FIRST MID BANCSHARES, INC. The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries as of, and for the three and six months endedJune 30, 2021 and 2020. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report.
Forward-Looking Statements
This document may contain certain forward-looking statements about First Mid and Delta, such as discussions of First Mid's and Delta's pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. First Mid intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of First Mid and Delta, are identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties, including, among other things, the possibility that any of the anticipated benefits of the proposed transactions between First Mid and Delta will not be realized or will not be realized within the expected time period; the risk that integration of the operations of Delta with First Mid will be materially delayed or will be more costly or difficult than expected; the inability to complete the proposed transactions due to the failure to satisfy conditions to completion of the proposed transactions, including failure to obtain the required regulatory, shareholder and other approvals; the failure of the proposed transactions to close for any other reason; the effect of the announcement of the proposed transactions on customer relationships and operating results; the possibility that the proposed transactions may be more expensive to complete than anticipated, including as a result of unexpected factors or events; changes in interest rates; general economic conditions and those in the market areas of First Mid and Delta; legislative and/or regulatory changes; monetary and fiscal policies of theU.S. Government , including policies of theU.S. Treasury and theFederal Reserve Board ; the quality or composition of First Mid's and Delta's loan or investment portfolios and the valuation of those investment portfolios; demand for loan products; deposit flows; competition, demand for financial services in the market areas of First Mid and Delta; accounting principles, policies and guidelines; the severity, magnitude and duration of the COVID-19 pandemic, the direct and indirect impact of such pandemic, including responses to the pandemic by theU.S. , state and local governments, customers' businesses, the disruption of global, national, state and local economies associated with the COVID-19 pandemic, which could affect First Mid's and Delta's liquidity and capital positions, impair the ability of First Mid's and Delta's borrowers to repay outstanding loans, impair collateral values, and further increase the allowance for credit losses, and the impact of the COVID-19 pandemic on First Mid's and Delta's financial results, including possible lost revenue and increased expenses (including cost of capital), as well as possible goodwill impairment charges. Additional information concerning First Mid, including additional factors and risks that could materially affect First Mid's financial results, are included in First Mid's filings with theSEC , including its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. Forward -looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of theSEC , we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
COVID-19 Impact
The COVID-19 outbreak is an unprecedented event that provides significant economic uncertainty for a broad spectrum of industries. The spread of this outbreak has caused significant disruptions in theU.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 theFederal 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 ofMarch 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 inMarch 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 ofJune 30, 2021 , a total of$10.1 million was deferred through these programs. In accordance with interagency guidance issued inMarch 2020 , these short-term deferrals are not considered troubled debt restructurings. 44
-------------------------------------------------------------------------------- BeginningApril 3, 2020 , with the passage of the initial Paycheck Protection Program ("PPP"), administered by theSmall Business Administration ("SBA"), the Company actively participated in assisting existing and new customers with applications for resources through the program. PPP loans have a two to five-year term and earn interest at 1%. The Company believes that most of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As ofJune 30, 2021 , the Company has outstanding 2,492 PPP loans totaling$165.1 million with the SBA. It is the Company's understanding that loans funded through the PPP program are fully guaranteed by theU.S. government and as such do not represent a credit risk. Employees. The Company has a business continuity plan in place that was executed inMarch 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 andFirst 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 throughJune 30, 2021 , were$33.5 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 ofJune 30, 2021 . Management's outlook. The Company's current financial position is strong and the fundamental earning capabilities of its currently existing operations is solid. Due to the uncertain economic outlook related to the COVID-19 crisis and the potential for loan losses and other asset impairments, it is anticipated that reserve levels will remain elevated compared to recent historical trends. All processes, procedures and internal controls are expected to continue as outlined in existing applicable policies despite remote working status of many employees. While the Company does not currently anticipate any material changes or deficiencies to its capital or liquidity sources, uncertainties about duration and overall effects on the economy could result in more adverse effects than expected. Overview This overview of management's discussion and analysis highlights selected information in this document and may not contain all the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates which have an impact on the Company's financial condition and results of operations you should carefully read this entire document. Net income was$16,330,000 and$20,136,000 for the six months endedJune 30, 2021 and 2020, respectively. Diluted net income per common share was$0.92 and$1.20 for the six months endedJune 30, 2021 and 2020. The following table shows the Company's annualized performance ratios for six months endedJune 30, 2021 and 2020, compared to the performance ratios for the year endedDecember 31, 2020 : Six months ended Year ended June 30, 2021 June 30, 2020 December 31, 2020 Return on average assets 0.59 % 0.99 % 1.05 % Return on average common equity 5.44 % 7.48 % 8.24 % Average equity to average assets 10.90 % 13.26 % 12.76 % 45
-------------------------------------------------------------------------------- Total assets were$5.8 billion atJune 30, 2021 , compared to$4.7 billion as ofDecember 31, 2020 . FromDecember 31, 2020 toJune 30, 2021 , cash and interest-bearing deposits decreased$76.5 million , net loan balances increased$644.3 million and investment securities increased$345.1 million . Net loan balances were$3.74 billion atJune 30, 2021 compared to$3.09 billion atDecember 31, 2020 . The increases were primarily due to the acquisition ofProvidence 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 3.18% for the six months endedJune 30, 2021 , down from 3.37% 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$79.5 million compared to net interest income of$61.5 million for the same period in 2020. The increase in net interest income was primarily due to the acquisition ofProvidence Bank during the first quarter of 2021. Total non-interest income of$36.0 million increased$5.6 million or 18.5% from$30.4 million for the same period last year. The increase in non-interest income resulted primarily from an increase in wealth management revenues, and income fromProvidence Bank . Total non-interest expense of$83.6 million increased$29.8 million or 55.3% from$53.8 million for the same period last year. The increase was primarily due to costs related to the acquisition of LINCO during the first quarter of 2021, and expenses fromProvidence 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 June 30, Six months ended 2021 June 30, 2021 Net interest income $ 11,165 $ 18,056 Provision for loan losses 6,696 41 Other income, including securities transactions 4,399 5,638 Other expenses (19,915 ) (29,784 ) Income taxes (261 ) 2,243 Decrease in net income $ 2,084 $ (3,806 ) Credit quality is an area of importance to the Company. Total nonperforming loans were$30.4 million atJune 30, 2021 , compared to$23.1 million atJune 30, 2020 and$28.1 million atDecember 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$7.2 million atJune 30, 2021 compared to$2.3 million atJune 30, 2020 and$2.5 million atDecember 31, 2020 . The increases in nonperforming loans and repossessed assets were due to the acquisition ofProvidence Bank . The Company's provision for loan losses for the six months endedJune 30, 2021 and 2020 was$11,576,000 and$11,617,000 , respectively. This provision expense during the first six months of 2021 included recording an initial provision for credit losses forProvidence Bank loans of$11.5 million , offset by lower provision expense forFirst Mid Bank compared to the same period in 2020 which included adoption of ASC 2016-13. Total loans past due 30 days or more were 1.35% of loans atJune 30, 2021 compared to 0.55% atJune 30, 2020 , and 0.44% of loans atDecember 31, 2020 . The increase in this ratio was primarily due to the increase in loan balances 30-59 days past due. Loans secured by both commercial and residential real estate comprised approximately 67.7% of the loan portfolio as ofJune 30, 2021 and 67.5% as ofDecember 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 atJune 30, 2021 and 2020 andDecember 31, 2020 was 10.92%, 14.07% and 14.63%, respectively. The Company's total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements atJune 30, 2021 and 2020, andDecember 31, 2020 was 13.91%, 15.19% and 18.82%, respectively. The decrease in these ratios fromDecember 31, 2020 was primarily due to the acquisition of LINCO and dividends paid to shareholders, offset by net income added to retained earnings. 46
-------------------------------------------------------------------------------- OnMarch 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 effectiveJanuary 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 atJune 30, 2021 and 2020, were$892 million and$615 million , respectively.
Federal Deposit Insurance Corporation Insurance Coverage. As
OnSeptember 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 theFDIC regulations:
• Surcharges on large banks (total consolidated assets of less than
billion) ended; the last surcharge on large banks was collected on December
28, 2018.
• Small banks (total consolidated assets of less than
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.
OnAugust 20, 2019 , the FDIC Board approved a Notice of Proposed Rulemaking which amended the Small Bank Credits regulation to permit credit usage when the reserve ratio is at least 1.35 percent (rather than 1.38 percent). Additionally, after eight quarters of credit usage, theFDIC would remit the remaining full nominal value to each bank. Eligible banks were notified inJanuary 24, 2019 with preliminary estimate of their share of small bank assessment credits.First Mid Bank's SmallBank 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$930,000 and$382,000 for the assessment during the first six 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.
Critical Accounting Policies and Use of Significant Estimates
The Company has established various accounting policies that govern the application ofU.S. generally accepted accounting principles in the preparation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements included in the Company's 2020 Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. Investment in Debt and Equity Securities. The Company classifies its investments in debt and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which was codified into ASC 320. Securities classified as held-to-maturity are recorded at amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of the Company. 47
-------------------------------------------------------------------------------- If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income (loss). Allowance for Credit Losses -Held-to-Maturity Securities . Currently all the Company's held-to-maturity securities are government agency-backed securities for which the risk of loss is minimal. Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities. Loans. Loans are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase discounts and premiums, fair value hedge accounting adjustments and deferred loan fees and costs. Accrued interest is reported separately and is included in interest receivable in the consolidated balance sheets. Allowance for Credit Losses - Loans. The Company believes the allowance for credit losses for loans is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. The allowance for credit losses for loans represents the best estimate of losses inherent in the existing loan portfolio. An estimate of potential losses inherent in the loan portfolio are determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, the Company uses relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis for non-individually evaluated loans with similar risk characteristics. Historical credit loss experience provides the basis for the estimate of expected credit losses. Adjustments to historical loss information are made for relevant factors to each pool including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. The Company estimates the appropriate level of allowance for credit losses for individually evaluated loans by evaluating them separately. A specific allowance is assigned to an impaired loan when expected cash flows or collateral are less than the carrying amount of the loan. Allowance for Credit Losses - Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period that the Company is exposed to credit risk via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is included in other liabilities in the consolidated balance sheets.
Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense.
Operating costs associated with the assets after acquisition are also recorded
as noninterest expense. Gains and losses on the disposition of other real estate
owned and foreclosed assets are netted and posted to other noninterest expense.
Mortgage Servicing Rights. The Company has elected to measure mortgage servicing
rights under the amortization method. Using this method, servicing rights are
amortized in proportion to and over the period of estimated net servicing
income. The amortized assets are assessed for impairment based on fair value at
each reporting date. Impairment is determined by stratifying rights into
tranches based on predominant characteristics, such as interest rate, loan type
and investor type.
Impairment is recognized through a valuation reserve, to the extent that fair
value is less than the carrying amount of the servicing assets. Fair value in
excess of the carrying amount of servicing assets is not recognized.
Deferred Income Tax Assets/Liabilities. The Company's net deferred income tax
asset arises from differences in the dates that items of income and expense
enter our reported income and taxable income. Deferred tax assets and
liabilities are established for these items as they arise. From an accounting
standpoint, deferred tax assets are reviewed to determine if they are realizable
based on the historical level of taxable income, estimates of future taxable
income and the reversals of deferred tax liabilities. In most cases, the
realization of the deferred tax asset is based on future profitability. If the
Company were to experience net operating losses for tax purposes in a future
period, the realization of deferred tax assets would be evaluated for a
potential valuation reserve.
Additionally, the Company reviews its uncertain tax positions annually under
FASB Interpretation No. 48 (FIN No. 48), "Accounting for Uncertainty in Income
Taxes," codified within ASC 740. An uncertain tax position is recognized as a
benefit
48
-------------------------------------------------------------------------------- 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 ofGoodwill 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 ofSeptember 30, 2020 as part of the goodwill impairment test and no impairment was identified. As a result of the Company's acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the consolidated balance sheets.Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually. Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company's valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded. SFAS No. 157, "Fair Value Measurements", which was codified into ASC 820, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date.
The three levels are defined as follows:
• Level 1 - quoted prices (unadjusted) for identical assets or liabilities in
active markets.
• Level 2 - inputs include quoted prices for similar assets and liabilities in
active markets, quoted prices of identical or similar assets or liabilities
in markets that are not active, and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term
of the financial instrument.
• Level 3 - inputs that are unobservable and significant to the fair value
measurement.
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 7 - Fair Value of Assets and Liabilities.
Results of Consolidated Operations
Net Interest Income
The largest source of revenue for the Company is net interest income. Net
interest income represents the difference between total interest income earned
on earning assets and total interest expense paid on interest-bearing
liabilities. The amount of interest income is dependent upon many factors,
including the volume and mix of earning assets, the general level of interest
rates and the dynamics of changes in interest rates. The cost of funds necessary
to support earning assets varies with the volume and mix of interest-bearing
liabilities and the rates paid to attract and retain such funds.
Net interest income is the excess of interest received from earning assets over
interest paid on interest-bearing liabilities. For analytical purposes, net
interest income is presented on a full tax equivalent ("TE") basis in the table
that follows. The federal statutory rate in effect of 21% for 2021 and 2020 was
used. The TE analysis portrays the income tax benefits associated with the
tax-exempt assets. The year-to-date net yield on interest-earning assets
excluding the TE adjustments of $1,207,000 and
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50
-------------------------------------------------------------------------------- The Company's average balances, fully tax equivalent interest income and interest expense, and rates earned or paid for major balance sheet categories are set forth for the three and six months endedJune 30, 2021 and 2020 in the following table (dollars in thousands): Three months ended June 30, 2021 Three months ended June 30, 2020 Average Average Average Average Balance Interest Rate Balance Interest Rate Assets Interest-bearing deposits with other financial institutions$ 341,907 $ 87 0.10 %$ 152,090 $ 55 0.15 % Federal funds sold 1,328 - - % 1,069 - - % Certificates of deposit 2,690 15 2.24 % 4,154 21 2.03 % Investment securities: Taxable 890,660 4,046 1.82 % 507,466 2,751 2.17 % Tax-exempt (1) 270,791 2,143 3.17 % 182,585 1,678 3.68 % Loans net of unearned income (TE) (2) 3,873,035 40,956 4.24 % 3,095,468 31,566 4.10 % Total earning assets 5,380,411 47,247 3.52 % 3,942,832 36,071 3.68 % Cash and due from banks 91,497 80,492 Premises and equipment 87,494 59,155 Other assets 341,570 254,386 Allowance for loan losses (55,656 ) (36,215 ) Total assets$ 5,845,316 $ 4,300,650 Liabilities and stockholders' equity Interest-bearing deposits Demand deposits$ 2,173,498 $ 1,027 0.19 %$ 1,464,173 $ 697 0.19 % Savings deposits 640,479 123 0.08 % 465,281 98 0.08 % Time deposits 788,375 1,112 0.57 % 541,413 2,310 1.72 % Total interest-bearing deposits 3,602,352 2,262 0.25 % 2,470,867 3,105 0.51 % Securities sold under agreements to repurchase 177,002 57 0.13 % 301,810 158 0.21 % FHLB advances 112,622 445 1.58 % 114,368 505 1.78 % Federal funds purchased - - - % - - - % Subordinated Debt 94,302 985 4.19 % Junior subordinated debt 19,083 139 2.92 % 18,915 174 3.70 % Other debt - - - % 1,868 11 2.37 % Total borrowings 403,009 1,626 1.62 % 436,961 848 0.78 % Total interest-bearing liabilities 4,005,361 3,888 0.39 % 2,907,828 3,953 0.55 % Non interest-bearing demand deposits 1,164,128 0.30 % 799,332 0.43 % Other liabilities 64,808 50,804 Stockholders' equity 611,019 542,686 Total liabilities and equity$ 5,845,316 $ 4,300,650 Net interest income$ 43,359 $ 32,118 Net interest spread 3.13 % 3.13 % Impact of non interest-bearing funds 0.09 % 0.12 % TE net yield on interest-bearing assets 3.22 % 3.25 % 51
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Six months ended June 30, 2021 Six months ended June 30, 2020
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Assets
Interest-bearing deposits with
other financial
institutions $ 310,296 $ 161 0.10 % $ 87,957 $ 147 0.34 %
Federal funds sold 1,322 - 0.03 % 998 2 0.50 %
Certificates of deposit 2,692 29 2.14 % 4,609 52 2.27 %
Investment securities:
Taxable 826,603 7,295 1.77 % 525,981 6,090 2.32 %
Tax-exempt (1) 259,498 4,159 3.21 % 178,173 3,260 3.66 %
Loans net of unearned income (TE)
(2) 3,676,486 77,014 4.22 % 2,899,259 61,781 4.29 %
Total earning assets 5,076,897 88,658 3.51 % 3,696,977 71,332 3.88 %
Cash and due from banks 87,964 86,888
Premises and equipment 77,941 59,316
Other assets 319,034 252,872
Allowance for loan losses (51,220 ) (33,102 )
Total assets $ 5,510,616 $ 4,062,951
Liabilities and stockholders'
equity
Interest-bearing deposits
Demand deposits $ 2,025,759 $ 1,913 0.19 % $ 1,364,331 $ 1,789 0.26 %
Savings deposits 610,224 259 0.09 % 450,381 217 0.10 %
Time deposits 706,568 2,574 0.73 % 555,773 4,960 1.79 %
Total interest-bearing deposits 3,342,551 4,746 0.29 % 2,370,485 6,966 0.59 %
Securities sold under agreements
to repurchase 187,776 127 0.14 % 252,252 352 0.28 %
FHLB advances 107,381 819 1.54 % 117,257 1,085 1.86 %
Federal funds purchased - - - % 1,055 10 1.91 %
Subordinated debt 94,284 1,969 4.21 %
Junior subordinated debentures 19,062 279 2.95 % 18,894 392 4.17 %
Other debt - - - % 1,319 16 2.44 %
Total borrowings 408,503 3,194 1.58 % 390,777 1,855 0.95 %
Total interest-bearing
liabilities 3,751,054 7,940 0.43 % 2,761,262 8,821 0.64 %
Non interest-bearing demand
deposits 1,099,295 0.33 % 713,960 0.51 %
Other liabilities 59,604 49,022
Stockholders' equity 600,663 538,707
Total liabilities and equity $ 5,510,616 $ 4,062,951
Net interest income $ 80,718 $ 62,511
Net interest spread 3.08 % 3.24 %
Impact of non interest-bearing
funds 0.10 % 0.13 %
TE net yield on interest-earning
assets 3.18 % 3.37 %
1. The tax-exempt income is shown on a tax equivalent basis.
2. Nonaccrual loans and loans held for sale are included in the averagebalances. Balances are net of unaccreted discount related to loans acquired.
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-------------------------------------------------------------------------------- Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for the three and six months endedJune 30, 2021 , compared to the same period in 2020 (in thousands): Three months ended June 30, 2021 Six months ended June 30, 2021 compared to 2020 Increase / (Decrease) compared to 2020 Increase / (Decrease) Total Total Change Volume (1) Rate (1) Change Volume (1) Rate (1) Earning assets: Interest-bearing deposits $ 32 $ 145$ (113 ) $ 14 $ 341$ (327 ) Federal funds sold - - - (2 ) 2 (4 ) Certificates of deposit investments (6 ) (18 ) 12 (23 ) (20 ) (3 ) Investment securities: Taxable 1,295 3,994 (2,699 ) 1,205 4,941 (3,736 ) Tax-exempt (2) 465 723 (258 ) 899 1,343 (444 ) Loans (2) (3) 9,390 8,266 1,124 15,233 18,184 (2,951 ) Total interest income$ 11,176 $ 13,110 $ (1,934 ) $ 17,326 $ 24,791 $ (7,465 ) Interest-bearing liabilities: Interest-bearing deposits Demand deposits $ 330 $ 330 $ - $ 124$ 1,308 $ (1,184 ) Savings deposits 25 25 - 42 103 (61 ) Time deposits (1,198 ) 4,564 (5,762 ) (2,386 ) 2,952 (5,338 ) Securities sold under agreements to repurchase (101 ) (53 ) (48 ) (225 ) (76 ) (149 ) FHLB advances (60 ) (7 ) (53 ) (266 ) (88 ) (178 ) Federal funds purchased - - - (10 ) (5 ) (5 ) Subordinated debt 985 985 - 1,969 1,969 - Junior subordinated debentures (35 ) 10 (45 ) (113 ) 10 (123 ) Other debt (11 ) (5 ) (6 ) (16 ) (8 ) (8 ) Total interest expense (65 ) 5,849 (5,914 ) (881 ) 6,165 (7,046 ) Net interest income$ 11,241 $ 7,261 $ 3,980 $ 18,207 $ 18,626 $ (419 )
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 $18.2 million , or 29.1%, to $80.7
million for the six months ended June 30, 2021 , from $62.5 million for the same
period in 2020. Net interest income increased primarily due to the acquisition
of Providence Bank during the first quarter of 2021. The net interest margin
decreased primarily due to a lower interest rates on loans and investments.
For the six months ended June 30, 2021 , average earning assets increased $1.4
billion , or 37.3%, and average interest-bearing liabilities increased $989.8
million or 35.8% 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 $222.3 million or 252.8%.
• Average federal funds sold increased $0.3 million or 32.5%.
• Average certificates of deposits investments decreased
• Average loans increased by$777.2 million or 26.8%. • Average securities increased by$381.9 million or 54.2%.
• Average interest-bearing customer deposits increased by
41.0%.
• Average securities sold under agreements to repurchase decreased by
million or 25.6%.
• Average borrowings and other debt increased by
• Net interest margin decreased to 3.18% for the first six months of 2021 from
3.37% for the first six months of 2020.
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Provision for Loan Losses
The provision for loan losses for the six months endedJune 30, 2021 and 2020 was$11.6 million and$11.6 million , respectively. This provision expense during the first six months of 2021included recording an initial provision for credit losses forProvidence Bank loans of$11.5 million , offset by lower provision expense forFirst Mid Bank compared to the same period in 2020 when ASC 2016-13 was adopted. Net charge-offs were$963,000 for the six months endedJune 30, 2021 , compared to net charge offs of$1.8 million forJune 30, 2020 . Nonperforming loans were$30.4 million and$23.1 million as ofJune 30, 2021 and 2020, respectively. For information on loan loss experience and nonperforming loans, see discussion under the "Nonperforming Loans" and "Loan Quality and Allowance for Loan Losses" sections below.
Other Income
An important source of the Company's revenue is other income. The following
table sets forth the major components of other income for the three and six
months ended
Three months June 30, 2021 Six months June 30, 2021
2021 2020 $ Change %
Change 2021 2020 $ Change % Change
Wealth management revenues
31.1 %$ 9,942 $ 7,453 $ 2,489 33.4 % Insurance commissions 4,988 4,088 900 22.0 % 10,845 10,709 136 1.3 % Service charges 1,539 1,111 428 38.5 % 2,903 2,889 14 0.5 % Security gains, net 73 287 (214 ) -74.6 % 77 818 (741 ) -90.6 % Mortgage banking revenue, net 1,691 1,236 455
36.8 % 3,100 1,544 1,556 100.8 % ATM / debit card revenue
3,141 2,239 902 40.3 % 5,840 4,226 1,614 38.2 %
Bank owned life insurance 761 428 333 77.8 % 1,398 859 539 62.7 %
Other 1,075 669 406 60.7 % 1,928 1,897 31 1.6 %
Total other income $ 18,284 $ 13,885 $ 4,399 31.7 % $ 36,033 $ 30,395 $ 5,638 18.5 %
Following are explanations of the changes in these other income categories for
the three and six months ended
• Wealth management revenues increased due to increases across all lines of
business within Wealth Management.
• Insurance commissions increased primarily due to an increase in commission
and fee income for the period, offset by a decline in contingency income
during the first quarter of 2021 compared to the same period last year.
• Fees from service charges decreased during the first six months of 2021 due
to an increase in waived commercial service charges but was offset by an
increase in service charge fees from the acquisition Providence Bank .• Gains from the sale of securities during the first six months of 2021 and
2020 were
• The increase in mortgage banking income was due to an increase in mortgage
refinancing activity and fees from loans sold in the secondary market, as
well as the acquisition of Providence Bank . Loans sold balances were as
follows:
•
521 loans) for the three and six months ended June 30, 2021 ,
respectively.
•
570 loans) for the three and six months ended
respectively.
• Revenue from ATMs and debit cards increased due to an increase in activity
during the period and the acquisition of
• Bank owned life insurance income increased approximately
2021 compared to the same period in 2020, due to
purchased during the first quarter and $30.3 million added through the
acquisition of Providence Bank .
• Other income increased primarily due to increases in loan and bank card fees
from the acquisition of
and a swap upfront fee received in 2020 that did not recur in 2021.
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55
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Other Expense
The following table sets forth the major components of other expense for the
three and six months ended
Three months June 30, Six months June 30,
2021 2020 $ Change
% Change 2021 2020 $ Change % Change
Salaries and employee benefits
61.2 %
32.4 % 10,452 8,383 2,069 24.7 % Net other real estate owned expense 1,966
(2 ) 1,968
98400.0 % 2,044 (48 ) 2,092 4358.3 %
478 289 189 65.4 % 930 382 548 143.5 %
Amortization of intangible assets 1,295 1,290 5 0.4 % 2,515 2,585 (70 ) -2.7 %
Stationery and supplies 235 275 (40 ) -14.5 % 551 543 8 1.5 %
Legal and professional 1,639 1,489 150 10.1 % 3,041 2,887 154 5.3 %
Marketing and donations 507 314 193 61.5 % 1,009 795 214 26.9 %
ATM/debit card expense 1,074 274 800 292.0 % 1,912 879 1,033 117.5 %
Other operating expenses 8,429 2,573 5,856 227.6 % 12,764 5,468 7,296 133.4 %
Total other expense $ 46,013 $ 26,098 $ 19,915 76.3 % $ 83,613 $ 53,829 $ 29,784 55.3 %
Following are explanations for the changes in these other expense categories for
the three and six months ended
• 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
full-time equivalent employees at
• The increase in occupancy and equipment expense was due to increases in
depreciation and other property related expenses from the acquisition of
Providence Bank and increases in data processing expense.
• The increase in net other real estate owned expense was primarily due to
properties acquired with the acquisition of Providence Bank that were sold
at prices lower than recorded book value.
• Expense for amortization of intangible assets increased due to increases in
amortization expense for core deposit intangibles and customer list
intangibles for the six months ended June 30, 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 $4,025,000 (19.8% effective tax rate) for
the six months ended June 30, 2021 , compared to $6.3 million (23.7% effective
tax rate) for the same period in 2020. The decline in effective rate is
primarily resulting from an increase in tax exempt income and an increase in
significant non-recurring costs.
The Company files
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Analysis of Consolidated Balance Sheets
Securities
The Company's overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of securities purchased are primarily based on the Company's current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the available-for-sale and held-to-maturity securities as ofJune 30, 2021 andDecember 31, 2020 (dollars in thousands) June 30, 2021 December 31, 2020 Amortized Weighted Amortized Weighted Cost Average Yield Cost Average YieldU.S. Treasury securities and obligations ofU.S. government corporations and agencies$ 199,730 1.20 %$ 132,083 1.25 % Obligations of states and political subdivisions 294,255 2.65 % 237,886 2.72 % Mortgage-backed securities: GSE residential 685,736 1.76 % 479,470 1.92 % Other securities 37,159 4.39 % 10,740 5.22 % Total securities$ 1,216,880 1.85 %$ 860,179 2.08 % AtJune 30, 2021 , the Company's investment portfolio increased by$356.7 million fromDecember 31, 2020 primarily due to securities added with the acquisition ofProvidence 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 ofJune 30, 2021 for certain investment securities (in thousands):
Average Credit Rating of Fair Value at
Amortized Estimated
Cost Fair Value AAA AA +/- A +/- BBB +/- < BBB - Not rated
Available-for-sale:
U.S. Treasury securities
and
obligations of U.S.
government
corporations and
agencies $ 194,722 $ 192,179 $ 29,397 $ 161,802 $ - $ - $ - $ 980
Obligations of state and
political
subdivisions 294,255 305,626 37,925 214,715 51,825 - - 1,161
Mortgage-backed
securities (2) 685,736 688,570 1,064 - - - - 687,506
Other securities 35,118 35,823 - - - 1,000 - 34,823
Total available-for-sale
$ 376,517 $ 51,825 $ 1,000 $ -$ 724,470 Held-to-maturity:U.S. Treasury securities and obligations ofU.S. government corporations and agencies$ 5,008 $ 5,064 $ -$ 5,064 $ - $ - $ - $ - Other securities 2,041 2,041 2,041 Total held-to-maturity$ 7,049 $ 7,105 $ -$ 5,064 $ - $ - $ -$ 2,041 Equity securities: Federal Agricultural Mtg Corp$ 84 $ 301 $ - $ - $ - $ - $ -$ 301
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,
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.
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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 ofJune 30, 2021 andDecember 31, 2020 (in thousands):June 30, 2021 December 31, 2020 Amortized % Outstanding
Amortized % Outstanding
Cost Loans Cost Loans
Construction and land development $ 141,568 3.7 % $ 122,479 3.9 %
Agricultural real estate 277,362 7.3 % 254,341 8.1 %
1-4 family residential properties 394,902 10.4 % 325,762 10.4 %
Multifamily residential properties 274,910 7.2 % 189,632 6.0 %
Commercial real estate 1,480,198 39.0 % 1,174,300 37.4 %
Loans secured by real estate 2,568,940 67.7 % 2,066,514 65.8 %
Agricultural loans 123,101 3.2 % 137,352 4.4 %
Commercial and industrial loans 864,554 22.8 % 738,313 23.5 %
Consumer loans 84,541 2.2 % 78,002 2.5 %
All other loans 155,168 4.1 % 118,238 3.8 %
Total loans $ 3,796,304 100.0 % $ 3,138,419 100.0 %
Loan balances increased $657.9 million , or 21.0% of which approximately $838
million were loans acquired with Providence Bank and $165.1 million were PPP
loans. The balance of real estate loans held for sale, included in the balances
shown above, amounted to $2.9 million and $1.9 million as of June 30, 2021 and
December 31, 2020 , respectively.
Commercial and commercial real estate loans generally involve higher credit
risks than residential real estate and consumer loans. Because payments on loans
secured by commercial real estate or equipment are often dependent upon the
successful operation and management of the underlying assets, repayment of such
loans may be influenced to a great extent by conditions in the market or the
economy. The Company does not have any sub-prime mortgages or credit card loans
outstanding which are also generally considered to be higher credit risk.
Loans are geographically dispersed in central and southern Illinois , the St.
Louis Metro area and central Missouri , and Texas . While these regions have
experienced some economic stress during 2021 and 2020, the Company does not
consider these locations high risk areas since these regions have not
experienced the significant 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 June 30, 2021 and December 31, 2020 , the Company did have industry loan
concentrations that exceeded 25% of total risk-based capital in the following
industries (dollars in thousands):
June 30, 2021 December 31, 2020
Principal % Outstanding Principal % Outstanding
balance Loans balance Loans
Other grain farming $ 278,577 7.34 % $ 308,202 9.82 %
Lessors of non-residential buildings 554,484 14.61 % 420,175 13.39 %
Lessors of residential buildings and
dwellings 407,131 10.72 % 313,268 9.98 %
Other gambling industries 58,946 1.55 % 119,549 3.81 %
Hotels and motels 130,628 3.44 % 124,755 3.98 %
The concentration of other gambling industries was less than 25% of total
risk-based capital as of
58
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The following table presents the balance of loans outstanding as of
Maturity (1)
One year Over 1 through Over 5
or less(2) 5 years years Total
Construction and land development
$ 32,899 $ 141,568 Agricultural real estate 20,298 113,361 143,703 277,362 1-4 family residential properties 23,516 74,565 296,821 394,902 Multifamily residential properties 34,421 154,886 85,603 274,910 Commercial real estate 137,265 592,435 750,498 1,480,198 Loans secured by real estate 248,564 1,010,852 1,309,524 2,568,940 Agricultural loans 89,858 30,281 2,962 123,101 Commercial and industrial loans 296,683 398,326 169,545 864,554 Consumer loans 13,243 56,786 14,512 84,541 All other loans 67,627 21,020 66,521 155,168 Total loans$ 715,975 $ 1,517,265 $ 1,563,064 $ 3,796,304 1. Based upon remaining contractual maturity. 2. Includes demand loans, past due loans and overdrafts.
As of
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 atJune 30, 2021 andDecember 31, 2020 (dollars in thousands): June 30, 2021 December 31, 2020 Nonaccrual loans$ 26,555 $ 23,750 Restructured loans which are performing in accordance with revised terms 3,855 4,373 Total nonperforming loans 30,410 28,123 Repossessed assets 7,238 2,493
Total nonperforming loans and repossessed assets
30,616
Nonperforming loans to loans, before allowance for loan losses
0.80 % 0.90 %
Nonperforming loans and repossessed assets to loans,
before allowance for
loan losses 0.99 % 0.98 %
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The$2,805,000 increase in nonaccrual loans during 2021 resulted from the net of$6,428,000 of loans put on nonaccrual status offset by$2,772,000 of loans becoming current or paid-off,$197,000 of loans transferred to other real estate and$654,000 of loans charged off. The following table summarizes the composition of nonaccrual loans (dollars in thousands): June 30, 2021 December 31, 2020 Balance % of Total Balance % of Total Construction and land development$ 29 0.1 %$ 162 0.7 % Agricultural real estate 343 1.3 % 359 1.5 % 1-4 family residential properties 8,302 31.3 % 6,930 29.2 % Multifamily residential properties 2,142 8.1 % 2,181 9.2 % Commercial real estate 9,069 34.2 % 8,760 36.9 % Loans secured by real estate 19,885 74.9 % 18,392 77.4 % Agricultural loans 238 0.9 % 659 2.8 % Commercial and industrial loans 6,085 22.9 % 4,372 18.4 % Consumer loans 347 1.3 % 327 1.4 % Other loans - 0.0 % - 0.0 % Total loans$ 26,555 100.0 %$ 23,750 100.0 % Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled$319,000 and$1,044,000 for the six months endedJune 30, 2021 and 2020, respectively. The$4,745,000 increase in repossessed assets during the first six months of 2021 resulted from$4,191,000 of additional assets repossessed and$7,911,000 of repossessed assets sold, write downs of two assets of$212,000 , assets added from the acquisition ofProvidence Bank of approximately$10.9 million , and realization of approximately$2,214,000 of deferred purchase premiums following the sale of two properties. The following table summarizes the composition of repossessed assets (dollars in thousands): June 30, 2021 December 31, 2020 Balance % of Total Balance % of Total Construction and land development$ 3,443 47.6 %$ 1,436 57.6 % 1-4 family residential properties 60 0.8 % 71 2.8 % Commercial real estate 3,735 51.6 % 982 39.4 % Total real estate 7,238 100.0 % 2,489 99.8 % Consumer loans - 0.0 % 4 0.2 % Total repossessed collateral$ 7,238 100.0 %$ 2,493 100.0 % Repossessed assets sold during the first six months of 2021 resulted in net losses of$1,886,000 , of which$625,000 of net losses was related to real estate asset sales and$1,000 of net gains was related to other repossessed assets. Additionally,$1,265,000 of losses were recognized due to write downs of assets. Repossessed assets sold during the same period in 2020 resulted in net gains of$157,000 , of which$174,000 of net losses was related to real estate asset sales and$17,000 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.
60
-------------------------------------------------------------------------------- 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 centralIllinois , 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. AtJune 30, 2021 , the Company's loan portfolio included$400.5 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount,$278.6 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased$8.8 million from$391.7 million atDecember 31, 2020 while loans concentrated in other grain farming decreased$29.6 million from$308.2 million atDecember 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$130.6 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$554.5 million of loans to lessors of non-residential buildings,$407.1 million of loans to lessors of residential buildings and dwellings, and$58.9 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. 61
-------------------------------------------------------------------------------- Analysis of the allowance for credit losses as ofJune 30, 2021 and 2020, and of changes in the allowance for the three and six months endedJune 30, 2021 and 2020, is as follows (dollars in thousands): Three months endedJune 30 ,
Six months ended
2021 2020 2021 2020
Average loans outstanding, net
of unearned income $ 3,873,035 $ 2,703,051 $ 3,676,486 $ 2,703,051
Allowance-prior year end of
period 55,418 32,876 41,910 26,911
Adjustment for adoption of ASU
2013-16 - - - 1,672
Allowance - beginning of period 55,418 32,876 41,910 28,583
Initial allowance on loans
purchased with credit
deterioration - - 2,074 -
Charge-offs:
Construction and land
development 23 - 23 -
1-4 family residential 14 69 196 265
Commercial real estate - 467 480 551
Agricultural - - - -
Commercial and industrial 68 311 86 1,283
Consumer 344 116 632 287
Total charge-offs 449 963 1,417 2,386
Recoveries:
1-4 family residential 18 140 26 202
Commercial real estate 13 - 22 5
Agricultural 1 - 1 -
Commercial and industrial 22 92 40 115
Consumer 134 100 365 245
Total recoveries 188 332 454 567
Net charge-offs (recoveries) 261 631 963 1,819
Provision for loan losses (560 ) 6,136 11,576 11,617
Allowance-end of period $ 54,597 $ 38,381 $ 54,597 $ 38,381
Ratio of annualized net
charge-offs to average loans 0.03 % 0.09 % 0.05 % 0.13 %
Ratio of allowance for credit
losses to loans outstanding (at
amortized cost) 1.44 % 1.20 % 1.44 % 1.20 %
Ratio of allowance for credit
losses to nonperforming loans 180 % 166 % 180 % 166 %
Excluding the fully guaranteed PPP loans, the ratio of allowance for credit
losses to loans outstanding was 1.50% as of June 30, 2021 . The increase in the
allowance for credit losses to nonperforming loans ratio is primarily due to the
increase in the allowance for credit losses and a decline in nonperforming loans
at June 30, 2021 compared to June 30, 2020 . The increase in allowance for credit
losses is primarily due to the day one provision required to be recorded in the
acquisition of loans with Providence Bank .
During the first six months of 2021, the Company had net charge-offs of $963,000
compared to net charge-offs of $1,819,000 in 2020. During the first six months
of 2021, there was a significant charge-off of one commercial real estate loans
of one borrower totaling $480,000 . During the first six months of 2020, there
were significant charge-offs of four commercial real estate loans to three
borrowers totaling $482,000 and four commercial loans to a single borrower
totaling $1.1 million .
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Deposits
Funding of the Company's earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates for the six months endedJune 30, 2021 and 2020 and for the year endedDecember 31, 2020 (dollars in thousands): Six months ended Six months ended Year ended June 30, 2021 June 30, 2020 December 31, 2020 Weighted Weighted Weighted Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate Demand deposits: Non-interest-bearing$ 1,099,295 -%$ 713,960 -%$ 777,435 -% Interest-bearing 2,025,759 0.19 % 1,364,331 0.26 % 1,557,264 0.24 % Savings 610,224 0.09 % 450,381 0.10 % 469,276 0.09 % Time deposits 706,568 0.73 % 555,773 1.79 % 531,834 1.61 % Total average deposits$ 4,441,846 0.22 %$ 3,084,445 0.45 %$ 3,335,809 0.38 % During the first six months of 2021, the average balance of deposits increased by$1.1 billion from the average balance for the year endedDecember 31, 2020 . Average non-interest-bearing deposits increased by$321.9 million , average interest-bearing balances increased by$468.5 million , savings account balances increased$140.9 million and balances of time deposits increased$174.7 million . These increases were primarily due to deposits added in the acquisition ofProvidence Bank . The following table sets forth the high and low month-end balances for the six months endedJune 30, 2021 and 2020 and for the year endedDecember 31, 2020 (in thousands): Six months ended Six months ended Year ended June 30, 2021 June 30, 2020 December 31, 2020 High month-end balances of total deposits$ 4,789,451 $ 3,385,827 $ 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$100,000 or more atJune 30, 2021 andDecember 31, 2020 (in thousands): June 30, 2021 December 31, 2020 3 months or less$ 147,313 $ 72,945 Over 3 through 6 months 86,846 49,710 Over 6 through 12 months 98,967 88,682 Over 12 months 73,359 72,070 Total$ 406,485 $ 283,407 63
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Repurchase Agreements and Other Borrowings
Securities sold under agreements to repurchase are short-term obligations ofFirst Mid Bank . These obligations are collateralized with certain government securities that are direct obligations ofthe 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 ofFederal 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 ofJune 30, 2021 andDecember 31, 2020 is presented below (dollars in thousands): June 30, 2021 December 31, 2020 Securities sold under agreements to repurchase$ 151,394 $ 206,937Federal Home Loan Bank advances: Fixed term - due in one year or less 15,247 18,984 Fixed term - due after one year 97,506 74,985 Other borrowings: Fed funds - - Subordinated debt 94,326 94,253 Junior subordinated debentures 19,111 19,027 Total$ 377,584 $ 414,186 Average interest rate at end of period 1.53 % 0.81 % Maximum outstanding at any month-end: Securities sold under agreements to repurchase$ 212,503 $ 350,288Federal 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 94,326 94,256 Junior subordinated debentures 19,111 19,027 Averages for the period (YTD): Securities sold under agreements to repurchase$ 187,776 $ 219,298Federal Home Loan Bank advances: FHLB - overnight - 1,831 Fixed term - due in one year or less 15,698 24,858 Fixed term - due after one year 91,683 79,999 Other borrowings: Federal funds purchased - 525 Loans due in one year or less - 656 Loans due after one year - - Subordinated debt 94,284 22,403 Junior subordinated debentures 19,062 18,936 Total$ 408,503 $ 370,338 Average interest rate during the period 1.58 % 1.07 % 64
-------------------------------------------------------------------------------- Securities sold under agreements to repurchase decreased$55.5 million during the first six months of 2021 primarily due to the cash flow needs of various customers. FHLB advances represent borrowings byFirst Mid Bank to economically fund loan demand. AtJune 30, 2021 the fixed term advances, before net premiums of$812,000 , consisted of$111.9 million as follows: Advance Term (in years) Interest Rate Maturity Date$ 5,000,000 7.0 2.55% October 1, 2021 5,000,000 5.0 2.71% March 21, 2022 5,000,000 1.0 0.00% May 31, 2022 5,000,000 3.0 2.41% May 31, 2022 5,000,000 3.0 2.12% June 7, 2022 5,000,000 3.0 2.12% June 7, 2022 5,000,000 8.0 2.40% January 9, 2023 5,000,000 4.0 2.44% May 30, 2023 5,000,000 3.5 1.51% July 31, 2023 5,000,000 3.5 0.77% September 11, 2023 10,000,000 5.0 1.45% December 31, 2024 5,000,000 5.0 0.91% March 10, 2025 6,940,511 10.0 2.64% December 23, 2025 5,000,000 10.0 1.14% October 3, 2029 5,000,000 10.0 1.15% October 3, 2029 5,000,000 10.0 1.12% October 3, 2029 10,000,000 10.0 1.39% December 31, 2029 15,000,000 10.0 1.41% December 31, 2029 The Company is party to a revolving credit agreement withThe Northern Trust Company in the amount of$15 million . There was no balance on this line of credit as ofJune 30, 2021 . This loan was renewed onApril 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 ofFirst Mid Bank . The Company andFirst Mid Bank were in compliance with the existing covenants atJune 30, 2021 and 2020, andDecember 31, 2020 . OnOctober 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 ofOctober 6, 2020 (the "Base Indenture"), between the Company andU.S. Bank National Association , as trustee (the "Trustee"), as supplemented by the First Supplemental Indenture, dated as ofOctober 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 onOctober 15, 2030 . From and including the date of issuance to, but excludingOctober 15, 2025 , the Notes will bear interest at an initial rate of 3.95% per annum. From and includingOctober 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 ofOctober 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 toOctober 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 forU.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. OnApril 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 untilJune 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points, 1.72% and 1.82% atJune 30, 2021 andDecember 31, 2020 , respectively). 65
-------------------------------------------------------------------------------- OnSeptember 8, 2016 , the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I ("CLST I"), a statutory business trust that was a wholly owned unconsolidated subsidiary of First Clover Financial. The$4,000,000 of trust preferred securities and an additional$124,000 additional investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (1.97% and 2.07% atJune 30, 2021 andDecember 31, 2020 , respectively) and resets quarterly. OnMay 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 ofFirst BancTrust Corporation . The$6,000,000 of trust preferred securities and an additional$186,000 additional investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (1.82% and 2.44% atJune 30, 2021 andDecember 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. OnMarch 1, 2005 , theFederal 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, endingSeptember 30, 2010 , for application of the revised quantitative limits. OnMarch 17, 2009 , theFederal 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 untilMarch 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 lawJuly 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 beginningJanuary 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 ofDecember 31, 2009 to continue to count toward Tier 1 capital any trust preferred securities issued beforeMay 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 toMay 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 toDecember 10, 2013 . The Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company orFirst Mid Bank . OnJune 25, 2020 , the agencies announced that certain restrictions under the Volcker Rule applicable to large banking entities will be eased commencingOctober 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.
66
-------------------------------------------------------------------------------- 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 atJune 30, 2021 (dollars in thousands): Rate Sensitive Within 1 years 1-2 years 2-3 years 3-4 years 4-5 years Thereafter Total Fair Value Interest-earning assets: Federal funds sold and other interest-bearing deposits$ 241,580 $ - $ - $ - $ - $ -$ 241,580 $ 241,580 Certificates of deposit 980 490 2,450 2,450 investments 980 - - - Taxable 172,522 153,350
102,598 57,571 266,515 929,105 929,161 investment securities
176,549
Nontaxable 14,756 12,666 25,015 22,822 187,663 300,443 300,443 investment securities
37,521
Loans 1,573,412 521,102 477,612 525,290 457,863 241,025 3,796,304 3,747,738
Total $ 2,030,042 $ 709,360 $ 644,118 $ 652,903 $ 538,256 $ 695,203 $ 5,269,882 $ 5,221,372
Interest-bearing
liabilities:
Savings and NOW accounts $ 512,508 $ 175,128 $ 175,128 $ 175,128 $ 175,128 $ 803,929 $ 2,016,949 $ 2,016,949
Money market accounts 584,753 35,528 35,528 35,528 35,528 115,906 842,771 842,771 Other time deposits
580,201 85,043 23,987 17,654 15,637 71 722,593 726,702
Short-term borrowings/debt 151,394 - - - - - 151,394 151,400
Long-term borrowings/debt 49,358 10,182 10,000
15,383 101,267 40,000 226,190 222,622 Total
$ 1,878,214 $ 305,881 $ 244,643
sensitive liabilities
151,828 555,307 954,782 1,363,992 1,574,688 1,309,985
Cumulative amounts as % of
total Rate sensitive
assets 2.9 % 7.7 % 7.6 % 7.8 % 4.0 % -5.0 %
Cumulative Ratio 2.9 % 10.5 % 18.1 % 25.9 % 29.9 % 24.9 %
The static GAP analysis shows that at June 30, 2021 , the Company was asset
sensitive, on a cumulative basis, through the twelve-month time horizon. This
indicates that future decreases in interest rates could have an adverse effect
on net interest income. There are several ways the Company measures and manages
the exposure to interest rate sensitivity, including static GAP analysis. The
Company's ALCO also uses other financial models to project interest income under
various rate scenarios and prepayment/extension assumptions consistent with
First Mid Bank's historical experience and with known industry trends. ALCO
meets at least monthly to review the Company's exposure to interest rate changes
as indicated by the various techniques and to make necessary changes in the
composition terms and/or rates of the assets and liabilities. The Company is
currently experiencing downward pressure on asset yields resulting from the
extended period of historically low interest rates and heightened competition
for loans. A continuation of this environment could result in a decline in
interest income and the net interest margin.
Capital Resources
AtJune 30, 2021 , the Company's stockholders' equity increased$47.8 million , or 8.4%, to$616 million from$568 million as ofDecember 31, 2020 . During the first six months of 2021, net income contributed$16.3 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$8.3 million , net of tax. Dividends of$7.1 million were paid during the first six months of 2021. The acquisition of LINCO also increase stockholders' equity$44.2 million . The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by theBoard of Governors of theFederal Reserve System ("Federal Reserve System "), andFirst Mid Bank follows similar minimum regulatory requirements established for banks by theOffice of the Comptroller of the Currency ("OCC") and theFederal 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 ofJune 30, 2021 andDecember 31, 2020 , the Company andFirst Mid Bank met all capital adequacy requirements. 67
-------------------------------------------------------------------------------- As permitted by the interim final rule issued onMarch 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 effectiveJanuary 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):
Required Minimum For To Be Well-Capitalized
Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
June 30, 2021
Total capital (to
risk-weighted assets)
Company $ 646,029 13.91 % $ 487,745 > 10.50% N/A N/A
First Mid Bank 602,849 15.34 412,515 > 10.50 $ 392,872 > 10.00%
Tier 1 capital (to
risk-weighted assets)
Company 507,243 10.92 394,841 > 8.50 N/A N/A
First Mid Bank 558,389 14.21 333,941 > 8.50 314,297 > 8.00
Common equity tier 1
capital (to risk-weighted
assets)
Company 488,132 10.51 325,163 > 7.00 N/A N/A
First Mid Bank 558,389 14.21 275,010 > 7.00 255,367 > 6.50
Tier 1 capital (to average
assets)
Company 507,243 8.87 228,756 > 4.00 N/A N/A
First Mid Bank 558,389 9.80 227,971 > 4.00 284,964 > 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 June 30,
2021 are computed in accordance with Basel III capital rules which were
effective January 1, 2015 . See heading "Basel III" in the Overview section of
this report for a more detailed description of the Basel III rules. As of
June 30, 2021 , the Company and First Mid Bank had capital ratios above the
required minimums for regulatory capital adequacy, and First Mid Bank had
capital ratios that qualified it for treatment as well-capitalized under the
regulatory framework for prompt corrective action with respect to banks.
68
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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 endedDecember 31, 2020 . At the Annual Meeting of Stockholders heldApril 26, 2017 , the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to succeed the Company's 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan. Following the stockholders' approval at the 2021 annual meeting of the Company, a maximum of 399,983 shares of common stock may be issued under the SI Plan. The Company awarded 27,750 and 25,200 restricted stock awards during 2021 and 2020, respectively and 35,400 and 16,950 as stock unit awards during 2021 and 2020, respectively. Employee Stock Purchase Plan At the Annual Meeting of Stockholders heldApril 25, 2018 , the stockholders approved theFirst 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 six months endedJune 30, 2021 and 2020, 8,439 shares and 3,804 shares, respectively, were issued pursuant to the ESPP.
Stock Repurchase Program
SinceAugust 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 theState of Illinois , the ability to borrow at theFederal Reserve Bank of Chicago , and the Company's operating line of credit withThe Northern Trust Company .
Details of the Company's liquidity sources include:
•
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
funds is subject to
requirements for total capital to risk-weighted assets and Tier 1 capital to
total average assets. As of June 30, 2021 , First Mid Bank met these
regulatory requirements.
•
liquidity. Availability of the funds is subject to the pledging of
collateral to the
includes one-to-four family residential real estate loans and securities. At
$616 million of additional advances forFirst Mid Bank . 69
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•
funds provided that sufficient collateral is pledged.
• In addition, as of
agreement in the amount of
an outstanding balance of
This loan was renewed on
agreement. The interest rate is floating at 2.25% over the federal funds
rate. The loan is secured by the stock of
requirements for operating and capital ratios. The Company and its
subsidiary bank were in compliance with the existing covenants at
2021 and 2020 and
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
• operating activities, including scheduled debt repayments and dividends to
stockholders.
The following table summarizes significant contractual obligations and other
commitments at
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Time deposits $ 722,593 $ 580,201 $ 109,030 $ 33,291 $ 71
Debt 113,437 - - - 113,437
Other borrowing 264,147 181,641 20,182 15,383 46,941
Operating leases 19,309 2,873 4,714 3,302 8,420
Supplemental retirement 1,595 353 100 150 992
$ 1,121,081 $ 765,068 $ 134,026 $ 52,126 $ 169,861
For the six months ended June 30, 2021 , net cash of $1.4 million was provided by
operating activities, $63.1 million was used in investing activities, and $14.8
million was used in financing activities. In total, cash and cash equivalents
decreased by $76.5 million since year-end 2020.
Off-Balance Sheet Arrangements
First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments. The off-balance sheet financial instruments whose contract amounts represent credit risk atJune 30, 2021 andDecember 31, 2020 were as follows (in thousands):June 30, 2021 December 31 ,
2020
Unused commitments and lines of credit: Commercial real estate$ 127,908 $ 56,309 Commercial operating 545,901 396,345 Home equity 55,138 40,464 Other 220,819 112,327 Total$ 949,766 $ 605,445 Standby letters of credit$ 11,592 $ 10,048 70
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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.
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