020

 

Net income

 

$

4,109

 

 

$

9,999

 

Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

Unrealized losses on available-for-sale securities, net of taxes of $4,903 and   $1,139 for three months ended March 31, 2021 and 2020, respectively

 

 

(12,005

)

 

 

(2,789

)

Amortized holding losses on held-to-maturity securities transferred from available-for- sale, net of taxes of $0 and ($5) for three months ended March 31, 2021 and 2020, respectively

 

 

 

 

 

15

 

Less: reclassification adjustment for realized gains included in net income, net of taxes of $1 and $154 for three months ended March 31, 2021 and 2020, respectively

 

 

(3

)

 

 

(377

)

Other comprehensive income, net of taxes

 

 

(12,008

)

 

 

(3,151

)

Comprehensive income (loss)

 

$

(7,899

)

 

$

6,848

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4

 

 


First Mid Bancshares, Inc.

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

For the three months ended March 31, 2021 and 2020

(in thousands)

 

Common

Stock

 

 

Additional

Paid-In-

Capital

 

 

Retained

Earnings

 

 

Deferred

Compensation

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Treasury

Stock

 

 

Total

 

December 31, 2020

 

$

71,449

 

 

$

297,806

 

 

$

197,726

 

 

$

2,980

 

 

$

17,095

 

 

$

(18,828

)

 

$

568,228

 

Net income

 

 

 

 

 

 

 

 

4,109

 

 

 

 

 

 

 

 

 

 

 

 

4,109

 

Other comprehensive income, net tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,008

)

 

 

 

 

 

(12,008

)

Cash dividends on common stock (.205/share)

 

 

 

 

 

 

 

 

(3,427

)

 

 

 

 

 

 

 

 

 

 

 

(3,427

)

Issuance of 4,896 common shares pursuant to the Dividend Reinvestment Plan

 

 

17

 

 

 

154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

171

 

Issuance of 18,397 common shares pursuant to Deferred Compensation Plan

 

 

3

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

Issuance of 27,750 restricted shares pursuant to the 2017 Stock Incentive Plan

 

 

111

 

 

 

832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

943

 

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 3,142 common shares pursuant to the Employee Stock Purchase Plan

 

 

13

 

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75

 

Deferred Compensation

 

 

 

 

 

 

 

 

 

 

 

(71

)

 

 

 

 

 

71

 

 

 

 

Tax benefit related to deferred compensation distributions

 

 

 

 

 

179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

179

 

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

 

 

 

 

 

 

 

 

 

 

 

(1,312

)

 

 

 

 

 

 

 

 

(1,312

)

March 31, 2021

 

$

76,652

 

 

$

338,897

 

 

$

198,408

 

 

$

1,597

 

 

$

5,087

 

 

$

(18,757

)

 

$

601,884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

9,999

 

 

 

 

 

 

 

 

 

 

 

 

9,999

 

Other comprehensive income, net tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,151

)

 

 

 

 

 

(3,151

)

Issuance of 25,200 restricted shares pursuant to the 2017 Stock Incentive Plan

 

 

101

 

 

 

767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

868

 

Issuance of 3,804 common shares pursuant to the Employee Stock Purchase Plan

 

 

15

 

 

 

71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

86

 

Deferred Compensation

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

5

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

(733

)

 

 

 

 

 

 

 

 

(733

)

March 31, 2020

 

$

71,268

 

 

$

296,853

 

 

$

175,949

 

 

$

2,022

 

 

$

5,209

 

 

$

(18,250

)

 

$

533,051

 

See accompanying notes to unaudited condensed consolidated financial statements.

5

 

 


First Mid Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

Three months ended March 31,

 

(In thousands)

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

4,109

 

 

$

9,999

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

12,136

 

 

 

5,481

 

Depreciation, amortization and accretion, net

 

 

2,692

 

 

 

2,721

 

Change in cash surrender value of bank owned life insurance

 

 

(637

)

 

 

(431

)

Stock-based compensation expense

 

 

262

 

 

 

204

 

Operating lease payments

 

 

(711

)

 

 

(677

)

Gains on investment securities, net

 

 

(4

)

 

 

(531

)

Gain on sales of repossessed assets, net

 

 

(35

)

 

 

(162

)

Gain on sale of premises and equipment

 

 

 

 

 

(26

)

Gains on sale of loans held for sale, net

 

 

(1,229

)

 

 

(353

)

Decrease in accrued interest receivable

 

 

2,034

 

 

 

155

 

(Decrease) increase in accrued interest payable

 

 

262

 

 

 

(164

)

Origination of loans held for sale

 

 

(42,379

)

 

 

(20,039

)

Proceeds from sale of loans held for sale

 

 

40,839

 

 

 

20,961

 

Increase in other investment

 

 

(84

)

 

 

 

(Increase) decrease in other assets

 

 

454

 

 

 

(937

)

Decrease in other liabilities

 

 

3,844

 

 

 

413

 

Net cash provided by operating activities

 

 

21,553

 

 

 

16,614

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from maturities of certificates of deposit investments

 

 

 

 

 

1,225

 

Purchases of certificates of deposit investments

 

 

 

 

 

(980

)

Proceeds from maturities of securities available-for-sale

 

 

68,541

 

 

 

108,666

 

Proceeds from maturities of securities held-to-maturity

 

 

 

 

 

45,000

 

Purchases of securities available-for-sale

 

 

(177,116

)

 

 

(44,830

)

Net (increase) decrease in loans

 

 

26,319

 

 

 

(50,059

)

Purchases of premises and equipment

 

 

(1,195

)

 

 

(786

)

Proceeds from sales of other real property owned

 

 

116

 

 

 

1,211

 

Investment in banked owned life insurance

 

 

(25,000

)

 

 

 

Net cash provided by acquisition

 

 

27,061

 

 

 

 

Net cash (used in) provided by investing activities

 

 

(81,274

)

 

 

59,447

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

54,499

 

 

 

(8,739

)

Decrease in federal funds purchased

 

 

 

 

 

(5,000

)

Increase in repurchase agreements

 

 

5,566

 

 

 

23,540

 

Proceeds from FHLB advances

 

 

 

 

 

15,000

 

Repayment of FHLB advances

 

 

(5,000

)

 

 

(9,000

)

Proceeds from long-term debt

 

 

 

 

 

5,000

 

Proceeds from issuance of common stock

 

 

179

 

 

 

85

 

Dividends paid on common stock

 

 

(3,257

)

 

 

 

Net cash provided by financing activities

 

 

51,987

 

 

 

20,886

 

Increase (decrease) in cash and cash equivalents

 

 

(7,734

)

 

 

96,947

 

Cash and cash equivalents at beginning of period

 

 

417,281

 

 

 

85,080

 

Cash and cash equivalents at end of period

 

$

409,547

 

 

$

182,027

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6

 

 


First Mid Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

Three months ended March 31,

 

(In thousands)

 

2021

 

 

2020

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

3,183

 

 

$

5,100

 

Income taxes

 

 

 

 

 

 

Supplemental disclosures of noncash investing and financing activities

 

 

 

 

 

 

 

 

Loans transferred to other real estate

 

 

45

 

 

 

184

 

Dividends reinvested in common stock

 

 

171

 

 

 

 

Net tax benefit related to option and deferred compensation plans

 

 

179

 

 

 

22

 

Supplemental dislosure of purchase of capital stock of LINCO Bancshares, Inc.

 

 

 

 

 

 

 

 

Fair value of assets acquired

 

$

1,173,443

 

 

 

-

 

Consideration paid:

 

 

 

 

 

 

 

 

Cash paid

 

 

103,500

 

 

 

-

 

Common stock issued

 

 

44,191

 

 

 

-

 

Total consideration paid

 

 

147,691

 

 

 

 

 

Fair value of liabilities assumed

 

$

1,025,752

 

 

 

-

 

 

7

 

 


 

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”), Providence Bank (“Providence Bank”), First Mid Wealth Management Company, Mid-Illinois Data Services, Inc. (“MIDS”), First Mid Insurance Group, Inc. (“First Mid Insurance”) and First Mid Captive, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. The 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 March 31, 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 March 31, 2021 presentation and there was no impact on net income or stockholders’ equity. The results of the interim period ended March 31, 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.

 

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.

 

8

 

 


 

Website

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

General Litigation

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

Loan Purchase

On April 21, 2020, First Mid Bank completed an acquisition of loans in the St. Louis metro market totaling $183 million. There were no loans purchased with deteriorated credit.

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 16,950 and 16,200 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 March 31, 2021 and 2020, 3,142 shares and 3,804 shares, respectively, were issued pursuant to the ESPP.

Captive Insurance Company

First Mid Captive, Inc. (theCaptive"), 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.


9

 

 


 

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.

10

 

 


Accumulated Other Comprehensive Income

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

 

 

Unrealized Gain

(Loss) on

Securities

 

March 31, 2021

 

 

 

 

Net unrealized gains on securities available-for-sale

 

$

7,165

 

Tax expense

 

 

(2,078

)

Balance at March 31, 2021

 

$

5,087

 

 

 

 

 

 

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 months ended March 31, 2021 and 2020, were as follows (in thousands):

 

 

 

Amounts Reclassified from

Other Comprehensive Income

 

 

 

 

 

Three months ended March 31,

 

 

 

 

 

2021

 

 

2020

 

 

Affected Line Item in the Statements of Income

Realized gains on available-for-sale securities

 

$

4

 

 

$

531

 

 

Securities gains, net

Tax effect

 

 

(1

)

 

 

(154

)

 

Income taxes

Total reclassifications out of accumulated other

   comprehensive income

 

$

3

 

 

$

377

 

 

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.

11

 

 


 

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 & Land Development

 

$

1,033

 

 

$

1,146

 

 

$

(113

)

Farm

 

 

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 & 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 & Land Development

 

$

291

 

 

$

 

 

$

291

 

1-4 Family Residential Properties

 

 

48

 

 

 

6

 

 

 

42

 

Commercial Real Estate

 

 

818

 

 

 

359

 

 

 

459

 

Commercial & Industrial

 

 

41

 

 

 

 

 

 

41

 

Allowance for credit losses for PCD loans

 

$

1,198

 

 

$

365

 

 

$

833

 

 


12

 

 


 

 

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 months ended March 31, 2021 and 2020 were as follows:

  

 

 

Three months ended March 31,

 

 

 

2021

 

 

2020

 

Basic Net Income per Common Share

 

 

 

 

 

 

 

 

Available to Common Stockholders:

 

 

 

 

 

 

 

 

Net income

 

$

4,109,000

 

 

$

9,999,000

 

Weighted average common shares outstanding

 

 

17,299,927

 

 

 

16,693,183

 

Basic earnings per common share

 

$

0.24

 

 

$

0.60

 

 

 

 

 

 

 

 

 

 

Diluted Net Income per Common Share

 

 

 

 

 

 

 

 

Available to Common Stockholders:

 

 

 

 

 

 

 

 

Net income applicable to diluted earnings per share

 

$

4,109,000

 

 

$

9,999,000

 

Weighted average common shares outstanding

 

 

17,299,927

 

 

 

16,693,183

 

Dilutive potential common shares:

 

 

 

 

 

 

 

 

Restricted stock awarded

 

 

53,020

 

 

 

46,908

 

Dilutive potential common shares

 

 

53,020

 

 

 

46,908

 

Diluted weighted average common shares outstanding

 

 

17,352,947

 

 

 

16,740,091

 

Diluted earnings per common share

 

$

0.24

 

 

$

0.60

 

13

 

 


 

 

There were no shares excluded when computing diluted earnings per share for the three months ended March 31, 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 March 31, 2021 and December 31, 2020 were as follows (in thousands):

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

(Losses)

 

 

Fair Value

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S.

   government corporations & agencies

 

$

174,789

 

 

$

377

 

 

$

(3,636

)

 

$

171,530

 

Obligations of states and political subdivisions

 

 

249,776

 

 

 

9,226

 

 

 

(1,283

)

 

 

257,719

 

Mortgage-backed securities: GSE residential

 

 

620,102

 

 

 

7,988

 

 

 

(6,138

)

 

 

621,952

 

Other securities

 

 

36,116

 

 

 

699

 

 

 

(68

)

 

 

36,747

 

Total available-for-sale

 

$

1,080,783

 

 

$

18,290

 

 

$

(11,125

)

 

$

1,087,948

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of

   U.S. government corporations & agencies

 

$

5,012

 

 

$

80

 

 

$

 

 

$

5,092

 

Annuity

 

 

2,033

 

 

 

 

 

 

 

 

 

2,033

 

Total held-to-maturity

 

$

7,045

 

 

$

80

 

 

$

 

 

$

7,125

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S.

   government corporations & 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 & agencies

 

$

5,016

 

 

$

103

 

 

$

 

 

$

5,119

 

 

The Company also had $300,000 and $218,000 of equity securities, at fair value, as of March 31, 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 March 31, 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 months ended March 31, 2021 and 2020 (in thousands):

 

 

 

Three months March 31,

 

 

 

2021

 

 

2020

 

Gross gains

 

$

4

 

 

$

531

 

Gross losses

 

 

 

 

 

 

 

14

 

 


 

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 March 31, 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

 

$

105,823

 

 

$

54,392

 

 

$

11,315

 

 

$

 

 

$

171,530

 

Obligations of state and political subdivisions

 

 

29,540

 

 

 

71,481

 

 

 

152,466

 

 

 

4,232

 

 

 

257,719

 

Mortgage-backed securities: GSE residential

 

 

26,948

 

 

 

293,661

 

 

 

301,343

 

 

 

 

 

 

621,952

 

Other securities

 

 

12,042

 

 

 

20,070

 

 

 

4,635

 

 

 

 

 

 

36,747

 

Total available-for-sale investments

 

$

174,353

 

 

$

439,604

 

 

$

469,759

 

 

$

4,232

 

 

$

1,087,948

 

Weighted average yield

 

 

1.87

%

 

 

2.28

%

 

 

1.69

%

 

 

2.57

%

 

 

1.96

%

Full tax-equivalent yield

 

 

2.06

%

 

 

2.45

%

 

 

1.94

%

 

 

3.52

%

 

 

2.17

%

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of

   U.S. government corporations and agencies

 

$

5,012

 

 

$

 

 

$

 

 

$

 

 

$

5,012

 

Annuity

 

 

 

 

 

 

 

 

 

 

 

 

 

2,033

 

 

 

2,033

 

Total held-to-maturity

 

$

5,012

 

 

$

 

 

$

 

 

$

2,033

 

 

$

7,045

 

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 March 31, 2021.

Investment securities carried at approximately $621 million and $531 million at March 31, 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 March 31, 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

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of

   U.S. government corporations and agencies

 

$

144,404

 

 

$

(3,636

)

 

$

 

 

$

 

 

$

144,404

 

 

$

(3,636

)

Obligations of states and political subdivisions

 

 

51,381

 

 

 

(1,283

)

 

 

 

 

 

 

 

 

51,381

 

 

 

(1,283

)

Mortgage-backed securities: GSE residential

 

 

230,029

 

 

 

(5,155

)

 

 

129,370

 

 

 

(983

)

 

 

359,399

 

 

 

(6,138

)

Other securities

 

 

12,679

 

 

 

(68

)

 

 

 

 

 

 

 

 

12,679

 

 

 

(68

)

Total

 

$

438,493

 

 

$

(10,142

)

 

$

129,370

 

 

$

(983

)

 

$

567,863

 

 

$

(11,125

)

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

)

 

15

 

 


 

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At March 31, 2021 and December 31, 2020, there were no available-for sale or 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 March 31, 2021 and December 31, 2020, 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 March 31, 2021, there were twelve mortgage-backed securities with a fair value of $129,370,000 and unrealized losses of $(983,000) 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 March 31, 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 March 31, 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 March 31, 2021 and December 31, 2020 follows (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Construction and land development

 

$

165,780

 

 

$

122,853

 

Agricultural real estate

 

 

269,759

 

 

 

254,662

 

1-4 Family residential properties

 

 

411,964

 

 

 

325,480

 

Multifamily residential properties

 

 

295,467

 

 

 

189,265

 

Commercial real estate

 

 

1,401,585

 

 

 

1,176,290

 

Loans secured by real estate

 

 

2,544,555

 

 

 

2,068,550

 

Agricultural loans

 

 

121,955

 

 

 

137,333

 

Commercial and industrial loans

 

 

1,020,608

 

 

 

741,819

 

Consumer loans

 

 

90,780

 

 

 

78,023

 

All other loans

 

 

163,901

 

 

 

118,196

 

Total Gross loans

 

 

3,941,799

 

 

 

3,143,921

 

Less: Loans held for sale

 

 

4,693

 

 

 

1,924

 

 

 

 

3,937,106

 

 

 

3,141,997

 

Less:

 

 

 

 

 

 

 

 

Net deferred loan fees (costs), premiums and discounts

 

 

(1,300

)

 

 

5,502

 

Allowance for credit losses

 

 

55,418

 

 

 

41,910

 

Net loans

 

$

3,882,988

 

 

$

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 $15.6 million and $15.9 million at March 31, 2021 and December 31, 2020, respectively.

16

 

 


Most of the Company’s business activities are with customers located near the Company's branch locations in Illinois, Missouri and Texas. At March 31, 2021, the Company’s loan portfolio included $390.7 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $278.2 million was concentrated in corn and other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased $1.0 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 $30.0 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 $126.0 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 $426.3 million of loans to lessors of non-residential buildings, $319.8 million of loans to lessors of residential buildings and dwellings, $109.8 million of loans to nursing care facilities, and $121.3 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 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 years. The Company’s commercial real estate portfolio is well below the thresholds that would designate a concentration in commercial real estate lending, as established by the federal banking regulators.

Commercial and Industrial Loans. Commercial and industrial loans are primarily comprised of working capital loans used to purchase inventory and fund accounts receivable that are secured by business assets other than real estate. These loans are generally written for one year or less. Also, equipment financing is provided to businesses with these loans generally limited to 80% of the value of the collateral and amortization periods limited to seven years. Commercial loans are often accompanied by a personal guaranty of the principal owners of a business. Like commercial real estate loans, the underlying cash flow of the business is the primary consideration in the underwriting process. The financial condition of commercial borrowers is monitored at least annually with the type of financial information required determined by the size of the relationship. Measures employed by the Company for businesses with higher risk profiles include the use of government- assisted lending programs through the Small Business Administration and U.S. Department of Agriculture.

Agricultural and Agricultural Real Estate Loans. Agricultural loans are generally comprised of seasonal operating lines to cash grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop. Loan-to-value ratios on loans secured by farmland generally do not exceed 65% and have amortization periods limited to twenty-five years. Federal government-assistance lending programs through the Farm Service Agency are used to mitigate the level of credit risk when deemed appropriate.

17

 

 


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. The Company retains all residential real estate loans with balloon payment features. Balloon periods are limited to five years. Residential real estate loans are typically underwritten to conform to industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit scores. Loans secured by first liens on residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have amortization periods of twenty-five years or less. The Company does not originate subprime mortgage loans.

Consumer Loans. Consumer loans are primarily comprised of loans to individuals for personal and household purposes such as the purchase of an automobile or other living expenses. Minimum underwriting criteria have been established that consider credit score, debt-to-income ratio, employment history, and collateral coverage. Typically, consumer loans are set up on monthly payments with amortization periods based on the type and age of the collateral.

Other Loans. Other loans consist primarily of loans to municipalities to support community projects such as infrastructure improvements or equipment purchases. Underwriting guidelines for these loans are consistent with those established for commercial loans with the additional repayment source of the taxing authority of the municipality.

Allowance for Credit Losses

The allowance for credit losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses expected over the remaining contractual life of the assets. The provision for credit losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit losses, and therefore the provision to be charged to current earnings, the Company relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and troubled debt restructurings, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates. The Company estimates the appropriate level of allowance for credit losses by evaluating large impaired loans separately from non-impaired loans.

Impaired loans

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

Non-Impaired loans

Non-impaired loans comprise the vast majority of the Company’s total loan portfolio and include loans in accrual status and those credits not identified as troubled debt 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.

18

 

 


Beginning January 1, 2020, the allowance for credit losses was estimated using the current expected credit loss model ("CECL"). The Company uses the Loss Rate method to estimate the historical loss rate for all non-impaired loans. Under this method, the allowance for credit losses is measured on a collective (pool) basis for non-impaired loans with similar risk characteristics. Historical credit loss experience provides the basis for the estimate of expected credit losses. For each pool, a historical loss rate is computed based on the average remaining contractual life of the pool. Adjustments to historical loss rates are made using qualitative factors relevant to each pool including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. In addition, a twelve-month forecast, using reasonable and supportable future conditions, is prepared that is used to estimate expected changes to existing and historical conditions in the current period.

The Company also considers specific current economic events occurring globally, in the U.S. and in its local markets. In March 2020, in response to the COVID-19 outbreak, its significant disruptions in the U.S. economy and impacts on local markets, First Mid Bank offered a 90-day commercial deferral program, primarily to hotel and restaurant borrowers. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings. These deferrals were, however, considered in the factors used to estimate the required allowance for credit losses for non-impaired loans. Other COVID-19 related impacts considered included revenue losses of businesses required to restrict or cease services, income loss to workers laid off as a result of COVID-19 restrictions, various federal and state government stimulus programs and additional deferral programs offered by First Mid Bank beginning in April 2020. Other events considered include the status of trade agreements with China, scheduled increases in minimum wage and changes to the minimum salary threshold for overtime provisions, current and projected unemployment rates, current and projected grain and oil prices and economies of local markets where customers work and operate.

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

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

Construction and Land Development Loans. The average life of the construction and land development segment was determined to be twelve months. Historical losses in this segment remained very low. Current activity in this industry was deemed essential and has continued during COVID-19. There was no adjustment to the qualitative factor for this segment.

Agricultural Real Estate Loans. The average life of the agricultural real estate segment was determined to be thirty-six months. Historical losses in the segment remain very low. Farmland values have remained steady over an extended period of time and there are no indications that this will change in the next year. There was no adjustment 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 and Providence Bank have also offered short-term loan payment deferral to borrowers in this segment.  Overall, the historical loss rate for this segment increased 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 and Providence Bank have implemented deferral programs for borrowers in this segment in order to ease the impact to these borrowers. There was a slight increase in the historical loss rate for this segment.

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. There was no change to the qualitative factor of this segment.

19

 

 


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 and Providence Bank's payment deferral program. There was a slight decrease in the historical loss rate but the qualitative factor for this segment was not changed.

Consumer Loans. The average life of the consumer segment was determined to be thirty-six months. The financial status of many borrowers has been impacted by COVID-19 events including layoffs and reduced hours. Some of this impact has been offset by government stimulus programs, increased paid leave and increased and extended unemployment benefits, however these benefits are now expiring. Additionally, First Mid Bank and Providence Bank have offered a short-term payment deferral program. There was a slight decrease in the historical loss rate for this period and the qualitative factor for the segment was not changed.

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 months ended March 31, 2021 (in thousands):

 

 

 

Construction

& Land

Development

 

 

Agricultural

Real Estate

 

 

1-4 Family

Residential

Properties

 

 

Commercial

Real Estate

 

 

Agricultural

Loans

 

 

Commercial

& Industrial

 

 

Consumer

Loans

 

 

Total

 

Three months ended March 31, 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

 

 

359

 

 

 

500

 

 

 

617

 

 

 

5,902

 

 

 

(645

)

 

 

4,674

 

 

 

729

 

 

 

12,136

 

Loans charged off

 

 

 

 

 

 

 

 

182

 

 

 

480

 

 

 

 

 

 

18

 

 

 

288

 

 

 

968

 

Recoveries collected

 

 

 

 

 

 

 

 

8

 

 

 

9

 

 

 

 

 

 

18

 

 

 

231

 

 

 

266

 

Ending balance

 

$

2,286

 

 

$

1,628

 

 

$

3,093

 

 

$

25,737

 

 

$

881

 

 

$

18,954

 

 

$

2,839

 

 

$

55,418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 


 

The following tables present the activity in the allowance for credit losses based on portfolio segment for the three months ended March 31, 2020 and for the year ended December 31, 2020 (in thousands):

 

 

 

Construction

& Land

Development

 

 

Agricultural

Real Estate

 

 

1-4 Family

Residential

Properties

 

 

Commercial

Real Estate

 

 

Agricultural

Loans

 

 

Commercial

& Industrial

 

 

Consumer

Loans

 

 

Total

 

Three months ended March 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

 

 

587

 

 

 

12

 

 

 

(77

)

 

 

1,961

 

 

 

41

 

 

 

2,815

 

 

 

142

 

 

 

5,481

 

Loans charged off

 

 

 

 

 

 

 

 

196

 

 

 

84

 

 

 

0

 

 

 

972

 

 

 

171

 

 

 

1,423

 

Recoveries collected

 

 

 

 

 

 

 

 

62

 

 

 

5

 

 

 

 

 

 

23

 

 

 

145

 

 

 

235

 

Ending balance

 

$

1,620

 

 

$

1,335

 

 

$

1,931

 

 

$

13,621

 

 

$

1,064

 

 

$

11,294

 

 

$

2,011

 

 

$

32,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 impaired loans that are considered solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

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


21

 

 


 

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 March 31, 2021 (in thousands):

 

 

 

Collateral

 

 

Allowance

 

 

 

Real Estate

 

 

Business

Assets

 

 

Other

 

 

Total

 

 

for Credit

Losses

 

Construction and land development

 

$

508

 

 

$

 

 

$

 

 

$

508

 

 

$

303

 

Agricultural real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 Family residential properties

 

 

4,436

 

 

 

 

 

 

 

 

 

4,436

 

 

 

163

 

Multifamily residential properties

 

 

1,914

 

 

 

 

 

 

 

 

 

1,914

 

 

 

 

Commercial real estate

 

 

12,308

 

 

 

 

 

 

 

 

 

12,308

 

 

 

1,252

 

Loans secured by real estate

 

 

19,166

 

 

 

 

 

 

 

 

 

19,166

 

 

 

1,718

 

Agricultural loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

 

 

 

3,393

 

 

 

1,909

 

 

 

5,302

 

 

 

808

 

Consumer loans

 

 

 

 

 

 

 

 

8

 

 

8

 

 

 

163

 

Other loans

 

 

 

 

 

26

 

 

 

 

 

26

 

 

 

26

 

Total loans

 

$

19,166

 

 

$

3,419

 

 

$

1,917

 

 

$

24,502

 

 

$

2,715

 

 

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.

22

 

 


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 March 31, 2021 (in thousands):

 

 

 

Term Loans by Origination Year

 

 

Revolving

 

 

 

 

 

Risk Rating

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Loans

 

 

Total

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction & Land Development Loans

 

Pass

 

$

6,259

 

 

$

55,930

 

 

$

35,782

 

 

$

44,866

 

 

$

12,068

 

 

$

9,723

 

 

$

 

 

$

164,628

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

128

 

 

 

0

 

 

 

573

 

 

 

47

 

 

 

 

 

 

748

 

Total

 

$

6,259

 

 

$

55,930

 

 

$

35,910

 

 

$

44,866

 

 

$

12,641

 

 

$

9,770

 

 

$

 

 

$

165,376

 

Agricultural Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

29,531

 

 

$

101,049

 

 

$

31,082

 

 

$

39,931

 

 

$

14,717

 

 

$

38,968

 

 

$

 

 

$

255,278

 

Special Mention

 

 

825

 

 

 

282

 

 

 

4,337

 

 

 

422

 

 

 

407

 

 

 

6,472

 

 

 

 

 

 

12,745

 

Substandard

 

 

 

 

 

 

 

 

0

 

 

 

707

 

 

 

625

 

 

 

297

 

 

 

 

 

 

1,629

 

Total

 

$

30,356

 

 

$

101,331

 

 

$

35,419

 

 

$

41,060

 

 

$

15,749

 

 

$

45,737

 

 

$

 

 

$

269,652

 

1-4 Family Residential Property Loans

 

Pass

 

$

28,885

 

 

$

114,918

 

 

$

29,974

 

 

$

40,369

 

 

$

20,251

 

 

$

117,623

 

 

$

34,265

 

 

$

386,285

 

Special Mention

 

 

 

 

 

189

 

 

 

2,136

 

 

 

349

 

 

 

2,714

 

 

 

1,190

 

 

 

57

 

 

 

6,635

 

Substandard

 

 

376

 

 

 

299

 

 

 

868

 

 

 

1,814

 

 

 

1,929

 

 

 

13,327

 

 

 

937

 

 

 

19,550

 

Total

 

$

29,261

 

 

$

115,406

 

 

$

32,978

 

 

$

42,532

 

 

$

24,894

 

 

$

132,140

 

 

$

35,259

 

 

$

412,470

 

Commercial Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

67,044

 

 

$

480,974

 

 

$

318,800

 

 

$

223,168

 

 

$

163,413

 

 

$

377,041

 

 

$

 

 

$

1,630,440

 

Special Mention

 

 

954

 

 

 

2,712

 

 

 

1,285

 

 

 

3,268

 

 

 

11,070

 

 

 

24,347

 

 

 

 

 

 

43,636

 

Substandard

 

 

 

 

 

1,794

 

 

 

37

 

 

 

6,901

 

 

 

2,004

 

 

 

16,057

 

 

 

 

 

 

26,793

 

Total

 

$

67,998

 

 

$

485,480

 

 

$

320,122

 

 

$

233,337

 

 

$

176,487

 

 

$

417,445

 

 

$

 

 

$

1,700,869

 

Agricultural Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

1,853

 

 

$

83,342

 

 

$

6,921

 

 

$

5,131

 

 

$

1,631

 

 

$

104

 

 

$

 

 

$

98,982

 

Special Mention

 

 

13,723

 

 

 

3,777

 

 

 

3,769

 

 

 

214

 

 

 

206

 

 

 

159

 

 

 

 

 

 

21,848

 

Substandard

 

 

53

 

 

 

44

 

 

 

118

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

240

 

Total

 

$

15,629

 

 

$

87,163

 

 

$

10,808

 

 

$

5,370

 

 

$

1,837

 

 

$

263

 

 

$

 

 

$

121,070

 

Commercial & Industrial Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

152,091

 

 

$

477,167

 

 

$

162,411

 

 

$

98,524

 

 

$

96,059

 

 

$

145,657

 

 

$

 

 

$

1,131,909

 

Special Mention

 

 

1,556

 

 

 

3,248

 

 

 

33,491

 

 

 

804

 

 

 

473

 

 

 

1,895

 

 

 

 

 

 

41,467

 

Substandard

 

 

397

 

 

 

343

 

 

 

2,369

 

 

 

447

 

 

 

2,345

 

 

 

2,680

 

 

 

 

 

 

8,581

 

Total

 

$

154,044

 

 

$

480,758

 

 

$

198,271

 

 

$

99,775

 

 

$

98,877

 

 

$

150,232

 

 

$

 

 

$

1,181,957

 

Consumer Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

7,723

 

 

$

35,908

 

 

$

33,307

 

 

$

11,526

 

 

$

138

 

 

$

2,681

 

 

$

 

 

$

91,283

 

Special Mention

 

 

 

 

 

 

 

 

23

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

44

 

Substandard

 

 

13

 

 

 

27

 

 

 

13

 

 

 

90

 

 

 

79

 

 

 

156

 

 

 

 

 

 

378

 

Total

 

$

7,736

 

 

$

35,935

 

 

$

33,343

 

 

$

11,637

 

 

$

217

 

 

$

2,837

 

 

$

 

 

$

91,705

 

Total Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

293,386

 

 

$

1,349,288

 

 

$

618,277

 

 

$

463,515

 

 

$

308,277

 

 

$

691,797

 

 

$

34,265

 

 

$

3,758,805

 

Special Mention

 

 

17,058

 

 

 

10,208

 

 

 

45,041

 

 

 

5,078

 

 

 

14,870

 

 

 

34,063

 

 

 

57

 

 

 

126,375

 

Substandard

 

 

839

 

 

 

2,507

 

 

 

3,533

 

 

 

9,984

 

 

 

7,555

 

 

 

32,564

 

 

 

937

 

 

 

57,919

 

Total

 

$

311,283

 

 

$

1,362,003

 

 

$

666,851

 

 

$

478,577

 

 

$

330,702

 

 

$

758,424

 

 

$

35,259

 

 

$

3,943,099

 

 

23

 

 


 

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 & 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 & 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 


 

 

The following table presents the Company’s loan portfolio aging analysis at March 31, 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 &

Accruing

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

227

 

 

$

 

 

$

128

 

 

$

355

 

 

$

165,021

 

 

$

165,376

 

 

$

 

Agricultural real estate

 

 

0

 

 

 

 

 

 

34

 

 

 

34

 

 

 

269,618

 

 

 

269,652

 

 

 

 

1-4 Family residential properties

 

 

1,212

 

 

 

2,400

 

 

 

1,546

 

 

 

5,158

 

 

 

407,312

 

 

 

412,470

 

 

 

 

Multifamily residential properties

 

 

39

 

 

 

1,098

 

 

 

 

 

 

1,137

 

 

 

296,847

 

 

 

297,984

 

 

 

 

Commercial real estate

 

 

846

 

 

 

1,166

 

 

 

1,961

 

 

 

3,973

 

 

 

1,398,912

 

 

 

1,402,885

 

 

 

 

Loans secured by real estate

 

 

2,324

 

 

 

4,664

 

 

 

3,669

 

 

 

10,657

 

 

 

2,537,710

 

 

 

2,548,367

 

 

 

 

Agricultural loans

 

 

2,153

 

 

 

125

 

 

 

22

 

 

 

2,300

 

 

 

118,770

 

 

 

121,070

 

 

 

 

Commercial and industrial loans

 

 

535

 

 

 

257

 

 

 

1,320

 

 

 

2,112

 

 

 

1,015,288

 

 

 

1,017,400

 

 

 

 

Consumer loans

 

 

122

 

 

 

50

 

 

 

136

 

 

 

308

 

 

 

91,397

 

 

 

91,705

 

 

 

 

All other loans

 

 

59

 

 

 

 

 

 

 

 

 

59

 

 

 

164,498

 

 

 

164,557

 

 

 

 

Total loans

 

$

5,193

 

 

$

5,096

 

 

$

5,147

 

 

$

15,436

 

 

$

3,927,663

 

 

$

3,943,099

 

 

$

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

 

 

$

 

 

$

128

 

 

$

128

 

 

$

122,351

 

 

$

122,479

 

 

$

 

Agricultural real estate

 

 

1,198

 

 

 

34

 

 

 

0

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

118,238

 

 

 

118,238

 

 

 

 

Total loans

 

$

7,551

 

 

$

1,538

 

 

$

4,760

 

 

$

13,849

 

 

$

3,124,570

 

 

$

3,138,419

 

 

$

 

 

Impaired 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.

25

 

 


The following tables present impaired loans as of March 31, 2021 and December 31, 2020 (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Recorded

Balance

 

 

Unpaid

Principal

Balance

 

 

Specific

Allowance

 

 

Recorded

Balance

 

 

Unpaid

Principal

Balance

 

 

Specific

Allowance

 

Loans with a specific allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

573

 

 

$

573

 

 

$

303

 

 

$

516

 

 

$

516

 

 

$

246

 

Agricultural real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 Family residential properties

 

 

5,817

 

 

 

5,990

 

 

 

163

 

 

 

4,005

 

 

 

4,157

 

 

 

158

 

Multifamily residential properties

 

 

1,914

 

 

 

1,914

 

 

 

 

 

 

1,914

 

 

 

1,914

 

 

 

0

 

Commercial real estate

 

 

12,317

 

 

 

13,062

 

 

 

1,252

 

 

 

11,528

 

 

 

11,794

 

 

 

863

 

Loans secured by real estate

 

 

20,621

 

 

 

21,539

 

 

 

1,718

 

 

 

17,963

 

 

 

18,381

 

 

 

1,267

 

Agricultural loans

 

 

 

 

 

228

 

 

 

 

 

 

0

 

 

 

228

 

 

 

0

 

Commercial and industrial loans

 

 

5,430

 

 

 

6,996

 

 

 

808

 

 

 

3,523

 

 

 

4,878

 

 

 

664

 

Consumer loans

 

 

182

 

 

 

126

 

 

 

163

 

 

 

112

 

 

 

114

 

 

 

0

 

Other loans

 

 

26

 

 

 

26

 

 

 

26

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

26,259

 

 

$

28,915

 

 

$

2,715

 

 

$

21,598

 

 

$

23,601

 

 

$

1,931

 

Loans without a specific allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

160

 

 

$

173

 

 

$

 

 

$

162

 

 

$

175

 

 

$

 

Agricultural real estate

 

 

374

 

 

 

374

 

 

 

 

 

 

359

 

 

 

359

 

 

 

 

1-4 Family residential properties

 

 

3,971

 

 

 

4,692

 

 

 

 

 

 

4,262

 

 

 

4,715

 

 

 

 

Multifamily residential properties

 

 

258

 

 

 

259

 

 

 

 

 

 

267

 

 

 

267

 

 

 

 

Commercial real estate

 

 

450

 

 

 

752

 

 

 

 

 

 

552

 

 

 

581

 

 

 

 

Loans secured by real estate

 

 

5,213

 

 

 

6,250

 

 

 

 

 

 

5,602

 

 

 

6,097

 

 

 

 

Agricultural loans

 

 

262

 

 

 

34

 

 

 

 

 

 

659

 

 

 

431

 

 

 

 

Commercial and industrial loans

 

 

973

 

 

 

3,026

 

 

 

 

 

 

907

 

 

 

1,331

 

 

 

 

Consumer loans

 

 

229

 

 

 

729

 

 

 

 

 

 

218

 

 

 

313

 

 

 

 

Total loans

 

$

6,677

 

 

$

10,039

 

 

$

 

 

$

7,386

 

 

$

8,172

 

 

$

 

Total loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

733

 

 

$

746

 

 

$

303

 

 

$

678

 

 

$

691

 

 

$

246

 

Agricultural real estate

 

 

374

 

 

 

374

 

 

 

 

 

 

359

 

 

 

359

 

 

 

 

1-4 Family residential properties

 

 

9,788

 

 

 

10,682

 

 

 

163

 

 

 

8,267

 

 

 

8,872

 

 

 

158

 

Multifamily residential properties

 

 

2,172

 

 

 

2,173

 

 

 

 

 

 

2,181

 

 

 

2,181

 

 

 

0

 

Commercial real estate

 

 

12,767

 

 

 

13,814

 

 

 

1,252

 

 

 

12,080

 

 

 

12,375

 

 

 

863

 

Loans secured by real estate

 

 

25,834

 

 

 

27,789

 

 

 

1,718

 

 

 

23,565

 

 

 

24,478

 

 

 

1,267

 

Agricultural loans

 

 

262

 

 

 

262

 

 

 

 

 

 

659

 

 

 

659

 

 

 

0

 

Commercial and industrial loans

 

 

6,403

 

 

 

10,022

 

 

 

808

 

 

 

4,430

 

 

 

6,209

 

 

 

664

 

Consumer loans

 

 

411

 

 

 

855

 

 

 

163

 

 

 

330

 

 

 

427

 

 

 

0

 

Other loans

 

 

26

 

 

 

26

 

 

 

26

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

32,936

 

 

$

38,954

 

 

$

2,715

 

 

$

28,984

 

 

$

31,773

 

 

$

1,931

 

26

 

 


 

 

The following tables present average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2021 and 2020 (in thousands):

 

 

 

For the three months ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

Average

Investment

in Impaired

Loans

 

 

Interest

Income

Recognized

 

 

Average

Investment

in Impaired

Loans

 

 

Interest

Income

Recognized

 

Construction and land development

 

$

754

 

 

$

5

 

 

$

600

 

 

$

8

 

Agricultural real estate

 

 

957

 

 

 

 

 

 

1,202

 

 

 

 

1-4 Family residential properties

 

 

9,857

 

 

 

13

 

 

 

8,997

 

 

 

18

 

Multifamily residential properties

 

 

2,294

 

 

 

 

 

 

3,323

 

 

 

1

 

Commercial real estate

 

 

13,156

 

 

 

38

 

 

 

8,266

 

 

 

42

 

Loans secured by real estate

 

 

27,018

 

 

 

56

 

 

 

22,388

 

 

 

69

 

Agricultural loans

 

 

262

 

 

 

6

 

 

 

960

 

 

 

 

Commercial and industrial loans

 

 

6,455

 

 

 

1

 

 

 

7,402

 

 

 

2

 

Consumer loans

 

 

438

 

 

 

 

 

 

544

 

 

 

 

All other loans

 

 

26

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

34,199

 

 

$

63

 

 

$

31,294

 

 

$

71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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. The average balances of these loans included in impaired loans at March 31, 2021 and 2020, were $4.1 million and $4.4 million, respectively.

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 March 31, 2021 and December 31, 2020 (in thousands). There were no loans past due over eighty-nine days that were still accruing.

 

 

 

March 31, 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

 

$

160

 

 

$

225

 

 

$

162

 

 

$

162

 

Agricultural real estate

 

 

374

 

 

 

374

 

 

 

359

 

 

 

359

 

1-4 Family residential properties

 

 

7,116

 

 

 

8,771

 

 

 

6,747

 

 

 

6,930

 

Multifamily residential properties

 

 

2,173

 

 

 

2,173

 

 

 

2,181

 

 

 

2,181

 

Commercial real estate

 

 

3,780

 

 

 

9,516

 

 

 

7,345

 

 

 

8,760

 

Loans secured by real estate

 

 

13,603

 

 

 

21,059

 

 

 

16,794

 

 

 

18,392

 

Agricultural loans

 

 

262

 

 

 

262

 

 

 

659

 

 

 

659

 

Commercial and industrial loans

 

 

3,641

 

 

 

6,137

 

 

 

3,677

 

 

 

4,372

 

Consumer loans

 

 

295

 

 

 

394

 

 

 

327

 

 

 

327

 

All other loans

 

 

0

 

 

 

25

 

 

 

 

 

 

 

 

 

Total loans

 

$

17,801

 

 

$

27,877

 

 

$

21,457

 

 

$

23,750

 

 

Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $1,021,000 and $1,029,000 for the three months ended March 31, 2021 and 2020, respectively.

 

27

 

 


 

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 March 31, 2021 and December 31, 2020 was $8.7 million and $9.5 million, respectively. There was $929,000 and $1,016,000 in specific reserves established with respect to these loans as of March 31, 2021 and December 31, 2020, respectively. As troubled debt restructurings, these loans are included in nonperforming loans and are classified as impaired which requires that they be individually measured for impairment. The modification of the terms of these loans included one or a combination of the following: a reduction of stated interest rate of the loan; an extension of the maturity date and change in payment terms; or a permanent reduction of the recorded investment in the loan.

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

 

Troubled debt restructurings:

 

March 31, 2021

 

 

December 31, 2020

 

1-4 Family residential properties

 

$

1,381

 

 

$

1,603

 

Commercial real estate

 

 

4,594

 

 

 

5,170

 

Loans secured by real estate

 

 

5,975

 

 

 

6,773

 

Agricultural loans

 

 

228

 

 

 

228

 

Commercial and industrial loans

 

 

2,362

 

 

 

2,389

 

Consumer loans

 

 

124

 

 

 

112

 

Total

 

$

8,689

 

 

$

9,502

 

Performing troubled debt restructurings:

 

 

 

 

 

 

 

 

1-4 Family residential properties

 

$

1,004

 

 

$

1,268

 

Commercial real estate

 

 

3,027

 

 

 

3,045

 

Loans secured by real estate

 

 

4,031

 

 

 

4,313

 

Commercial and industrial loans

 

 

55

 

 

 

58

 

Consumer loans

 

 

17

 

 

 

2

 

Total

 

$

4,103

 

 

$

4,373

 

 

 


28

 

 


 

The following table presents loans modified as TDRs during the three months ended March 31, 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.

 

 

 

March 31, 2021

 

March 31, 2020

 

 

Number of

 

 

Recorded

 

 

Type of

 

Number of

 

 

Recorded

 

 

Type of

 

 

Modifications

 

 

Investment

 

 

Modifications

 

Modifications

 

 

Investment

 

 

Modifications

Commercial real estate

 

 

 

 

$

 

 

 

 

 

1

 

 

$

305

 

 

(b)(c)(d)

Loans secured by real estate

 

 

 

 

 

 

 

 

 

 

1

 

 

 

305

 

 

 

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

1

 

 

 

7

 

 

(b)(c)(d)

Consumer Loans

 

 

2

 

 

 

16

 

 

(b)

 

 

1

 

 

 

11

 

 

(c)

Total

 

 

2

 

 

$

16

 

 

 

 

 

3

 

 

$

323

 

 

 

 

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 three months ended March 31, 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 $13,339,000 and $2,489,000 of foreclosed real estate properties recorded as a result of obtaining physical possession of the property at March 31, 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 $634,000 and $713,000 at March 31, 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 loans at acquisition

 

 

 

 

$

64,647

 

Allowance for credit losses at acquisition

 

 

 

 

 

(2,074

)

Non-credit discount/(premium) at acquisition

 

 

 

 

 

(187

)

Fair value of acquired loans at acquisition

 

 

 

 

$

62,386

 

 

 

 

 

 

 

 

 

 


29

 

 


 

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 March 31, 2021 and December 31, 2020 (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Gross Carrying

Value

 

 

Accumulated

Amortization

 

 

Gross Carrying

Value

 

 

Accumulated

Amortization

 

Goodwill not subject to amortization (effective 1/1/02)

 

$

117,708

 

 

$

3,760

 

 

$

108,752

 

 

$

3,760

 

Intangibles from branch acquisition

 

 

3,015

 

 

 

3,015

 

 

 

3,015

 

 

 

3,015

 

Core deposit intangibles

 

 

34,503

 

 

 

21,620

 

 

 

32,355

 

 

 

20,910

 

Other intangibles

 

 

16,779

 

 

 

5,555

 

 

 

16,389

 

 

 

5,222

 

 

 

$

172,005

 

 

$

33,950

 

 

$

160,511

 

 

$

32,907

 

 

Goodwill of $9 million was provisionally recorded for the acquisition and merger of LINCO during the first quarter of 2021. All goodwill was assigned to the banking segment of the Company.

 

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

 

 

 

 

$

14,992

 

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

 

2,530

 

 

 

 

 

Other liabilities

 

(184

)

 

 

 

 

 

 

 

 

 

 

6,036

 

 

 

 

 

 

$

8,956

 

 

 

 

 

 

 

 

 

 

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 March 31, 2021, March 31, 2020 and December 31, 2020 (in thousands):

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

December 31, 2020

 

Beginning Balance

 

$

516

 

 

$

1,444

 

 

$

1,444

 

Valuation reserve

 

 

210

 

 

 

(18

)

 

 

(273

)

Mortgage servicing rights amortized

 

 

(177

)

 

 

(126

)

 

 

(593

)

Interest only Strip

 

 

2

 

 

 

(4

)

 

 

(62

)

Ending Balance

 

$

551

 

 

$

1,296

 

 

$

516

 

 

Total amortization expense for the three months ended March 31, 2021 and 2020 was as follows (in thousands):

 

 

 

Three months

ended March 31,

 

 

 

2021

 

 

2020

 

Core deposit intangibles

 

$

710

 

 

$

843

 

Customer list intangibles

 

 

333

 

 

 

326

 

Mortgage servicing rights

 

 

177

 

 

 

126

 

 

 

$

1,220

 

 

$

1,295

 

 

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):

30

 

 


 

Aggregate amortization expense:

 

 

 

 

For period 01/01/21-3/31/21

 

$

1,220

 

Estimated amortization expense:

 

 

 

 

For period 04/01/21-12/31/21

 

 

3,888

 

For year ended 12/31/22

 

 

3,885

 

For year ended 12/31/23

 

 

3,534

 

For year ended 12/31/24

 

 

3,234

 

For year ended 12/31/25

 

 

2,891

 

For year ended 12/31/26

 

 

2,215

 

 

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 $212.5 million at March 31, 2021, an increase of $5.6 million from $206.9 million at December 31, 2020. The increase during the first three 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 0.15%.

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):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

US Treasury securities and obligations of U.S. government corporations & agencies

 

$

55,619

 

 

$

37,423

 

Mortgage-backed securities: GSE: residential

 

 

156,884

 

 

 

168,480

 

Miscellaneous

 

 

 

 

 

1,034

 

Total

 

$

212,503

 

 

$

206,937

 

 


31

 

 


 

FHLB borrowings, before net premiums of $921,000, were $115.9 million and $94 million at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 the advances were as follows:

 

Advance

 

 

Term (in years)

 

 

Interest Rate

 

 

Maturity Date

$

5,000,000

 

 

 

5.0

 

 

1.85%

 

 

April 12, 2021

 

4,000,000

 

 

 

1.0

 

 

2.00%

 

 

May 3, 2021

 

5,000,000

 

 

 

7.0

 

 

2.55%

 

 

October 1, 2021

 

5,000,000

 

 

 

5.0

 

 

2.71%

 

 

March 21, 2022

 

5,000,000

 

 

 

8.0

 

 

2.40%

 

 

January 9, 2023

 

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

 

 

 

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.

32

 

 


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 March 31, 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)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government

   corporations and agencies

 

$

171,530

 

 

$

 

 

$

171,530

 

 

$

 

Obligations of states and political subdivisions

 

 

257,719

 

 

 

 

 

 

257,105

 

 

 

614

 

Mortgage-backed securities

 

 

621,952

 

 

 

 

 

 

621,952

 

 

 

 

Other securities

 

 

36,747

 

 

 

 

 

 

36,747

 

 

 

 

Total available-for-sale securities

 

 

1,087,948

 

 

 

 

 

 

1,087,334

 

 

 

614

 

Equity securities

 

 

300

 

 

 

300

 

 

 

 

 

 

 

Derivative assets: interest rate swaps

 

 

262

 

 

 

 

 

 

262

 

 

 

 

          Total assets

 

$

1,088,510

 

 

$

300

 

 

$

1,087,596

 

 

$

614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities: interest rate swaps

 

$

1,013

 

 

$

 

 

$

1,013

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 months ended March 31, 2021 and 2020 is summarized as follows (in thousands):

 

 

Obligation of State and Political Subdivisions

 

 

 

Three months ended

 

 

 

March 31, 2021

 

 

March 30, 2020

 

Beginning balance

 

$

794

 

 

$

973

 

Transfers into Level 3

 

 

 

 

 

 

Transfers out of Level 3

 

 

 

 

 

 

Total gains or losses:

 

 

 

 

 

 

 

 

Included in net income

 

 

1

 

 

 

1

 

Included in other comprehensive income (loss)

 

 

 

 

 

 

Purchases, issuances, sales and settlements:

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

Issuances

 

 

 

 

 

 

Sales

 

 

(181

)

 

 

(184

)

Settlements

 

 

 

 

 

 

Ending balance

 

$

614

 

 

$

790

 

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

 

$

 

 

$

 

 

33

 

 


 

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

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

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Management establishes a specific allowance for impaired 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 March 31, 2021 was $15,429,000 and a fair value of $2,696,000 resulting in specific loss exposures of $12,733,000.

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 March 31, 2021 was $13,339,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $11,292,000.

Mortgage Servicing Rights. As of March 31, 2021, mortgage servicing rights had a carrying value of $920,000 and a fair value of $551,000 resulting in a valuation reserve of $369,000. 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 March 31, 2021 and December 31, 2020 (in thousands):

 

March 31, 2021

 

Fair Value

 

 

Valuation

Technique

 

Unobservable Inputs

 

Range

 

Weighted Average

 

Impaired loans (collateral dependent)

 

$

12,733

 

 

Third party

valuations

 

Discount to reflect realizable value

 

0% - 40%

 

20%

 

Foreclosed assets held for sale

 

 

11,292

 

 

Third party

valuations

 

Discount to reflect realizable value

less estimated selling costs

 

0% - 40%

 

35%

 

Mortgage servicing rights

 

 

551

 

 

Third party

valuations

 

PSA standard prepayment model rate

 

242 - 438

 

 

304

 

 

December 31, 2020

 

Fair Value

 

 

Valuation

Technique

 

Unobservable Inputs

 

Range

 

Weighted Average

 

Impaired loans (collateral dependent)

 

$

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

 

 

 

 

 

 

34

 

 


 

 

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

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

408,226

 

 

$

408,226

 

 

$

408,226

 

 

$

 

 

$

 

Federal funds sold

 

 

1,321

 

 

 

1,321

 

 

 

1,321

 

 

 

 

 

 

 

Certificates of deposit investments

 

 

2,695

 

 

 

2,695

 

 

 

 

 

 

2,695

 

 

 

 

Available-for-sale securities

 

 

1,087,948

 

 

 

1,087,948

 

 

 

 

 

 

1,087,334

 

 

 

614

 

Held-to-maturity securities

 

 

7,045

 

 

 

7,125

 

 

 

 

 

 

7,125

 

 

 

 

Equity securities

 

 

300

 

 

 

300

 

 

 

300

 

 

 

 

 

 

 

Loans held for sale

 

 

4,693

 

 

 

4,693

 

 

 

 

 

 

4,693

 

 

 

 

Loans net of allowance for credit losses

 

 

3,882,988

 

 

 

3,839,827

 

 

 

 

 

 

 

 

 

3,839,827

 

Interest receivable

 

 

20,218

 

 

 

20,218

 

 

 

 

 

 

20,218

 

 

 

 

Federal Reserve Bank stock

 

 

9,401

 

 

 

9,401

 

 

 

 

 

 

9,401

 

 

 

 

Federal Home Loan Bank stock

 

 

5,450

 

 

 

5,450

 

 

 

 

 

 

5,450

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

4,737,693

 

 

$

4,740,802

 

 

$

 

 

$

3,926,107

 

 

$

814,695

 

Securities sold under agreements to repurchase

 

 

212,503

 

 

 

212,514

 

 

 

 

 

 

212,514

 

 

 

 

Interest payable

 

 

3,214

 

 

 

3,214

 

 

 

 

 

 

3,214

 

 

 

 

Federal Home Loan Bank borrowings

 

 

116,861

 

 

 

117,670

 

 

 

 

 

 

117,670

 

 

 

 

Subordinated debt, net

 

 

94,289

 

 

 

94,289

 

 

 

 

 

 

 

94,289

 

 

 

 

 

Junior subordinated debentures, net

 

 

19,069

 

 

 

14,495

 

 

 

 

 

 

14,495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 


35

 

 


 

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 ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with LINCO Bancshares, Inc., a Missouri corporation ("LINCO"), and the sellers as defined therein, pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business combination whereby Merger Sub will merge with and into LINCO, whereupon the separate corporate existence of Merger Sub will cease and LINCO will continue as the surviving company and a wholly-owned subsidiary of the Company (the "Merger").

 

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $1.00 per share, of LINCO issued and outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by LINCO) will be converted into and become the right to receive, cash or shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments.  On an aggregate basis, the total consideration payable by the Company at the closing of the Merger was $103.5 million in cash and 1,262,246 shares of the Company’s common stock, provided that the shareholders of LINCO have collectively elected pursuant to the Merger Agreement to receive varying amounts of cash or shares of common stock of the Company as consideration in the Merger.   In addition, immediately prior to the closing of the proposed merger, LINCO paid a special dividend to its shareholders in the aggregate amount of $13 million.

 

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 $8.9 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

 

 

 

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

 

 

 

2,456

 

 

 

10,891

 

Premises and equipment

 

 

23,440

 

 

 

4,819

 

 

 

28,259

 

Goodwill

 

 

-

 

 

 

8,956

 

 

 

8,956

 

Core deposit intangible

 

 

123

 

 

 

2,025

 

 

 

2,148

 

Right of use asset

 

 

-

 

 

 

794

 

 

 

794

 

Other assets

 

 

43,697

 

 

 

1,736

 

 

 

45,433

 

Total assets acquired

 

$

1,155,211

 

 

$

18,232

 

 

$

1,173,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

7,242

 

 

 

(610

)

 

 

6,632

 

Total liabilities assumed

 

 

1,022,512

 

 

 

3,240

 

 

 

1,025,752

 

Net assets acquired

 

$

132,699

 

 

$

14,992

 

 

$

147,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration Paid

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

$

103,500

 

Common stock

 

 

 

 

 

 

 

 

 

 

44,191

 

 

 

 

 

 

 

 

 

 

 

$

147,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 


 

 

 

The Company has recognized approximately $3.1 million, pre-tax, of acquisition costs for the LINCO acquisition. Of this amount, $2.6 million was recognized during the first quarter 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 million, will be 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):

 

 

 

 

 

Three months ended                                     March 31, 2021

 

 

Three months ended                                     March 31, 2020

 

Net interest income

 

 

 

$

38,237

 

 

$

40,626

 

Provision for loan losses

 

 

 

 

12,136

 

 

 

5,492

 

Non-interest income

 

 

 

 

17,749

 

 

 

17,651

 

Non-interest expense

 

 

 

 

37,659

 

 

 

32,060

 

     Income before taxes

 

 

 

 

6,191

 

 

 

20,725

 

Income tax expense (benefit)

 

 

 

 

1,078

 

 

 

5,277

 

     Net income (loss)

 

 

 

$

5,113

 

 

$

15,448

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

$

0.30

 

 

$

0.86

 

Diluted

 

 

 

 

0.29

 

 

 

0.86

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares o/s

 

 

 

 

17,299,927

 

 

 

17,955,429

 

Diluted weighted average shares o/s

 

 

 

 

17,352,947

 

 

 

18,002,337

 

 

Note 9 -- Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of March 31, 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:

 

1.

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

 

2.

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

 

3.

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.

 

 

37

 

 


 

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):

 

 

 

March 31,

2021

 

 

March 31,

2020

 

 

December 31,

2020

 

Operating lease right-of-use assets

 

$

17,424

 

 

$

16,542

 

 

$

17,209

 

Operating lease liabilities

 

 

17,578

 

 

 

16,568

 

 

 

17,351

 

Weighted-average remaining lease term (in years)

 

 

6.8

 

 

 

7.1

 

 

 

7.3

 

Weighted-average discount rate

 

 

2.63

%

 

 

3.08

%

 

 

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

 

 

$

2,226

 

 

2022

 

 

 

2,703

 

 

2023

 

 

 

2,364

 

 

2024

 

 

 

1,942

 

 

2025

 

 

 

1,629

 

Thereafter

 

 

 

9,150

 

Total lease payments

 

 

 

20,014

 

Less imputed interest

 

 

 

(2,436

)

Total lease liability

 

 

$

17,578

 

 

The components of lease expense for the three months ended March 31, 2021 and 2020 were as follows (in thousands):

 

 

 

Three months ended March 31,

 

 

 

2021

 

 

2020

 

Operating lease cost

 

$

708

 

 

$

642

 

Short-term lease cost

 

 

35

 

 

 

46

 

Variable lease cost

 

 

137

 

 

 

169

 

Total lease cost

 

 

880

 

 

 

857

 

Income from subleases

 

 

(153

)

 

 

(193

)

Net lease cost

 

$

727

 

 

$

664

 

 

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):

 

 

March 31, 2021

 

 

March 31, 2020

 

Operating cash flows from operating leases

 

$

711

 

 

$

677

 

 

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.

38

 

 


 

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 March 31, 2021 and December 31, 2020 (in thousands):

 

 

 

Balance

Sheet

Location

 

Weighted

Average

Remaining

Maturity

(Years)

 

Notional

Amount

 

 

Estimated

Value

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other liabilities

 

8.1 years

 

$

14,276

 

 

$

(1,013

)

 

 

 

 

 

 

 

 

 

 

 

 

 

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 months ended March 31, 2021 and 2020 were as follows (in thousands):

 

 

 

 

 

Three months ended March 31,

 

Derivative

 

Location of Gain (Loss) on Derivatives

 

2021

 

 

2020

 

Interest rate swap agreements

 

Interest income on loans

 

$

(743

)

 

$

(1,384

)

 

 

 

 

 

 

Three months ended March 31,

 

Derivative

 

Location of Gain (Loss) on Hedged Items

 

2021

 

 

2020

 

Interest rate swap agreements

 

Interest income on loans

 

$

743

 

 

$

1,384

 

 

 

As of March 31, 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

 

$

13,525

 

 

$

751

 

 

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 three months ended March 31, 2021 and 2020  (in thousands):

 

September 30, 2020

 

Balance

Sheet

Location

 

Weighted

Average

Remaining

Maturity

(Years)

 

Notional

Amount

 

 

Estimated

Value

 

Interest rate swap agreements

 

Other assets

 

6.8

 

$

42,223

 

 

$

262

 

Interest rate swap agreements

 

Other liabilities

 

6.8

 

 

42,223

 

 

 

(262

)

 

39

 

 


 

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 months ended March 31, 2021 and 2020. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report.

Forward-Looking Statements

This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses, planned schedules and COVID-19. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words “believe,” ”expect,” ”intend,” ”anticipate,” ”estimate,” ”project,” or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties, including those described in Item 1A-“Risk Factors” and other sections of the Company’s Annual Report on Form 10-K and the Company’s other filings with the SEC, and the possibility that any of the anticipated benefits of the closed transaction between First Mid and LINCO will not be realized or will not be realized within the expected time period; the risk that integration of the operations of LINCO with First Mid will be materially delayed or will be more costly or difficult than expected; changes in interest rates, general economic conditions and those in the Company’s market area, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios and the valuation of the investment portfolio, the Company’s success in raising capital and effecting and integrating acquisitions, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines, the severity, magnitude and duration of COVID-19 pandemic, the direct and indirect impact of such pandemic, including responses to the pandemic by the government, businesses customers' businesses, the disruption of global, national, state and local economies associated with the COVID-19 pandemic, which could affect the Company's liquidity and capital positions, impair the ability of the Company'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 the Company's financial results, including possible lost revenue and increased expenses (including cost of capital), as well as possible goodwill impairment charges. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise. Further information concerning the Company and its business, including a discussion of these and additional factors that could materially affect the Company’s financial results, is included in the Company’s 2019 Annual Report on Form 10-K under the headings “Item 1. Business" and “Item 1A. Risk Factors."

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 March 31, 2021, a total of $50.6 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.

40

 

 


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-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 March 31, 2021, the Company has outstanding 2,732 PPP loans totaling $259.7 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 March 31, 2021, were $33.2 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 $2.3 billion of total available capacity as of March 31, 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 $4,109,000 and $9,999,000 for the three months ended March 31, 2021 and 2020, respectively. Diluted net income per common share was $0.24 and $0.60 for the three months ended March 31, 2021 and 2020.

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

 

 

Three months ended

 

 

Year ended

 

 

March 31, 2021

 

 

March 31, 2020

 

 

December 31, 2020

 

Return on average assets

 

0.32

%

 

 

1.05

%

 

 

1.05

%

Return on average common equity

 

2.78

%

 

 

7.48

%

 

 

8.24

%

Average equity to average assets

 

11.41

%

 

 

13.97

%

 

 

12.76

%

 

 

 

 

 

 

 

41

 

 


 

 

Total assets were $5.8 billion at March 31, 2021, compared to $4.7 billion as of December 31, 2020. From December 31, 2020 to March 31, 2021, cash and interest-bearing deposits decreased $7.7 million, net loan balances increased $788.4 million and investment securities increased $210.8 million. Net loan balances were $3.88 billion at March 31, 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.

Net interest margin, on a tax equivalent basis, defined as net interest income divided by average interest-earning assets, was 3.16% for the three months ended March 31, 2021, down from 3.51% 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 $36.8 million compared to net interest income of $29.9 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 $17.7 million increased $1.2 million or 7.5% from $16.5 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 $37.6 million increased $9.9 million or 35.6% from $27.7 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 March 31, 2021

 

Net interest income

 

 

$

6,891

 

Provision for loan losses

 

 

 

(6,655

)

Other income, including securities transactions

 

 

 

1,239

 

Other expenses

 

 

 

(9,869

)

Income taxes

 

 

 

2,504

 

Decrease in net income

 

 

$

(5,890

)

 

 

Credit quality is an area of importance to the Company. Total nonperforming loans were $32.0 million at March 31, 2021, compared to $24.5 million at March 31, 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 $13.3 million at March 31, 2021 compared to $2.8 million at March 31, 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 three months ended March 31, 2021 and 2020 was $12,136,000 and $5,481,000, respectively. This increase was due to recording initial provision for credit losses for Providence Bank loans of $11.5 million, offset by lower provision expense for First Mid Bank during the first quarter of 2021 compared to 2020 when ASC 2016-13 was adopted. Total loans past due 30 days or more were 0.39% of loans at March 31, 2021 compared to 1.43% at March 31, 2020, and 0.44% of loans at December 31, 2020. The decline in this ratio was primarily due to the increase in loan balances. Loans secured by both commercial and residential real estate comprised approximately 64.6% of the loan portfolio as of March 31, 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 March 31, 2021 and 2020 and December 31, 2020 was 10.74%, 15.05% and 14.63%, respectively. The Company’s total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at March 31, 2021 and 2020, and December 31, 2020 was 13.75%, 16.13% and 18.82%, respectively. The decrease in these ratios from December 31, 2020 was primarily due to the acquisition of LINCO offset by net income added to retained earnings.

42

 

 


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 March 31, 2021 and 2020, were $850 million and $596 million, respectively.

Federal Deposit Insurance Corporation Insurance Coverage. As FDIC-insured institutions, First Mid Bank and Providence Bank are 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%). 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 $452,045 and $93,000 for the assessment during the first three 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.

Basel III. In September 2010, the Basel Committee on Banking Supervision proposed higher global minimum capital standards, including a minimum Tier 1 common capital ratio and additional capital and liquidity requirements. On July 2, 2013, the Federal Reserve Board approved a final rule to implement these reforms and changes required by the Dodd-Frank Act. This final rule was subsequently adopted by the OCC and the FDIC.

The final rule includes new risk-based capital and leverage ratios:

(i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement was being phased in beginning in January 2016 at 0.625% of risk weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount.


43

 

 


 

On March 27, 2020, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the "agencies") issued and interim final rule ("IFR") that delays the estimated impact on regulatory capital stemming from the implementation of ASU 2016-13 for a transition period of up to five years ("CECL IFR"). The goal of the CECL IFR is to provide regulatory relief to banking organizations that are required to adopt ASU 2016-13 as of January 1, 2020 in order to allow them to better focus on support lending to credit-worthy households and businesses. The CECL IFR is calibrated to approximate the difference in allowances under ASU 2016-13 relative to the previous incurred loss methodology for the first two years of the transition period. The cumulative difference at the end of the second year of the transition period is then phased into regulatory capital over a three-year transition period. A banking organization's five-year transition period under CECL IFR begins on the date it would have been required to adopt ASU 2016-13 under U.S. GAAP regardless of whether the banking organization uses the statutory relief offered under the CARES Act.

See discussion under the heading "Capital Resources" for a description of the Company's, First Mid Bank's and Providence Bank’s risk-based capital.

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 2019 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.

44

 

 


The allowance for credit losses is measured on a collective (pool) basis for non-impaired loans with similar risk characteristics. Historical credit loss experience provides the basis for the estimate of expected credit losses. Adjustments to historical loss information are made for relevant factors to each pool including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. The Company estimates the appropriate level of allowance for credit losses for impaired loans by evaluating them separately. A specific allowance is assigned to an impaired loan when expected cash flows or collateral are less than the carrying amount of the loan.

Allowance for Credit Losses - Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period that the Company is exposed to credit risk via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is included in other liabilities in the consolidated balance sheets.

Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for 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.

45

 

 


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 2020 and 2019 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 $595,000 and $520,000 for 2021 and 2020, respectively were 3.11% and 3.45% at March 31, 2021 and March 31, 2020.


46

 

 


 

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 months ended March 31, 2021 and 2020 in the following table (dollars in thousands):

 

 

 

Three months ended March 31, 2021

 

 

Three months ended March 31, 2020

 

 

 

Average

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

 

 

Balance

 

 

Interest

 

 

Rate

 

 

Balance

 

 

Interest

 

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits with other financial

   institutions

 

$

278,295

 

 

$

74

 

 

 

0.11

%

 

$

23,824

 

 

$

91

 

 

 

1.54

%

Federal funds sold

 

 

1,316

 

 

 

 

 

 

0.03

%

 

 

926

 

 

 

2

 

 

 

0.87

%

Certificates of deposit

 

 

2,695

 

 

 

14

 

 

 

2.14

%

 

 

5,064

 

 

 

31

 

 

 

2.46

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

761,727

 

 

 

3,249

 

 

 

1.71

%

 

 

543,799

 

 

 

3,339

 

 

 

2.46

%

Tax-exempt (1)

 

 

248,188

 

 

 

2,016

 

 

 

3.25

%

 

 

174,459

 

 

 

1,582

 

 

 

3.63

%

Loans net of unearned income (TE) (2)

 

 

3,477,754

 

 

 

36,058

 

 

 

4.20

%

 

 

2,703,051

 

 

 

30,215

 

 

 

4.50

%

Total earning assets

 

 

4,769,975

 

 

 

41,411

 

 

 

3.52

%

 

 

3,451,123

 

 

 

35,260

 

 

 

4.11

%

Cash and due from banks

 

 

84,392

 

 

 

 

 

 

 

 

 

 

 

93,283

 

 

 

 

 

 

 

 

 

Premises and equipment

 

 

68,282

 

 

 

 

 

 

 

 

 

 

 

59,476

 

 

 

 

 

 

 

 

 

Other assets

 

 

296,284

 

 

 

 

 

 

 

 

 

 

 

251,359

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(46,735

)

 

 

 

 

 

 

 

 

 

 

(29,990

)

 

 

 

 

 

 

 

 

Total assets

 

$

5,172,198

 

 

 

 

 

 

 

 

 

 

$

3,825,251

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

1,876,378

 

 

$

886

 

 

 

0.19

%

 

$

1,264,489

 

 

$

1,092

 

 

 

0.35

%

Savings deposits

 

 

579,632

 

 

 

136

 

 

 

0.10

%

 

 

435,480

 

 

 

119

 

 

 

0.11

%

Time deposits

 

 

623,852

 

 

 

1,462

 

 

 

0.95

%

 

 

570,132

 

 

 

2,650

 

 

 

1.87

%

Total Interest-bearing deposits

 

 

3,079,862

 

 

 

2,484

 

 

 

0.33

%

 

 

2,270,101

 

 

 

3,861

 

 

 

0.68

%

Securities sold under agreements to repurchase

 

 

198,670

 

 

 

70

 

 

 

0.14

%

 

 

202,693

 

 

 

194

 

 

 

0.38

%

FHLB advances

 

 

102,081

 

 

 

374

 

 

 

1.49

%

 

 

120,146

 

 

 

580

 

 

 

1.94

%

Federal funds purchased

 

 

 

 

 

 

 

 

0.00

%

 

 

2,110

 

 

 

10

 

 

 

1.91

%

Subordinated debt

 

 

94,266

 

 

 

984

 

 

 

4.23

%

 

 

 

 

 

 

 

 

0.00

%

Junior subordinated debentures

 

 

19,041

 

 

 

140

 

 

 

2.98

%

 

 

18,873

 

 

 

218

 

 

 

4.65

%

Other debt

 

 

 

 

 

 

 

 

0.00

%

 

 

769

 

 

 

4

 

 

 

2

 

Total borrowings

 

 

414,058

 

 

 

1,568

 

 

 

1.54

%

 

 

344,591

 

 

 

1,006

 

 

 

1.17

%

Total interest-bearing liabilities

 

 

3,493,920

 

 

 

4,052

 

 

 

0.47

%

 

 

2,614,692

 

 

 

4,867

 

 

 

0.75

%

Non interest-bearing demand deposits

 

 

1,033,741

 

 

 

 

 

 

 

0.36

%

 

 

628,588

 

 

 

 

 

 

 

0.60

%

Other liabilities

 

 

54,346

 

 

 

 

 

 

 

 

 

 

 

47,539

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

590,191

 

 

 

 

 

 

 

 

 

 

 

534,432

 

 

 

 

 

 

 

 

 

Total liabilities & equity

 

$

5,172,198

 

 

 

 

 

 

 

 

 

 

$

3,825,251

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

37,359

 

 

 

 

 

 

 

 

 

 

$

30,393

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

 

 

3.05

%

 

 

 

 

 

 

 

 

 

 

3.36

%

Impact of non interest-bearing funds

 

 

 

 

 

 

 

 

 

 

0.11

%

 

 

 

 

 

 

 

 

 

 

0.15

%

TE Net yield on interest-earning assets

 

 

 

 

 

 

 

 

 

 

3.16

%

 

 

 

 

 

 

 

 

 

 

3.51

%

 

 

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.

47

 

 


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 months ended March 31, 2021, compared to the same period in 2020 (in thousands):

 

 

Three months ended March 31, 2021

compared to 2020 Increase / (Decrease)

 

 

Total

 

 

 

 

 

 

 

 

 

 

Change

 

 

Volume (1)

 

 

Rate (1)

 

Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

$

(17

)

 

$

612

 

 

$

(629

)

Federal funds sold

 

(2

)

 

 

4

 

 

 

(6

)

Certificates of deposit investments

 

(17

)

 

 

(13

)

 

 

(4

)

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

(90

)

 

 

4,581

 

 

 

(4,671

)

Tax-exempt (2)

 

434

 

 

 

613

 

 

 

(179

)

Loans (2) (3)

 

5,843

 

 

 

17,898

 

 

 

(12,055

)

Total interest income

$

6,151

 

 

$

23,695

 

 

$

(17,544

)

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

$

(206

)

 

$

1,975

 

 

$

(2,181

)

Savings deposits

 

17

 

 

 

82

 

 

 

(65

)

Time deposits

 

(1,188

)

 

 

1,496

 

 

 

(2,684

)

Securities sold under agreements to repurchase

 

(124

)

 

 

(4

)

 

 

(120

)

FHLB advances

 

(206

)

 

 

(81

)

 

 

(125

)

Federal Funds Purchased

 

(10

)

 

 

(5

)

 

 

(5

)

Subordinated debt

 

984

 

 

 

931

 

 

 

53

 

Junior subordinated debentures

 

(78

)

 

 

14

 

 

 

(92

)

Other debt

 

(4

)

 

 

(2

)

 

 

(2

)

Total interest expense

 

(815

)

 

 

4,406

 

 

 

(5,221

)

Net interest income

$

6,966

 

 

$

19,289

 

 

$

(12,323

)

 

 

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 $7.0 million, or 22.9%, to $37.4 million for the three months ended March 31, 2021, from $30.4 million for the same period in 2019. 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 three months ended March 31, 2021, average earning assets increased $1.3 billion, or 38.2%, and average interest-bearing liabilities increased $879.2 million or 33.6% 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 $254.5 million or 1068.1%.

 

Average federal funds sold increased $0.4 million or 42.1%.

 

Average certificates of deposits investments decreased $2.4 million or 46.8%

 

Average loans increased by $774.7 million or 28.7%.

 

Average securities increased by $291.7 million or 40.6%.

 

Average interest-bearing customer deposits increased by $809.8 million or 35.7%

 

Average securities sold under agreements to repurchase decreased by $4.0 million or 2.0%.

 

Average borrowings and other debt increased by $73.5 million or 51.8%.

 

Net interest margin decreased to 3.16% for the first three months of 2021 from 3.51% for the first three months of 2020.

48

 

 


 

Provision for Loan Losses

The provision for loan losses for the three months ended March 31, 2021 and 2020 was $12.1 million and $5.5 million, respectively. This increase was due to recording initial provision for credit losses for Providence Bank loans of $11.5 million, offset by lower provision expense for First Mid Bank during the first quarter of 2021 compared to 2020 when ASC 2016-13 was adopted. Net charge-offs were $702,000 for the three months ended March 31, 2021, compared to net charge offs of $1.2 million for March 31, 2020. Nonperforming loans were $32.0 million and $24.5 million as of March 31, 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 months ended March 31, 2021 and 2020 (in thousands):

 

 

 

Three months March 31, 2021

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

 

% Change

 

 

Wealth management revenues

 

$

4,926

 

 

$

3,626

 

 

$

1,300

 

 

 

35.9

%

 

Insurance commissions

 

 

5,857

 

 

 

6,621

 

 

 

(764

)

 

 

-11.5

%

 

Service charges

 

 

1,364

 

 

 

1,778

 

 

 

(414

)

 

 

-23.3

%

 

Security gains, net

 

 

4

 

 

 

531

 

 

 

(527

)

 

 

-99.2

%

 

Mortgage banking revenue, net

 

 

1,409

 

 

 

308

 

 

 

1,101

 

 

 

357.5

%

 

ATM / debit card revenue

 

 

2,699

 

 

 

1,987

 

 

 

712

 

 

 

35.8

%

 

Bank Owned Life Insurance

 

 

637

 

 

 

431

 

 

 

206

 

 

 

47.8

%

 

Other

 

 

853

 

 

 

1,228

 

 

 

(375

)

 

 

-30.5

%

 

Total other income

 

$

17,749

 

 

$

16,510

 

 

$

1,239

 

 

 

7.5

%

 

 

Following are explanations of the changes in these other income categories for the three months ended March 31, 2021 compared to the same period in 2020:

 

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

 

Insurance commissions decreased primarily due to a decrease in contingency income for the period compared to the same period last year.

 

Fees from service charges decreased due to an increase in waived commercial service charges.

 

Gains from the sale of securities during the first quarter of 2021 and 2020 were $3,900 and $531,000, respectively.

 

The increase in mortgage banking income was due to an increase in mortgage refinancing activity and fees from loans sold in the secondary market. Loans sold balances were as follows:

 

$108.3 million (representing 263 loans) for the three months ended March 31, 2021

 

$20.6 million (representing 151 loans) for the three months ended March 31, 2020

First Mid Bank and Providence 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 quarter.

 

Bank owned life insurance income increased approximately $206,000 during the period in 2021 compared to the same period in 2020, due to $25 million of additional purchased during the first quarter and $30.3 million added through the acquisition of Providence Bank.

 

Other income declined primarily due a swap upfront fee received in 2020 that did not recur in 2021.

 


49

 

 


 

Other Expense

The following table sets forth the major components of other expense for the three months ended March 31, 2021 and 2020 (in thousands):

 

 

 

Three months March 31, 2021

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

 

% Change

 

 

Salaries and employee benefits

 

$

23,487

 

 

$

16,500

 

 

$

6,987

 

 

 

42.3

%

 

Net occupancy and equipment expense

 

 

4,970

 

 

 

4,242

 

 

 

728

 

 

 

17.2

%

 

Net other real estate owned expense

 

 

78

 

 

 

(46

)

 

 

124

 

 

 

269.6

%

 

FDIC insurance

 

 

452

 

 

 

93

 

 

 

359

 

 

 

386.0

%

 

Amortization of intangible assets

 

 

1,220

 

 

 

1,295

 

 

 

(75

)

 

 

-5.8

%

 

Stationery and supplies

 

 

316

 

 

 

268

 

 

 

48

 

 

 

17.9

%

 

Legal and professional

 

 

1,402

 

 

 

1,398

 

 

 

4

 

 

 

0.3

%

 

Marketing and donations

 

 

502

 

 

 

481

 

 

 

21

 

 

 

4.4

%

 

ATM/debit card expense

 

 

838

 

 

 

605

 

 

 

233

 

 

 

38.5

%

 

Other operating expenses

 

 

4,335

 

 

 

2,895

 

 

 

1,440

 

 

 

49.7

%

 

Total other expense

 

$

37,600

 

 

$

27,731

 

 

$

9,869

 

 

 

35.6

%

 

 

Following are explanations for the changes in these other expense categories for the three months ended March 31, 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 for part of the first quarter of 2021. There were 983 and 835 full-time equivalent employees at March 31, 2021 and 2020, respectively.

 

The decrease in occupancy and equipment expense was due to a decrease in expense for software and other uncapitalized equipment offset by an increase in rent expense.

 

The increase in net other real estate owned expense was primarily due to properties acquired with the acquisition of Providence Bank.

 

Expense for amortization of intangible assets decreased due to less amortization for core deposit intangibles for the three months ended March 31, 2021 compared to 2020.

 

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 $668,000 (14.0% effective tax rate) for the three months ended March 31, 2021, compared to $3.2 million (24.1% effective tax rate) for the same period in 2020. The decline in effective rate is primarily resulting from costs incurred in the acquisition of LINCO and Providence Bank.

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


50

 

 


 

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 March 31, 2021 and December 31, 2020 (dollars in thousands)

 

 

 

March 31, 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

 

$

179,801

 

 

 

1.20

%

 

$

132,083

 

 

 

1.25

%

Obligations of states and political subdivisions

 

 

249,776

 

 

 

2.65

%

 

 

237,886

 

 

 

2.72

%

Mortgage-backed securities: GSE residential

 

 

620,102

 

 

 

1.76

%

 

 

479,470

 

 

 

1.92

%

Other securities

 

 

38,148

 

 

 

4.39

%

 

 

10,740

 

 

 

5.22

%

Total securities

 

$

1,087,827

 

 

 

1.95

%

 

$

860,179

 

 

 

2.08

%

 

At March 31, 2021, the Company’s investment portfolio increased by $227.6 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 March 31, 2021 for certain investment securities (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Average Credit Rating of Fair Value at March 31, 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

 

$

174,789

 

 

$

171,530

 

 

$

29,261

 

 

$

131,290

 

 

$

 

 

$

 

 

$

 

 

$

10,980

 

Obligations of state and political

   subdivisions

 

 

249,776

 

 

 

257,719

 

 

 

20,117

 

 

 

173,117

 

 

 

63,244

 

 

 

 

 

 

 

 

 

1,241

 

Mortgage-backed securities (2)

 

 

620,102

 

 

 

621,952

 

 

 

1,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

620,879

 

Other securities

 

 

36,116

 

 

 

36,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36,747

 

Total available-for-sale

 

$

1,080,783

 

 

$

1,087,948

 

 

$

50,451

 

 

$

304,407

 

 

$

63,244

 

 

$

 

 

$

 

 

$

669,847

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and

   obligations of U.S. government

   corporations and agencies

 

$

5,012

 

 

$

5,092

 

 

$

 

 

$

5,092

 

 

$

 

 

$

 

 

$

 

 

$

 

Annuity

 

 

2,033

 

 

 

2,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,033

 

Total held-to-maturity

 

$

7,045

 

 

$

7,125

 

 

$

 

 

$

5,092

 

 

$

 

 

$

 

 

$

 

 

$

2,033

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Agricultural Mtg Corp

 

$

84

 

 

$

300

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

300

 

 

 

 

1.

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

 

2.

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

 

 

 

 

 

 

 

 

 

51

 

 


 

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 March 31, 2021 and December 31, 2020 (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Amortized

Cost

 

 

% Outstanding

Loans

 

 

Amortized

Cost

 

 

% Outstanding

Loans

 

Construction and land development

 

$

165,376

 

 

 

4.2

%

 

$

122,479

 

 

 

3.9

%

Agricultural real estate

 

 

269,652

 

 

 

6.8

%

 

 

254,341

 

 

 

8.1

%

1-4 Family residential properties

 

 

412,470

 

 

 

10.5

%

 

 

325,762

 

 

 

10.4

%

Multifamily residential properties

 

 

297,984

 

 

 

7.6

%

 

 

189,632

 

 

 

6.0

%

Commercial real estate

 

 

1,402,885

 

 

 

35.6

%

 

 

1,174,300

 

 

 

37.4

%

Loans secured by real estate

 

 

2,548,367

 

 

 

64.6

%

 

 

2,066,514

 

 

 

65.8

%

Agricultural loans

 

 

121,070

 

 

 

3.1

%

 

 

137,352

 

 

 

4.4

%

Commercial and industrial loans

 

 

1,017,400

 

 

 

25.8

%

 

 

738,313

 

 

 

23.5

%

Consumer loans

 

 

91,705

 

 

 

2.3

%

 

 

78,002

 

 

 

2.5

%

All other loans

 

 

164,557

 

 

 

4.2

%

 

 

118,238

 

 

 

3.8

%

Total loans

 

$

3,943,099

 

 

 

100.0

%

 

$

3,138,419

 

 

 

100.0

%

 

Loan balances increased $804.7 million, or 25.6% of which approximately $838 million were loans acquired with Providence Bank and $259.7 million were PPP loans. The balance of real estate loans held for sale, included in the balances shown above, amounted to $4.7 million and $1.9 million as of March 31, 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 declines 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 March 31, 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):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Principal

balance

 

 

% Outstanding

Loans

 

 

Principal

balance

 

 

% Outstanding

Loans

 

Other grain farming

 

$

278,186

 

 

 

7.06

%

 

$

308,202

 

 

 

9.82

%

Lessors of non-residential buildings

 

 

426,294

 

 

 

10.81

%

 

 

420,175

 

 

 

13.39

%

Lessors of residential buildings & dwellings

 

 

319,777

 

 

 

8.11

%

 

 

313,268

 

 

 

9.98

%

Other gambling industries

 

 

121,283

 

 

 

3.08

%

 

 

119,549

 

 

 

3.81

%

Hotels and motels

 

 

126,016

 

 

 

3.20

%

 

 

124,755

 

 

 

3.98

%

Nursing care facilities (skilled nursing)

 

 

109,839

 

 

 

2.79

%

 

 

114,937

 

 

 

3.66

%

 

The concentration of nursing care facilities was less than 25% of total risk-based capital as of March 31, 2021 however is shown for comparative purposes. The Company had no further industry loan concentrations in excess of 25% of total risk- based capital.


52

 

 


 

The following table presents the balance of loans outstanding as of March 31, 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

 

$

31,740

 

 

$

84,287

 

 

$

49,349

 

 

$

165,376

 

Agricultural real estate

 

 

29,201

 

 

 

99,640

 

 

 

140,811

 

 

 

269,652

 

1-4 Family residential properties

 

 

29,086

 

 

 

75,631

 

 

 

307,753

 

 

 

412,470

 

Multifamily residential properties

 

 

29,627

 

 

 

164,465

 

 

 

103,892

 

 

 

297,984

 

Commercial real estate

 

 

168,171

 

 

 

569,110

 

 

 

665,604

 

 

 

1,402,885

 

Loans secured by real estate

 

 

287,825

 

 

 

993,133

 

 

 

1,267,409

 

 

 

2,548,367

 

Agricultural loans

 

 

71,515

 

 

 

46,750

 

 

 

2,805

 

 

 

121,070

 

Commercial and industrial loans

 

 

250,797

 

 

 

582,829

 

 

 

183,774

 

 

 

1,017,400

 

Consumer loans

 

 

4,968

 

 

 

68,502

 

 

 

18,235

 

 

 

91,705

 

All other loans

 

 

73,130

 

 

 

24,041

 

 

 

67,386

 

 

 

164,557

 

Total loans

 

$

688,235

 

 

$

1,715,255

 

 

$

1,539,609

 

 

$

3,943,099

 

 

 

1.

Based upon remaining contractual maturity.

 

2.

Includes demand loans, past due loans and overdrafts.

As of March 31, 2021, loans with maturities over one year consisted of approximately $2.5 billion in fixed rate loans and approximately $719 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 March 31, 2021 and December 31, 2020 (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Nonaccrual loans

 

$

27,877

 

 

$

23,750

 

Restructured loans which are performing in accordance with revised terms

 

 

4,104

 

 

 

4,373

 

Total nonperforming loans

 

 

31,981

 

 

 

28,123

 

Repossessed assets

 

 

13,339

 

 

 

2,493

 

Total nonperforming loans and repossessed assets

 

$

45,320

 

 

$

30,616

 

Nonperforming loans to loans, before allowance for loan losses

 

 

0.81

%

 

 

0.90

%

Nonperforming loans and repossessed assets to loans, before allowance for loan losses

 

 

1.15

%

 

 

0.98

%

 

53

 

 


 

 

The $4,127,000 increase in nonaccrual loans during 2021 resulted from the net of $6,120,000 of loans put on nonaccrual status offset by $1,336,000 of loans becoming current or paid-off, $45,000 of loans transferred to other real estate and $612,000 of loans charged off. The following table summarizes the composition of nonaccrual loans (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Balance

 

 

% of Total

 

 

Balance

 

 

% of Total

 

Construction and land development

 

$

225

 

 

 

0.8

%

 

$

162

 

 

 

0.7

%

Agricultural real estate

 

 

374

 

 

 

1.3

%

 

 

359

 

 

 

1.5

%

1-4 Family residential properties

 

 

8,771

 

 

 

31.5

%

 

 

6,930

 

 

 

29.2

%

Multifamily Residential properties

 

 

2,173

 

 

 

7.8

%

 

 

2,181

 

 

 

9.2

%

Commercial real estate

 

 

9,516

 

 

 

34.2

%

 

 

8,760

 

 

 

36.9

%

Loans secured by real estate

 

 

21,059

 

 

 

75.6

%

 

 

18,392

 

 

 

77.4

%

Agricultural loans

 

 

262

 

 

 

0.9

%

 

 

659

 

 

 

2.8

%

Commercial and industrial loans

 

 

6,137

 

 

 

22.0

%

 

 

4,372

 

 

 

18.4

%

Consumer loans

 

 

394

 

 

 

1.4

%

 

 

327

 

 

 

1.4

%

Other loans

 

 

25

 

 

 

0.1

%

 

 

 

 

 

0.0

%

Total loans

 

$

27,877

 

 

 

100.0

%

 

$

23,750

 

 

 

100.0

%

 

Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $154,000 and $221,000 for the three months ended March 31, 2021 and 2020, respectively.

The $10,846,000 increase in repossessed assets during the first three months of 2021 resulted from $45,000 of additional assets repossessed and $53,000 of repossessed assets sold, a write down of one asset of $37,000 and assets added from the acquisition of Providence Bank of approximately $10.9 million. The following table summarizes the composition of repossessed assets (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Balance

 

 

% of Total

 

 

Balance

 

 

% of Total

 

Construction and land development

 

$

4,839

 

 

 

36.3

%

 

$

1,436

 

 

 

57.6

%

1-4 family residential properties

 

 

6,778

 

 

 

50.8

%

 

 

71

 

 

 

2.8

%

Commercial real estate

 

 

1,722

 

 

 

12.9

%

 

 

982

 

 

 

39.4

%

Total real estate

 

 

13,339

 

 

 

100.0

%

 

 

2,489

 

 

 

99.8

%

Consumer loans

 

 

 

 

 

0.0

%

 

 

4

 

 

 

0.2

%

Total repossessed collateral

 

$

13,339

 

 

 

100.0

%

 

$

2,493

 

 

 

100.0

%

 

Repossessed assets sold during the first three months of 2021 resulted in net gains of $72,000, of which $71,000 of net gains was related to real estate asset sales and $1,000 of net losses was related to other repossessed assets. Additionally, $37,000 of losses were recognized due to write down of one asset. Repossessed assets sold during the same period in 2020 resulted in net gains of $162,000, of which $170,000 of net losses was related to real estate asset sales and $8,000 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.

 

 

54

 

 


 

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 March 31, 2021, the Company’s loan portfolio included $390.7 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $278.2 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased $1.0 million from $391.7 million at December 31, 2020 while loans concentrated in other grain farming decreased $30.0 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 $126.0 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 $426.3 million of loans to lessors of non-residential buildings, $319.8 million of loans to lessors of residential buildings and dwellings, and $121.3 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.

 

 

55

 

 


 

Analysis of the allowance for credit losses as of March 31, 2021 and 2020, and of changes in the allowance for the three months ended March 31, 2021 and 2020, is as follows (dollars in thousands):

 

 

 

Three months ended March 31,

 

 

 

 

2021

 

 

2020

 

 

Average loans outstanding, net of unearned income

 

$

3,477,754

 

 

$

2,703,051

 

 

Allowance-prior year end of period

 

 

41,910

 

 

 

26,911

 

 

Adjustment for adoption of ASU 2013-16

 

 

 

 

 

1,672

 

 

Allowance - beginning of period

 

 

41,910

 

 

 

28,583

 

 

Initial allowance on loans purchased with credit deterioration

 

 

2,074

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Construction & Land Development

 

 

 

 

 

 

 

1-4 Family residential

 

 

182

 

 

 

196

 

 

Commercial Real Estate

 

 

480

 

 

 

84

 

 

Agricultural

 

 

 

 

 

 

 

Commercial & Industrial

 

 

18

 

 

 

972

 

 

Consumer

 

 

288

 

 

 

171

 

 

Total charge-offs

 

 

968

 

 

 

1,423

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

1-4 Family Residential

 

 

8

 

 

 

62

 

 

Commercial Real Estate

 

 

9

 

 

 

5

 

 

Commercial & Industrial

 

 

18

 

 

 

23

 

 

Consumer

 

 

231

 

 

 

145

 

 

Total recoveries

 

 

266

 

 

 

235

 

 

Net charge-offs (recoveries)

 

 

702

 

 

 

1,188

 

 

Provision for loan losses

 

 

12,136

 

 

 

5,481

 

 

Allowance-end of period

 

$

55,418

 

 

$

32,876

 

 

Ratio of annualized net charge-offs to average loans

 

 

0.08

%

 

 

0.18

%

 

Ratio of allowance for credit losses to loans outstanding (at amortized cost)

 

 

1.41

%

 

 

1.20

%

 

Ratio of allowance for credit losses to nonperforming loans

 

 

173

%

 

 

134

%

 

 

 

Excluding the fully guaranteed PPP loans, the ratio of allowance for credit losses to loans outstanding was 1.50% as of March 31, 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 March 31, 2021 compared to March 31, 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 three months of 2021, the Company had net charge-offs of $702,000 compared to net charge-offs of $1,188,000 in 2020. During the first three months of 2021, there was a significant charge-off of one commercial real estate loans of one borrower totaling $480,000. During the first three months of 2020, there was one significant charge off on one loan to a commercial borrower of $836,200.


56

 

 


 

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 three months ended March 31, 2021 and 2020 and for the year ended December 31, 2020 (dollars in thousands):

 

 

 

Three months ended March 31, 2021

 

 

Three months ended March 31, 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

 

$

1,033,741

 

 

—%

 

 

$

628,588

 

 

—%

 

 

$

777,435

 

 

—%

 

Interest-bearing

 

 

1,876,378

 

 

 

0.19

%

 

 

1,264,489

 

 

 

0.35

%

 

 

1,557,264

 

 

 

0.24

%

Savings

 

 

579,632

 

 

 

0.10

%

 

 

435,480

 

 

 

0.11

%

 

 

469,276

 

 

 

0.09

%

Time deposits

 

 

623,852

 

 

 

0.95

%

 

 

570,132

 

 

 

1.86

%

 

 

531,834

 

 

 

1.61

%

Total average deposits

 

$

4,113,603

 

 

 

0.25

%

 

$

2,898,689

 

 

 

0.54

%

 

$

3,335,809

 

 

 

0.38

%

 

During the first three months of 2021, the average balance of deposits increased by $777.8 million from the average balance for the year ended December 31, 2020. Average non-interest-bearing deposits increased by $256.3 million, average interest-bearing balances increased by $319.1 million, savings account balances increased $110.4 million and balances of time deposits increased $92.0 million. These increases were primarily due to deposits added in the acquisition of Providence Bank.

 

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

 

 

Three months ended                      March 31, 2021

 

 

Three months ended                      March 31, 2020

 

 

Year ended

December 31, 2020

 

High month-end balances of total deposits

$

4,737,693

 

 

$

2,932,973

 

 

$

3,692,784

 

Low month-end balances of total deposits

 

3,725,741

 

 

 

2,873,260

 

 

 

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 March 31, 2021 and December 31, 2020 (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

3 months or less

 

$

126,122

 

 

$

72,945

 

Over 3 through 6 months

 

 

127,404

 

 

 

49,710

 

Over 6 through 12 months

 

 

334,529

 

 

 

88,682

 

Over 12 months

 

 

79,133

 

 

 

72,070

 

Total

 

$

667,188

 

 

$

283,407

 

 

57

 

 


 

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 March 31, 2021 and December 31, 2020 is presented below (dollars in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Securities sold under agreements to repurchase

 

$

212,503

 

 

$

206,937

 

Federal Home Loan Bank advances:

 

 

 

 

 

 

 

 

Fixed term – due in one year or less

 

 

18,984

 

 

 

18,984

 

Fixed term – due after one year

 

 

97,877

 

 

 

74,985

 

Other borrowings:

 

 

 

 

 

 

 

 

Fed funds

 

 

 

 

 

 

Subordinated debt

 

 

94,289

 

 

 

94,253

 

Junior subordinated debentures

 

 

19,069

 

 

 

19,027

 

Total

 

$

442,722

 

 

$

414,186

 

Average interest rate at end of period

 

 

1.39

%

 

 

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

 

 

18,984

 

 

 

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

 

 

94,289

 

 

 

94,256

 

Junior subordinated debentures

 

 

19,069

 

 

 

19,027

 

 

 

 

 

 

 

 

 

 

Averages for the period (YTD):

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

198,670

 

 

$

219,298

 

Federal Home Loan Bank advances:

 

 

 

 

 

 

 

 

FHLB-overnight

 

 

 

 

 

1,831

 

Fixed term – due in one year or less

 

 

17,406

 

 

 

24,858

 

Fixed term – due after one year

 

 

84,675

 

 

 

79,999

 

Other borrowings:

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

 

 

 

525

 

Loans due in one year or less

 

 

 

 

 

656

 

Loans due after one year

 

 

 

 

 

 

Subordinated debt

 

 

94,266

 

 

 

22,403

 

Junior subordinated debentures

 

 

19,041

 

 

 

18,936

 

Total

 

$

414,058

 

 

$

370,338

 

Average interest rate during the period

 

 

1.52

%

 

 

1.07

%

 

58

 

 


 

Securities sold under agreements to repurchase increased $5.6 million during the first three months of 2021 primarily due to the cash flow needs of various customers. FHLB advances represent borrowings by First Mid Bank and Providence Bank to economically fund loan demand. At March 31, 2021 the fixed term advances, before net premiums of $921,000, consisted of $115.9 million as follows:

 

Advance

 

 

Term (in years)

 

 

Interest Rate

 

 

Maturity Date

$

5,000,000

 

 

 

5.0

 

 

1.85%

 

 

April 12, 2021

 

4,000,000

 

 

 

1.0

 

 

2.00%

 

 

May 3, 2021

 

5,000,000

 

 

 

7.0

 

 

2.55%

 

 

October 1, 2021

 

5,000,000

 

 

 

5.0

 

 

2.71%

 

 

March 21, 2022

 

5,000,000

 

 

 

8.0

 

 

2.40%

 

 

January 9, 2023

 

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

 

 

 

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 March 31, 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 March 31, 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.

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.

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, 1.78% and 1.82% at March 31, 2021 and December 31, 2020, respectively).

59

 

 


On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First Clover Financial. The $4,000,000 of trust preferred securities and an additional $124,000 additional investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (2.03% and 2.07% at March 31, 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 (1.88% and 2.44% at March 31, 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, First Mid Bank or Providence 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.

60

 

 


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 March 31, 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

 

$

331,066

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

331,066

 

 

$

331,066

 

Certificates of deposit investments

 

 

980

 

 

 

1,715

 

 

 

 

 

 

 

 

 

 

 

 

 

2,695

 

 

 

2,695

 

Taxable investment securities

 

 

130,978

 

 

 

127,482

 

 

 

114,465

 

 

 

110,812

 

 

 

43,819

 

 

 

315,174

 

 

 

842,730

 

 

 

842,730

 

Nontaxable investment securities

 

 

37,250

 

 

 

13,785

 

 

 

13,750

 

 

 

17,927

 

 

 

16,016

 

 

 

153,835

 

 

 

252,563

 

 

 

252,643

 

Loans

 

 

1,341,946

 

 

 

639,970

 

 

 

461,940

 

 

 

597,510

 

 

 

448,676

 

 

 

453,057

 

 

 

3,943,099

 

 

 

3,899,938

 

Total

 

$

1,842,220

 

 

$

782,952

 

 

$

590,155

 

 

$

726,249

 

 

$

508,511

 

 

$

922,066

 

 

$

5,372,153

 

 

$

5,329,072

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and NOW accounts

 

$

496,434

 

 

$

171,251

 

 

$

171,251

 

 

$

171,251

 

 

$

171,251

 

 

$

755,542

 

 

$

1,936,980

 

 

$

1,936,980

 

Money market accounts

 

 

527,665

 

 

 

33,838

 

 

 

33,838

 

 

 

33,838

 

 

 

33,838

 

 

 

140,929

 

 

 

803,946

 

 

 

803,946

 

Other time deposits

 

 

669,953

 

 

 

87,194

 

 

 

23,041

 

 

 

19,888

 

 

 

11,439

 

 

 

71

 

 

 

811,586

 

 

 

814,695

 

Short-term borrowings/debt

 

 

212,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

212,503

 

 

 

212,514

 

Long-term borrowings/debt

 

 

38,053

 

 

 

20,326

 

 

 

15,206

 

 

 

15,000

 

 

 

101,634

 

 

 

40,000

 

 

 

230,219

 

 

 

226,454

 

Total

 

$

1,944,608

 

 

$

312,609

 

 

$

243,336

 

 

$

239,977

 

 

$

318,162

 

 

$

936,542

 

 

$

3,995,234

 

 

$

3,994,589

 

Rate sensitive assets – rate

   sensitive liabilities

 

$

(102,388

)

 

$

470,343

 

 

$

346,819

 

 

$

486,272

 

 

$

190,349

 

 

$

(14,476

)

 

$

1,376,919

 

 

 

 

 

Cumulative GAP

 

 

(102,388

)

 

 

367,955

 

 

 

714,774

 

 

 

1,201,046

 

 

 

1,391,395

 

 

 

1,376,919

 

 

 

 

 

 

 

 

 

Cumulative amounts as % of

   total Rate sensitive assets

 

 

-1.9

%

 

 

8.8

%

 

 

6.5

%

 

 

9.1

%

 

 

3.5

%

 

 

-0.3

%

 

 

 

 

 

 

 

 

Cumulative Ratio

 

 

-1.9

%

 

 

6.8

%

 

 

13.3

%

 

 

22.4

%

 

 

25.9

%

 

 

25.6

%

 

 

 

 

 

 

 

 

 

The static GAP analysis shows that at March 31, 2021, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis. The Company’s ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank’s historical experience and with known industry trends. ALCO meets at least monthly to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities. 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 March 31, 2021, the Company’s stockholders' equity increased $33.7 million, or 5.9%, to $602 million from $568 million as of December 31, 2020. During the first three months of 2021, net income contributed $4.1 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 $12.0 million, net of tax. Dividends of $3.4 million were paid during the first quarter 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 and Providence Bank follow 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 March 31, 2021 and December 31, 2020, the Company, First Mid Bank and Providence Bank met all capital adequacy requirements.

61

 

 


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

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk-weighted

   assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

636,910

 

 

 

13.75

%

 

$

486,239

 

 

> 10.50%

 

N/A

 

 

N/A

First Mid Bank

 

 

453,194

 

 

 

14.56

 

 

 

326,900

 

 

> 10.50

 

$

311,334

 

 

> 10.00%

Providence Bank

 

 

139,480

 

 

 

17.12

 

 

 

85,564

 

 

> 10.50

 

$

81,490

 

 

> 10.00%

Tier 1 Capital (to risk-weighted

   assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

497,506

 

 

 

10.74

 

 

 

393,622

 

 

> 8.50

 

N/A

 

 

N/A

First Mid Bank

 

 

415,986

 

 

 

13.36

 

 

 

264,633

 

 

> 8.50

 

 

249,067

 

 

> 8.00

Providence Bank

 

 

131,573

 

 

 

16.15

 

 

 

69,266

 

 

> 8.50

 

 

65,192

 

 

> 8.00

Common Equity Tier 1 Capital

   (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

478,437

 

 

 

10.33

 

 

 

324,160

 

 

> 7.00

 

N/A

 

 

N/A

First Mid Bank

 

 

415,986

 

 

 

13.36

 

 

 

217,933

 

 

> 7.00

 

 

202,367

 

 

> 6.50

Providence Bank

 

 

131,573

 

 

 

16.15

 

 

 

57,043

 

 

> 7.00

 

 

52,968

 

 

> 6.50

Tier 1 Capital (to average

   assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

497,506

 

 

 

10.74

 

 

 

202,161

 

 

> 4.00

 

N/A

 

 

N/A

First Mid Bank

 

 

415,986

 

 

 

13.36

 

 

 

183,401

 

 

> 4.00

 

 

229,252

 

 

> 5.00

Providence Bank

 

 

131,573

 

 

 

16.15

 

 

 

42,143

 

 

> 4.00

 

 

52,678

 

 

> 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 March 31, 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 March 31, 2021, the Company, First Mid Bank and Providence Bank had capital ratios above the required minimums for regulatory capital adequacy, and First Mid Bank and Providence Bank had capital ratios that qualified it for treatment as well-capitalized under the regulatory framework for prompt corrective action with respect to banks.

62

 

 


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 2020 and 2019, respectively and 35,400 and 16,950 as stock unit awards during 2020 and 2019, 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. During the three months ended March 31, 2021 and 2020, 3,142 shares and 3,804 shares, respectively, were issued pursuant to the ESPP.

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 March 31, 2021, First Mid Bank met these regulatory requirements.

 

First Mid Bank and Providence 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 March 31, 2021, the excess collateral at the FHLB would support approximately $812 million of additional advances for First Mid Bank and Providence Bank.

 

63

 

 


 

 

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 March 31, 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 March 31, 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 March 31, 2021 (in thousands):

 

 

 

 

 

 

 

Less than

 

 

 

 

 

 

 

 

 

 

More than

 

 

 

Total

 

 

1 year

 

 

1-3 years

 

 

3-5 years

 

 

5 years

 

Time deposits

 

$

811,586

 

 

$

669,953

 

 

$

110,235

 

 

$

31,327

 

 

$

71

 

Debt

 

 

113,358

 

 

 

 

 

 

 

 

 

 

 

 

113,358

 

Other borrowing

 

 

329,364

 

 

 

231,487

 

 

 

35,326

 

 

 

15,206

 

 

 

47,345

 

Operating leases

 

 

20,009

 

 

 

2,908

 

 

 

4,901

 

 

 

3,428

 

 

 

8,772

 

Supplemental retirement

 

 

419

 

 

 

50

 

 

 

100

 

 

 

100

 

 

 

169

 

 

 

$

1,274,736

 

 

$

904,398

 

 

$

150,562

 

 

$

50,061

 

 

$

169,715

 

 

 

For the three months ended March 31, 2021, net cash of $21.6 million was provided by operating activities, $81.3 million was used in investing activities, and $52.0 million was provided by financing activities. In total, cash and cash equivalents decreased by $7.7 million since year-end 2020.

Off-Balance Sheet Arrangements

First Mid Bank and Providence Bank enter 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 March 31, 2021 and December 31, 2020 were as follows (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Unused commitments and lines of credit:

 

 

 

 

 

 

 

 

Commercial real estate

 

$

98,463

 

 

$

56,309

 

Commercial operating

 

 

419,682

 

 

 

396,345

 

Home equity

 

 

54,927

 

 

 

40,464

 

Other

 

 

263,538

 

 

 

112,327

 

Total

 

$

836,610

 

 

$

605,445

 

Standby letters of credit

 

$

13,183

 

 

$

10,048

 

 

 

 

 

 

64

 

 


 

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.

 

65

 

 


 

 

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.

66

 

 


PART II

 

ITEM 1.

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

 

 

$

0.00

 

 

 

0

 

 

$

4,660,000

 

 

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.

 


67

 

 


 

 

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

 

First Amendment to Agreement and Plan of Merger, dated as of February 21, 2021, by and among First Mid Bancshares, Inc., Eval Sub Inc., a Missouri corporation, Eval Sub Inc., a Delaware corporation, LINCO Bancshares, Inc., and the sellers named therein (incorporated by reference to Exhibit 2.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 22, 2021).

 

 

 

10.1

 

Second Amendment to Sixth Amended and Restated Credit Agreement by and between First Mid Bancshares, Inc. and The Northern Trust Company, dated as of January 26, 2021 (incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on January 27, 2021).

 

 

 

10.2

 

Registration Rights Agreement, dated as of February 22, 2021, by and between First Mid Bancshares, Inc. and the stockholder named therein (incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 22, 2021).

 

 

 

10.3

 

Third Amendment to Sixth Amended and Restate Credit Agreement by and between First Mid Bancshares, Inc.
and The Northern Trust Company, dated as of April 9, 2021 (incorporated by reference to Exhibit 10.1 to First
Mid Bancshares, Inc.'s Current Report on Form 8-K filed with the SEC on April 12, 2021.

 

 

 

10.4

 

2017 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on April 30, 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 March 31, 2021 (formatted as Inline XBRL and contained in Exhibits 101)

 

 

 

 

 

68

 

 


 

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: May 10, 2021

 

 

/s/ Joseph R. Dively

 

Joseph R. Dively

President and Chief Executive Officer

 

/s/ Matthew K. Smith

 

Matthew K. Smith

Chief Financial Officer

 

 

69