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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2023

Or

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

For the transition period from to .

Commission file number 001-36434

FIRST MID BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

37-1103704

(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification no.)

 

1421 Charleston Avenue

 

Mattoon, Illinois

61938

(Address of principal executive offices)

(Zip code)

 

(217) 234-7454

(Registrant's telephone number, including area code)

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

FMBH

NASDAQ Global Market

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐

 

Accelerated filer ☒

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

As of May 9, 2023, 20,528,944 common shares, $4.00 par value, were outstanding.

PART I

ITEM 1. FINANCIAL STATEMENTS

First Mid Bancshares, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

(In thousands, except share data)

 

March 31, 2023

 

 

December 31, 2022

 

Assets

 

 

 

 

 

 

Cash and due from banks:

 

 

 

 

 

 

Non-interest bearing

 

$

151,845

 

 

$

138,412

 

Interest bearing

 

 

9,391

 

 

 

6,394

 

Federal funds sold

 

 

7,898

 

 

 

7,627

 

Cash and cash equivalents

 

 

169,134

 

 

 

152,433

 

Certificates of deposit

 

 

1,715

 

 

 

1,470

 

Investment securities:

 

 

 

 

 

 

Available-for-sale, at fair value (amortized cost of $1,406,923 and $1,432,372 at March 31, 2023 and December 31, 2022, respectively)

 

 

1,212,698

 

 

 

1,218,985

 

Held-to-maturity, at amortized cost (estimated fair value of $2,979 and $2,954 at March 31, 2023 and December 31, 2022, respectively)

 

 

2,979

 

 

 

2,954

 

Equity securities, at fair value

 

 

362

 

 

 

311

 

Loans held for sale

 

 

999

 

 

 

338

 

Loans

 

 

4,759,632

 

 

 

4,825,874

 

Less allowance for credit losses

 

 

(58,223

)

 

 

(59,093

)

Net loans

 

 

4,701,409

 

 

 

4,766,781

 

Interest receivable

 

 

28,729

 

 

 

28,357

 

Other real estate owned

 

 

4,024

 

 

 

4,261

 

Premises and equipment, net

 

 

90,178

 

 

 

90,473

 

Goodwill

 

 

140,412

 

 

 

140,412

 

Intangible assets, net

 

 

27,961

 

 

 

29,485

 

Bank owned life insurance

 

 

151,366

 

 

 

151,756

 

Right of use lease assets

 

 

15,092

 

 

 

15,774

 

Deferred tax asset, net

 

 

66,698

 

 

 

72,254

 

Other assets

 

 

69,094

 

 

 

68,171

 

Total assets

 

$

6,682,850

 

 

$

6,744,215

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Non-interest bearing

 

$

1,262,181

 

 

$

1,256,514

 

Interest bearing

 

 

3,768,597

 

 

 

4,000,487

 

Total deposits

 

 

5,030,778

 

 

 

5,257,001

 

Securities sold under agreements to repurchase

 

 

228,664

 

 

 

221,414

 

Interest payable

 

 

4,732

 

 

 

3,346

 

FHLB borrowings

 

 

595,021

 

 

 

465,071

 

Junior subordinated debentures, net

 

 

19,406

 

 

 

19,364

 

Subordinated debt, net

 

 

94,593

 

 

 

94,553

 

Lease liabilities

 

 

15,353

 

 

 

16,035

 

Other liabilities

 

 

32,438

 

 

 

34,276

 

Total liabilities

 

 

6,020,985

 

 

 

6,111,060

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock ($4 par value; authorized 30,000,000 shares; issued 21,158,977 and 21,091,466 shares in 2023 and 2022, respectively; outstanding 20,519,717 and 20,452,376 shares in 2023 and 2022, respectively)

 

 

86,636

 

 

 

86,366

 

Additional paid-in capital

 

 

428,283

 

 

 

427,001

 

Retained earnings

 

 

303,768

 

 

 

289,284

 

Deferred compensation

 

 

963

 

 

 

2,064

 

Accumulated other comprehensive loss

 

 

(137,901

)

 

 

(151,507

)

Less treasury stock, at cost (639,260 shares in 2023 and 639,090 shares in 2022)

 

 

(19,884

)

 

 

(20,053

)

Total stockholders’ equity

 

 

661,865

 

 

 

633,155

 

Total liabilities and stockholders’ equity

 

$

6,682,850

 

 

$

6,744,215

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

2

 

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Income (unaudited)

(In thousands, except per share data)

 

 

 

Three months ended March 31,

 

(In thousands, except per share data)

 

2023

 

 

2022

 

Interest income:

 

 

 

 

 

 

Interest and fees on loans

 

$

56,236

 

 

$

39,908

 

Interest on investment securities

 

 

7,127

 

 

 

7,170

 

Interest on certificates of deposit investments

 

 

14

 

 

 

12

 

Interest on federal funds sold

 

 

85

 

 

 

 

Interest on deposits with other financial institutions

 

 

209

 

 

 

55

 

Total interest income

 

 

63,671

 

 

 

47,145

 

Interest expense:

 

 

 

 

 

 

Interest on deposits

 

 

12,767

 

 

 

2,148

 

Interest on securities sold under agreements to repurchase

 

 

1,463

 

 

 

67

 

Interest on FHLB borrowings

 

 

4,874

 

 

 

276

 

Interest on other borrowings

 

 

9

 

 

 

 

Interest on junior subordinated debentures

 

 

379

 

 

 

146

 

Interest on subordinated debentures

 

 

988

 

 

 

986

 

Total interest expense

 

 

20,480

 

 

 

3,623

 

Net interest income

 

 

43,191

 

 

 

43,522

 

Provision for credit losses

 

 

(817

)

 

 

2,952

 

Net interest income after provision for credit losses

 

 

44,008

 

 

 

40,570

 

Other income:

 

 

 

 

 

 

Wealth management revenues

 

 

5,514

 

 

 

5,975

 

Insurance commissions

 

 

8,480

 

 

 

7,104

 

Service charges

 

 

2,203

 

 

 

2,056

 

Securities losses, net

 

 

(46

)

 

 

—

 

Mortgage banking revenue, net

 

 

150

 

 

 

444

 

ATM / debit card revenue

 

 

3,083

 

 

 

2,898

 

Bank owned life insurance

 

 

1,641

 

 

 

844

 

Other

 

 

1,454

 

 

 

1,767

 

Total other income

 

 

22,479

 

 

 

21,088

 

Other expense:

 

 

 

 

 

 

Salaries and employee benefits

 

 

26,071

 

 

 

24,302

 

Net occupancy and equipment expense

 

 

6,005

 

 

 

6,155

 

Net other real estate owned expense

 

 

133

 

 

 

(33

)

FDIC insurance

 

 

463

 

 

 

426

 

Amortization of intangible assets

 

 

1,522

 

 

 

1,522

 

Stationery and supplies

 

 

292

 

 

 

311

 

Legal and professional

 

 

1,690

 

 

 

1,734

 

ATM / debit card

 

 

1,223

 

 

 

1,078

 

Marketing and donations

 

 

654

 

 

 

873

 

Other

 

 

3,524

 

 

 

4,020

 

Total other expense

 

 

41,577

 

 

 

40,388

 

Income before income taxes

 

 

24,910

 

 

 

21,270

 

Income taxes

 

 

5,730

 

 

 

4,654

 

Net income

 

$

19,180

 

 

$

16,616

 

Per share data:

 

 

 

 

 

 

Basic net income per common share

 

$

0.94

 

 

$

0.86

 

Diluted net income per common share

 

 

0.93

 

 

 

0.86

 

Cash dividends declared per common share

 

 

0.230

 

 

 

0.220

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3

 

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 

 

 

Three months ended March 31,

 

(In thousands)

 

2023

 

 

2022

 

Net income

 

$

19,180

 

 

$

16,616

 

Other comprehensive income/(loss)

 

 

 

 

 

 

Unrealized gains (losses) on available-for-sale securities, net of taxes of ($5,544) and $29,898 for three months ended March 31, 2023 and 2022, respectively

 

 

13,573

 

 

 

(73,197

)

Less: reclassification adjustment for realized gains (losses) included in net income, net of taxes (benefit) of ($13) and $0 for three months ended March 31, 2023 and 2022, respectively

 

 

(33

)

 

 

—

 

Other comprehensive income/(loss), net of taxes

 

 

13,606

 

 

 

(73,197

)

Comprehensive income/(loss)

 

$

32,786

 

 

$

(56,581

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

4

 

First Mid Bancshares, Inc.

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

For the three months ended March 31, 2023 and 2022

 

(In thousands)

 

Common
Stock

 

 

Additional
Paid-In-
Capital

 

 

Retained
Earnings

 

 

Deferred
Compensation

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Treasury
Stock

 

 

Total

 

December 31, 2022

 

$

86,366

 

 

$

427,001

 

 

$

289,284

 

 

$

2,064

 

 

$

(151,507

)

 

$

(20,053

)

 

$

633,155

 

Net income

 

 

—

 

 

 

—

 

 

 

19,180

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

19,180

 

Other comprehensive income, net tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

13,606

 

 

 

—

 

 

 

13,606

 

Cash dividends on common stock (.230/share)

 

 

—

 

 

 

—

 

 

 

(4,696

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,696

)

Issuance of 55,198 restricted shares pursuant to 2017 stock incentive plan

 

 

221

 

 

 

1,423

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,644

 

Issuance of 4,350 common shares pursuant to 2017 stock incentive plan

 

 

17

 

 

 

103

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

120

 

Issuance of 7,963 common shares pursuant to the employee stock purchase plan

 

 

32

 

 

 

184

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

216

 

Purchase of 170 shares of treasury stock

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(5

)

 

 

(5

)

Deferred compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,355

)

 

 

—

 

 

 

174

 

 

 

(1,181

)

Grant of restricted units pursuant to 2017 stock incentive plan

 

 

—

 

 

 

1,048

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,048

 

Release of restricted units pursuant to 2017 stock incentive plan

 

 

—

 

 

 

(1,529

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,529

)

Vested restricted shares/units compensation expense

 

 

—

 

 

 

53

 

 

 

—

 

 

 

254

 

 

 

—

 

 

 

—

 

 

 

307

 

March 31, 2023

 

$

86,636

 

 

$

428,283

 

 

$

303,768

 

 

$

963

 

 

$

(137,901

)

 

$

(19,884

)

 

$

661,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

(In thousands)

 

Common
Stock

 

 

Additional
Paid-In-
Capital

 

 

Retained
Earnings

 

 

Deferred
Compensation

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Treasury
Stock

 

 

Total

 

December 31, 2021

 

$

76,835

 

 

$

340,419

 

 

$

234,162

 

 

$

2,517

 

 

$

(831

)

 

$

(19,208

)

 

$

633,894

 

Net income

 

 

—

 

 

 

—

 

 

 

16,616

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

16,616

 

Other comprehensive loss, net tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(73,197

)

 

 

—

 

 

 

(73,197

)

Cash dividends on common stock (.220/share)

 

 

—

 

 

 

—

 

 

 

(3,973

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,973

)

Issuance of 1,939 common shares pursuant to the deferred compensation plan

 

 

8

 

 

 

75

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

83

 

Issuance of 54,834 restricted shares pursuant to the 2017 stock incentive plan

 

 

219

 

 

 

2,040

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,259

 

Issuance of 4,950 common shares pursuant to the 2017 stock incentive plan

 

 

20

 

 

 

179

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

199

 

Issuance of 3,149 common shares pursuant to the employee stock purchase plan

 

 

13

 

 

 

111

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

124

 

Issuance of 2,292,270 common shares pursuant to acquisition of Delta Banshares, Co., net proceeds

 

 

9,169

 

 

 

83,003

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

92,172

 

Issuance costs pursuant to acquisition of Delta Bancshares Company

 

 

—

 

 

 

(31

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(31

)

Purchase of 262 treasury shares

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(11

)

 

 

(11

)

Deferred compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,518

)

 

 

—

 

 

 

(53

)

 

 

(2,571

)

Grant of restricted units pursuant to 2017 stock incentive plan

 

 

—

 

 

 

1,529

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,529

 

Release of restricted units pursuant to 2017 stock incentive plan

 

 

—

 

 

 

(1,216

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,216

)

Vested restricted shares/units compensation expense

 

 

—

 

 

 

39

 

 

 

—

 

 

 

469

 

 

 

—

 

 

 

—

 

 

 

508

 

March 31, 2022

 

$

86,264

 

 

$

426,148

 

 

$

246,805

 

 

$

468

 

 

$

(74,028

)

 

$

(19,272

)

 

$

666,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6

 

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

Three months ended March 31,

 

(In thousands)

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

19,180

 

 

$

16,616

 

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

 

 

 

 

 

 

Provision for credit losses

 

 

(817

)

 

 

2,952

 

Depreciation, amortization and accretion, net

 

 

3,485

 

 

 

3,777

 

Change in cash surrender value of bank owned life insurance

 

 

(926

)

 

 

(844

)

Gain on redemption of bank owned life insurance

 

 

(715

)

 

 

—

 

Stock-based compensation expense

 

 

307

 

 

 

508

 

Operating lease payments

 

 

(781

)

 

 

(722

)

Loss on investment securities, net

 

 

46

 

 

 

—

 

Loss (gain) on sales and write downs of other real estate owned, net

 

 

71

 

 

 

(210

)

Loss on sale of other assets

 

 

—

 

 

 

4

 

Gain on sale of loans held for sale, net

 

 

(207

)

 

 

(415

)

Increase in accrued interest receivable

 

 

(372

)

 

 

(725

)

Increase in accrued interest payable

 

 

1,378

 

 

 

745

 

Origination of loans held for sale

 

 

(12,191

)

 

 

(18,931

)

Proceeds from sale of loans held for sale

 

 

11,737

 

 

 

20,057

 

Decrease (increase) in other investment

 

 

—

 

 

 

(487

)

Decrease in other assets

 

 

1,867

 

 

 

2,616

 

Decrease in other liabilities

 

 

(1,757

)

 

 

(846

)

Net cash provided by operating activities

 

 

20,305

 

 

 

24,133

 

Cash flows from investing activities:

 

 

 

 

 

 

Proceeds from maturities of certificates of deposit investments

 

 

—

 

 

 

490

 

Purchases of certificates of deposit investments

 

 

(245

)

 

 

—

 

Proceeds from sales of securities available-for-sale

 

 

6,483

 

 

 

—

 

Proceeds from maturities of securities available-for-sale

 

 

19,250

 

 

 

39,854

 

Proceeds from maturities of securities held-to-maturity

 

 

—

 

 

 

5,000

 

Purchases of securities available-for-sale

 

 

(1,063

)

 

 

(7,806

)

Purchase of securities held-to-maturity

 

 

(25

)

 

 

—

 

Net decrease (increase) in loans

 

 

65,541

 

 

 

(41,434

)

Purchases of premises and equipment

 

 

(941

)

 

 

(27

)

Proceeds from sales of other real property owned

 

 

734

 

 

 

475

 

Net cash provided by acquisition

 

 

—

 

 

 

67,323

 

Net cash provided by investing activities

 

 

89,734

 

 

 

63,875

 

Cash flows from financing activities:

 

 

 

 

 

 

Net decrease in deposits

 

 

(226,223

)

 

 

(29,558

)

Increase in repurchase agreements

 

 

7,250

 

 

 

5,535

 

Proceeds from FHLB advances

 

 

170,000

 

 

 

20,000

 

Repayment of FHLB advances

 

 

(40,000

)

 

 

(25,000

)

Proceeds from issuance of common stock

 

 

336

 

 

 

406

 

Direct expenses related to capital transactions

 

 

—

 

 

 

(29

)

Purchase of treasury stock

 

 

(5

)

 

 

(11

)

Dividends paid on common stock

 

 

(4,696

)

 

 

(3,973

)

Net cash used in financing activities

 

 

(93,338

)

 

 

(32,630

)

Increase in cash and cash equivalents

 

 

16,701

 

 

 

55,378

 

Cash and cash equivalents at beginning of period

 

 

152,433

 

 

 

168,602

 

Cash and cash equivalents at end of period

 

$

169,134

 

 

$

223,980

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

7

 

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

Three months ended March 31,

 

(In thousands)

 

2023

 

 

2022

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

19,094

 

 

$

2,503

 

Income taxes

 

 

(288

)

 

 

—

 

Supplemental disclosures of noncash investing and financing activities

 

 

 

 

 

 

Loans transferred to other real estate

 

$

648

 

 

$

198

 

Initial recognition of right-of-use assets

 

 

—

 

 

 

715

 

Initial recognition of lease liabilities

 

 

—

 

 

 

715

 

Supplemental disclosures of purchases of capital stock

 

 

 

 

 

 

Fair value of assets acquired

 

$

—

 

 

$

750,063

 

Consideration paid:

 

 

 

 

 

 

Cash paid

 

 

—

 

 

 

15,150

 

Common stock issued

 

 

—

 

 

 

92,172

 

Total consideration paid

 

 

—

 

 

 

107,322

 

Fair value of liabilities assumed

 

$

—

 

 

$

642,741

 

 

 

 

8

 

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 -- Basis of Accounting and Consolidation

The unaudited condensed consolidated financial statements include the accounts of First Mid Bancshares, Inc. (“Company”) and its wholly owned subsidiaries: First Mid Bank & Trust, N.A. (“First Mid Bank”), First Mid Wealth Management Company, First Mid Insurance Group, Inc. (“First Mid Insurance”), and First Mid Captive, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended March 31, 2023 and 2022, and all such adjustments are of a normal recurring nature. Certain amounts in the prior year’s consolidated financial statements may have been reclassified to conform to the March 31, 2023 presentation and there was no impact on net income or stockholders’ equity. The results of the interim period ended March 31, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023. The Company operates as a one-segment entity for financial reporting purposes. The 2022 year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and related footnote disclosures although the Company believes that the disclosures made are adequate to make the information not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2022 Annual Report on Form 10-K.

Blackhawk Bancorp, Inc

On March 21, 2023, First Mid Bancshares, Inc. (“First Mid”) and Eagle Sub LLC, a newly formed Wisconsin limited liability company and wholly-owned subsidiary of First Mid (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Blackhawk Bancorp, Inc., a Wisconsin corporation (“Blackhawk”), pursuant to which, among other things, First Mid agreed to acquire 100% of the issued and outstanding shares of Blackhawk pursuant to a business combination whereby Blackhawk will merge with and into Merger Sub, whereupon the separate corporate existence of Blackhawk will cease and Merger Sub will continue as the surviving company and a wholly-owned subsidiary of First Mid (the “Merger”).

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $0.01 per share, of Blackhawk issued and outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by Blackhawk and dissenting shares) will be converted into and become the right to receive 1.15 shares of common stock, par value $4.00 per share, of First Mid and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration payable by First Mid at the closing of the Merger to Blackhawk’s shareholders and equity award holders is approximately 3,330,176 shares of First Mid common stock. Blackhawk’s outstanding stock equity awards will fully vest upon consummation of the Merger.

It is anticipated that Blackhawk’s wholly-owned bank subsidiary, Blackhawk Bank (“Blackhawk Bank”), will be merged with and into First Mid’s wholly-owned bank subsidiary, First Mid Bank & Trust, N.A. (“First Mid Bank”), at a date following completion of the Merger. At the time of the bank merger, Blackhawk Bank’s banking offices will become branches of First Mid Bank.

The Merger is anticipated to be completed in the third quarter of 2023 and is subject to the satisfaction of customary closing conditions in the Merger Agreement and the approval of the appropriate regulatory authorities.

Delta Bancshares Company

On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Delta Merger Sub”), entered into an Agreement and Plan of Merger (the “Delta Merger Agreement”) with Delta Bancshares Company, a Missouri corporation (“Delta”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a business combination whereby Delta merged with and into Merger Sub, whereupon the separate corporate existence of Delta ceased and Merger Sub continued as the surviving company and a wholly-owned subsidiary of First Mid (the “Delta Merger”). The Delta Merger was completed on February 14, 2022.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Delta Merger, each share of common stock, par value $10.00 per share, of Delta issued and outstanding immediately prior to the effective time of the Delta Merger (other than shares held in treasury by Delta) converted into and became the right to receive cash and shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the Delta Merger to Delta’s shareholders and option holders was approximately $15.15 million in cash and 2,292,270 shares of Company common

9

 

stock. Delta’s outstanding stock options vested upon consummation of the Delta Merger, and all outstanding Delta options that were unexercised prior to the effective time of the Delta Merger were cashed out.

Delta’s wholly owned bank subsidiary, Jefferson Bank, was merged with and into First Mid Bank during the second quarter of 2022. At the time of the bank merger, Jefferson Bank’s banking offices became branches of First Mid Bank.

Website

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

General Litigation

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

Stock Plans

At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the First Mid-Illinois Bancshares, Inc. 2017 Stock Incentive Plan (“SI Plan”). The SI Plan was implemented to succeed the Company’s 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of common stock of the Company on the terms and conditions established in the SI Plan.

Following the stockholders’ approval at the 2021 annual meeting of the Company, a maximum of 399,983 shares of common stock may be issued under the SI Plan. There have been no stock options awarded under any Company plan since 2008. The Company has awarded 60,550 and 26,000 shares of restricted stock during the three months ended March 31, 2023 and 2022, respectively, and 37,900 and 37,150 restricted stock units during the three months ended March 31, 2023 and 2022, respectively.

Employee Stock Purchase Plan

At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 15% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code.

A maximum of 600,000 shares of common stock may be issued under the ESPP. During the three months ended March 31, 2023 and 2022, 7,963 shares and 3,149 shares, respectively, were issued pursuant to the ESPP.

Captive Insurance Company

First Mid Captive, Inc. (the “Captive"), a wholly owned subsidiary of the Company which was formed and began operations in December 2019, is a Nevada-based captive insurance company. The Captive insures against certain risks unique to operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today's insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,650,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company's consolidated financial statements and its federal income return.

Bank Owned Life Insurance

First Mid Bank has purchased life insurance policies on certain senior management. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts that are probable at settlement.

10

 

Revenue Recognition

Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), establishes a revenue recognition model for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. Most of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans and investment securities, and revenue related to mortgage servicing activities, which are subject to other accounting standards. A description of the revenue-generating activities that are within the scope of ASC 606, and included in other income in the Company’s condensed consolidated statements of income are as follows:

Trust revenues. The Company generates fee income from providing fiduciary services through its subsidiary, First Mid Wealth Management Company. Fees are billed in arrears based upon the preceding period account balance. Revenue from farm management services is recorded when the service is complete, for example when crops are sold.

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

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

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

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

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

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

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss included in stockholders’ equity as of March 31, 2023 and December 31, 2022 are as follows (in thousands):

 

 

Unrealized Losses on Securities

 

March 31, 2023

 

 

 

Net unrealized losses on securities available-for-sale

 

$

(194,225

)

Tax benefit

 

 

56,324

 

Balance at March 31, 2023

 

$

(137,901

)

 

 

 

December 31, 2022

 

 

 

Net unrealized losses on securities available-for-sale

 

$

(213,387

)

Tax benefit

 

 

61,880

 

Balance at December 31, 2022

 

$

(151,507

)

 

11

 

 

Amounts reclassified from accumulated other comprehensive loss and the affected line items in the statements of income during the three months ended March 31, 2023 and 2022, were as follows (in thousands):

 

 

Amounts Reclassified from
Other Comprehensive Income (Loss)

 

 

 

 

 

Three months ended March 31,

 

 

 

 

 

2023

 

 

2022

 

 

Affected Line Item in the Statements of Income

Realized losses on available-for-sale securities

 

$

(46

)

 

$

—

 

 

Securities (loss) gains, net

Tax effect

 

 

13

 

 

 

—

 

 

Income taxes

Total reclassifications out of accumulated other comprehensive income (loss)

 

$

(33

)

 

$

—

 

 

Net reclassified amount

 

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

Adoption of New Accounting Guidance

Accounting Standards Update 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). In March 2022, FASB issued ASU 2022-02. The amendments in this update eliminate the accounting guidance and related disclosures for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty and requiring an entity to disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost.

 

The amendments in this update were effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method. The adoption of this accounting guidance resulted in updated disclosures within the Company's consolidated financial statements.

 

Note 2 -- Earnings Per Share

Basic net income per common share available to common stockholders is calculated as net income less preferred stock dividends divided by the weighted average number of common shares outstanding. Diluted net income per common share available to common stockholders is computed using the weighted average number of common shares outstanding, increased by the Company’s stock options, unless anti-dilutive.

The components of basic and diluted net income per common share available to common stockholders for the three months ended March 31, 2023 and 2022 were as follows:

 

 

Three months ended March 31,

 

 

 

2023

 

 

2022

 

Basic net income per common share

 

 

 

 

 

 

Available to common stockholders:

 

 

 

 

 

 

Net income

 

$

19,180,000

 

 

$

16,616,000

 

Weighted average common shares outstanding

 

 

20,492,254

 

 

 

19,295,860

 

Basic earnings per common share

 

$

0.94

 

 

$

0.86

 

 

 

 

 

 

 

Diluted net income per common share

 

 

 

 

 

 

Available to common stockholders:

 

 

 

 

 

 

Net income applicable to diluted earnings per share

 

$

19,180,000

 

 

$

16,616,000

 

Weighted average common shares outstanding

 

 

20,492,254

 

 

 

19,295,860

 

Dilutive potential common shares: restricted stock awarded

 

 

71,718

 

 

 

62,597

 

Diluted weighted average common shares outstanding

 

 

20,563,972

 

 

 

19,358,457

 

Diluted earnings per common share

 

$

0.93

 

 

$

0.86

 

 

There were no shares excluded when computing diluted earnings per share for the three months ended March 31, 2023 and 2022 because they were anti-dilutive.

 

 

12

 

Note 3 -- Investment Securities

The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at March 31, 2023 and December 31, 2022 were as follows (in thousands):

 

 

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
(Losses)

 

 

Fair Value

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

253,228

 

 

$

5

 

 

$

(29,688

)

 

$

223,545

 

Obligations of states and political subdivisions

 

 

339,808

 

 

 

158

 

 

 

(54,969

)

 

 

284,997

 

Mortgage-backed securities: GSE residential

 

 

730,036

 

 

 

3

 

 

 

(105,767

)

 

 

624,272

 

Other securities

 

 

83,851

 

 

 

24

 

 

 

(3,991

)

 

 

79,884

 

Total available-for-sale

 

$

1,406,923

 

 

$

190

 

 

$

(194,415

)

 

$

1,212,698

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

2,979

 

 

$

—

 

 

$

—

 

 

$

2,979

 

Total held-to-maturity

 

$

2,979

 

 

$

—

 

 

$

—

 

 

$

2,979

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

252,934

 

 

$

—

 

 

$

(32,407

)

 

$

220,527

 

Obligations of states and political subdivisions

 

 

347,409

 

 

 

134

 

 

 

(59,845

)

 

 

287,698

 

Mortgage-backed securities: GSE residential

 

 

744,636

 

 

 

3

 

 

 

(116,759

)

 

 

627,880

 

Other securities

 

 

87,393

 

 

 

6

 

 

 

(4,519

)

 

 

82,880

 

Total available-for-sale

 

$

1,432,372

 

 

$

143

 

 

$

(213,530

)

 

$

1,218,985

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

2,954

 

 

$

—

 

 

$

—

 

 

$

2,954

 

Total held-to-maturity

 

$

2,954

 

 

$

—

 

 

$

—

 

 

$

2,954

 

 

The Company also had $362,000 and $311,000 of equity securities, at fair value, as of March 31, 2023 and December 31, 2022, respectively. The Company's held-to-maturity securities are annuities for which the risk of loss is minimal. As such, as of March 31, 2023, the Company did not record an allowance for credit losses on its held-to-maturity securities.

Realized gains and losses resulting from sales of securities were as follows during the three months ended March 31, 2023 and 2022 (in thousands):

 

 

 

Three months March 31,

 

 

 

2023

 

 

2022

 

Gross gains

 

$

6

 

 

$

—

 

Gross losses

 

 

(52

)

 

 

—

 

 

13

 

The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity presented at amortized cost, at March 31, 2023 and the weighted average yield for each range of maturities (dollars in thousands):

 

 

 

One year
or less

 

 

After 1
through
5 years

 

 

After 5
through
10 years

 

 

After
ten years

 

 

Total

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

172,917

 

 

$

40,859

 

 

$

9,769

 

 

$

—

 

 

$

223,545

 

Obligations of state and political subdivisions

 

 

18,652

 

 

 

74,899

 

 

 

190,220

 

 

 

1,226

 

 

 

284,997

 

Mortgage-backed securities: GSE residential

 

 

2,544

 

 

 

7,981

 

 

 

25,211

 

 

 

588,536

 

 

 

624,272

 

Other securities

 

 

19,266

 

 

 

59,821

 

 

 

797

 

 

 

—

 

 

 

79,884

 

Total available-for-sale investments

 

$

213,379

 

 

$

183,560

 

 

$

225,997

 

 

$

589,762

 

 

$

1,212,698

 

Weighted average yield

 

 

1.56

%

 

 

2.67

%

 

 

2.00

%

 

 

1.70

%

 

 

1.87

%

Full tax-equivalent yield

 

 

1.59

%

 

 

2.67

%

 

 

1.94

%

 

 

1.71

%

 

 

1.87

%

Held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

$

—

 

 

$

—

 

 

$

—

 

 

$

2,979

 

 

$

2,979

 

Total held-to-maturity

 

$

—

 

 

$

—

 

 

$

—

 

 

$

2,979

 

 

$

2,979

 

Weighted average yield

 

 

—

%

 

 

—

%

 

 

—

%

 

 

—

%

 

 

—

%

Full tax-equivalent yield

 

 

—

%

 

 

—

%

 

 

—

%

 

 

—

%

 

 

—

%

 

The weighted average yields are calculated based on the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent yields have been calculated using a 21% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at March 31, 2023.

Investment securities carried at approximately $709 million and $770 million at March 31, 2023 and December 31, 2022, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

The following table presents the aging of gross unrealized losses and fair value by investment category as of March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Fair
Value

 

 

Unrealized
Losses

 

 

Fair
Value

 

 

Unrealized
Losses

 

 

Fair
Value

 

 

Unrealized
Losses

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,757

 

 

$

(19

)

 

$

220,714

 

 

$

(29,669

)

 

$

222,471

 

 

$

(29,688

)

Obligations of states and political subdivisions

 

 

45,880

 

 

 

(1,204

)

 

 

212,715

 

 

 

(53,765

)

 

 

258,595

 

 

 

(54,969

)

Mortgage-backed securities: GSE residential

 

 

12,887

 

 

 

(589

)

 

 

610,896

 

 

 

(105,178

)

 

 

623,783

 

 

 

(105,767

)

Other securities

 

 

13,483

 

 

 

(537

)

 

 

54,878

 

 

 

(3,454

)

 

 

68,361

 

 

 

(3,991

)

Total

 

$

74,007

 

 

$

(2,349

)

 

$

1,099,203

 

 

$

(192,066

)

 

$

1,173,210

 

 

$

(194,415

)

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

57,007

 

 

$

(3,493

)

 

$

163,520

 

 

$

(28,914

)

 

$

220,527

 

 

$

(32,407

)

Obligations of states and political subdivisions

 

 

220,102

 

 

 

(43,221

)

 

 

45,419

 

 

 

(16,624

)

 

 

265,521

 

 

 

(59,845

)

Mortgage-backed securities: GSE residential

 

 

165,966

 

 

 

(19,859

)

 

 

461,446

 

 

 

(96,900

)

 

 

627,412

 

 

 

(116,759

)

Other securities

 

 

64,676

 

 

 

(3,675

)

 

 

6,698

 

 

 

(844

)

 

 

71,374

 

 

 

(4,519

)

Total

 

$

507,751

 

 

$

(70,248

)

 

$

677,083

 

 

$

(143,282

)

 

$

1,184,834

 

 

$

(213,530

)

 

14

 

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At March 31, 2023 there were forty-five available-for-sale securities with a fair value of $220.7 million and unrealized losses of $29.7 million in a continuous unrealized loss position for twelve months or more. At December 31, 2022, there were sixteen available-for-sale securities with a fair value of $163.5 million and unrealized losses of $28.9 million in a continuous unrealized loss position for twelve months or more. There were no held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more.

Obligations of states and political subdivisions. At March 31, 2023, there were two hundred and two obligations of states and political subdivisions with a fair value of $212.7 million and unrealized losses of $53.8 million in a continuous unrealized loss position for twelve months or more. At December 31, 2022 there were thirty-six obligations of states and political subdivisions with a fair value of $45.4 million and unrealized losses of $16.6 million in a continuous unrealized loss position for twelve months or more.

Mortgage-backed Securities: GSE Residential. At March 31, 2023, there were two hundred nineteen mortgage-backed securities with a fair value of $$610.9 million and unrealized losses of $105.2 million in a continuous unrealized loss position for twelve months or more. At December 31, 2022, there were ninety-one mortgage-backed securities with a fair value of $461.4 million and unrealized losses of $96.9 million in a continuous unrealized loss position for twelve months or more.

Other securities. At March 31, 2023, there were fourty other securities with a fair value of $54.9 million and unrealized losses of $3.5 million in a continuous unrealized loss position for twelve months or more. At December 31, 2022, there were five other securities with a fair value of $6.7 million and unrealized losses of $0.8 million in a continuous unrealized loss position for twelve months or more.

Note 4 – Loans and Allowance for Credit Losses

Loans are stated at amortized cost net of an allowance for credit losses. Amortized cost is the unpaid principal net of unearned premiums and discounts, and net deferred origination fees and costs. Deferred loan origination fees are reduced by loan origination costs and are amortized to interest income over the life of the related loan using methods that approximated the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding.

A summary of loans at March 31, 2023 and December 31, 2022 follows (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Construction and land development

 

$

159,266

 

 

$

144,387

 

Agricultural real estate

 

 

402,283

 

 

 

410,790

 

1-4 family residential properties

 

 

424,373

 

 

 

440,018

 

Multifamily residential properties

 

 

302,506

 

 

 

295,073

 

Commercial real estate

 

 

2,009,524

 

 

 

2,036,243

 

Loans secured by real estate

 

 

3,297,952

 

 

 

3,326,511

 

Agricultural loans

 

 

146,679

 

 

 

166,695

 

Commercial and industrial loans

 

 

1,080,004

 

 

 

1,085,004

 

Consumer loans

 

 

88,404

 

 

 

97,730

 

All other loans

 

 

156,210

 

 

 

159,499

 

Total gross loans

 

 

4,769,249

 

 

 

4,835,439

 

Less: loans held for sale

 

 

999

 

 

 

338

 

 

 

4,768,250

 

 

 

4,835,101

 

Less:

 

 

 

 

 

 

Net deferred loan fees, premiums and discounts

 

 

8,618

 

 

 

9,227

 

Allowance for credit losses

 

 

58,223

 

 

 

59,093

 

Net loans

 

$

4,701,409

 

 

$

4,766,781

 

 

Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at fair value, taking into consideration future commitments to sell the loans. These loans are primarily for 1-4 family residential properties.

Accrued interest on loans, which is excluded from the amortized cost of the balances above, totaled $22.6 million and $23.0 million at March 31, 2023 and December 31, 2022, respectively.

15

 

Most of the Company’s business activities are with customers located near the Company's branch locations in Illinois, Missouri, and Texas. At March 31, 2023, the Company’s loan portfolio included $548.8 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $422.4 million was concentrated in corn and other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased $28.4 million from $577.2 million at December 31, 2022 due to seasonal timing of cash flow requirements. Loans concentrated in corn and other grain farming decreased $22.8 million from $445.2 million at December 31, 2022. The Company's underwriting practices include collateralization of loans. Any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio.

In addition, the Company has $211.4 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 $945.7 million of loans to lessors of non-residential buildings, and $462.8 million of loans to lessors of residential buildings and dwellings.

The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the board of directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation and most borrowers are below regulatory thresholds. The Company can occasionally have outstanding balances to one borrower up to but not exceeding the regulatory threshold should underwriting guidelines warrant. Most of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

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

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

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

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

16

 

Residential Real Estate Loans. Residential real estate loans generally include loans for the purchase or refinance of residential real estate properties consisting of one-to-four units and home equity loans and lines of credit. The Company sells most of its long-term fixed rate residential real estate loans to secondary market investors. The Company also releases the servicing of these loans upon sale. Residential real estate loans are typically underwritten to conform to industry standards including criteria for maximum debt-to-income and loan-to-value ratios as well as minimum credit scores. Loans secured by first liens on residential real estate held in the portfolio typically do not exceed 80% of the value of the collateral and have amortization periods of twenty-five years or less. The Company does not originate subprime mortgage loans.

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

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

Allowance for Credit Losses

The allowance for credit losses represents the Company’s best estimate of the reserve necessary to adequately account for probable losses expected over the remaining contractual life of the assets. The provision for credit losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit losses, and therefore the provision to be charged to current earnings, the Company relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and modified 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. The Company estimates the appropriate level of allowance for credit losses by evaluating large individually evaluated loans separately from non-individually evaluated loans.

Individually Evaluated Loans

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

Non-Individually Evaluated Loans

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

 

To determine the allowance, the loan portfolio is segmented based on similar risk characteristics. The allowance for credit losses is estimated using a discounted cash flow (DCF) methodology. The DCF projects future cash flows over the life of the loan portfolio. Probability of default (PD) and loss given default (LGD) are key components in calculating expected losses in this model. The PD is forecasted using a regression model that determines the likelihood of default with a forward-looking forecast of unemployment rates. The LGD is the percentage of defaulted loans that is ultimately charged off. The allowance is calculated as the net present value of the expected cash flows less the amortized cost basis of the loans. Prior to 2022, the allowance for credit losses was measured on a collective (pool) basis for non-individually evaluated loans with similar risk characteristics. Historical credit loss experience provided the basis for the estimate of expected credit losses. Adjustments to expected losses are made using qualitative factors for relevant to each loan segment including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. In addition, a forecast, using reasonable and supportable future conditions, is prepared that is used to estimate expected changes to existing and historical conditions in the current period.

17

 

The Company also considers specific current economic events occurring globally, in the U.S. and in its local markets. Events considered include the status of trade agreements with China, scheduled increases in minimum wage and changes to the minimum salary threshold for overtime provisions, current and projected unemployment rates, current and projected grain and oil prices and economies of local markets where customers work and operate.

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

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

Construction and Land Development Loans. Historical losses in this segment remain very low. While staffing shortages and supply chain disruptions cause risk in this segment, most projects are associated with financially strong borrowers. The qualitative factors for this segment were not changed.

Agricultural Real Estate Loans. Historical losses in the segment remain very low. Farmland values have increased over an extended period of time and there are no indications that this will change in the next year. There was no change to the qualitative factors for this segment.

1- 4 Family Residential Properties Loans. The loan segment has remained stable throughout the last several years. Both adversely classified and past dues have been consistent. There was no change to the qualitative factors for this segment.

Commercial Real Estate Loans. This segment includes the Company's largest balances and the largest allowance for credit losses. The qualitative factors on both non-owner occupied and owner-occupied loans for this segment were increased due to actual and expected changes in economic and business conditions.

Agricultural Loans. Losses in this segment are very low. Commodity prices have been elevated and yields have been strong. The qualitative factors of this segment was not changed.

Commercial and Industrial Loans. This segment includes the second largest balance of allowance for credit losses. The qualitative factors for this segment was increased due to actual and expected changes in economic and business conditions.

Consumer Loans. This segment is the smallest portion of the Company's loan portfolio. There was no significant change to the qualitative factors.

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

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

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

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

18

 

The following table presents the activity in the allowance for credit losses based on portfolio segment for the three months ended March 31, 2023 (in thousands):

 

 

 

Construction
and Land
Development

 

 

Agricultural
Real Estate

 

 

1-4 Family
Residential
Properties

 

 

Commercial
Real Estate

 

 

Agricultural
Loans

 

 

Commercial
and Industrial

 

 

Consumer
Loans

 

 

Total

 

Three months ended March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,250

 

 

$

1,433

 

 

$

3,742

 

 

$

28,157

 

 

$

585

 

 

$

20,808

 

 

$

2,118

 

 

$

59,093

 

Initial allowance on loans purchased with credit deterioration

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Provision for credit loss expense

 

 

176

 

 

 

(29

)

 

 

(306

)

 

 

(834

)

 

 

(8

)

 

 

91

 

 

 

93

 

 

 

(817

)

Loans charged off

 

 

—

 

 

 

—

 

 

 

40

 

 

 

—

 

 

 

—

 

 

 

13

 

 

 

427

 

 

 

480

 

Recoveries collected

 

 

—

 

 

 

—

 

 

 

24

 

 

 

4

 

 

 

3

 

 

 

256

 

 

 

140

 

 

 

427

 

Ending balance

 

$

2,426

 

 

$

1,404

 

 

$

3,420

 

 

$

27,327

 

 

$

580

 

 

$

21,142

 

 

$

1,924

 

 

$

58,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following tables present the activity in the allowance for credit losses based on portfolio segment for the three months ended March 31, 2022 and for the year ended December 31, 2022 (in thousands):

 

 

 

Construction and Land Development

 

 

Agricultural Real Estate

 

 

1-4 Family Residential Properties

 

 

Commercial Real Estate

 

 

Agricultural Loans

 

 

Commercial and Industrial

 

 

Consumer Loans

 

 

Total

 

Three months ended March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance (prior to adoption of ASC 326)

 

$

1,743

 

 

$

1,257

 

 

$

2,330

 

 

$

26,246

 

 

$

983

 

 

$

19,241

 

 

$

2,855

 

 

$

54,655

 

Initial allowance on loans purchased with credit deterioration

 

 

272

 

 

 

—

 

 

 

3

 

 

 

478

 

 

 

—

 

 

 

94

 

 

 

16

 

 

 

863

 

Provision for credit loss expense

 

 

(25

)

 

 

714

 

 

 

1,264

 

 

 

3,613

 

 

 

68

 

 

 

(2,045

)

 

 

(637

)

 

 

2,952

 

Loans charged off

 

 

2

 

 

 

—

 

 

 

72

 

 

 

339

 

 

 

—

 

 

 

3

 

 

 

358

 

 

 

774

 

Recoveries collected

 

 

—

 

 

 

—

 

 

 

203

 

 

 

347

 

 

 

—

 

 

 

61

 

 

 

167

 

 

 

778

 

Ending balance

 

$

1,988

 

 

$

1,971

 

 

$

3,728

 

 

$

30,345

 

 

$

1,051

 

 

$

17,348

 

 

$

2,043

 

 

$

58,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve months ended December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance (prior to adoption of ASC 326)

 

$

1,743

 

 

$

1,257

 

 

$

2,330

 

 

$

26,246

 

 

$

983

 

 

$

19,241

 

 

$

2,855

 

 

$

54,655

 

Impact of adopting ASC 326

 

 

272

 

 

 

—

 

 

 

3

 

 

 

478

 

 

 

—

 

 

 

94

 

 

 

16

 

 

 

863

 

Provision for credit loss expense

 

 

137

 

 

 

176

 

 

 

1,241

 

 

 

1,462

 

 

 

(359

)

 

 

2,135

 

 

 

14

 

 

 

4,806

 

Loans charged off

 

 

2

 

 

 

—

 

 

 

191

 

 

 

414

 

 

 

93

 

 

 

870

 

 

 

1,380

 

 

 

2,950

 

Recoveries collected

 

 

100

 

 

 

—

 

 

 

359

 

 

 

385

 

 

 

54

 

 

 

208

 

 

 

613

 

 

 

1,719

 

Ending balance

 

$

2,250

 

 

$

1,433

 

 

$

3,742

 

 

$

28,157

 

 

$

585

 

 

$

20,808

 

 

$

2,118

 

 

$

59,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For individually evaluated loans that are considered solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

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

19

 

The following table presents the amortized cost basis of collateral-dependent loans by class of loans that were individually evaluated to determine expected credit losses, and the related allowance for credit losses, as of March 31, 2023 (in thousands):

 

 

 

Collateral

 

 

Allowance

 

 

 

Real Estate

 

 

Business
Assets

 

 

Other

 

 

Total

 

 

for Credit
Losses

 

Construction and land development

 

$

440

 

 

$

—

 

 

$

—

 

 

$

440

 

 

$

211

 

Agricultural real estate

 

 

—

 

 

 

—

 

 

 

16

 

 

 

16

 

 

 

—

 

1-4 family residential properties

 

 

84

 

 

 

—

 

 

 

—

 

 

 

84

 

 

 

—

 

Multifamily residential properties

 

 

1,151

 

 

 

—

 

 

 

—

 

 

 

1,151

 

 

 

—

 

Commercial real estate

 

 

5,674

 

 

 

—

 

 

 

—

 

 

 

5,674

 

 

 

—

 

Loans secured by real estate

 

 

7,349

 

 

 

—

 

 

 

16

 

 

 

7,365

 

 

 

211

 

Agricultural loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Commercial and industrial loans

 

 

320

 

 

 

156

 

 

 

—

 

 

 

476

 

 

 

53

 

Consumer loans

 

 

—

 

 

 

—

 

 

 

—

 

 

0

 

 

 

—

 

Total loans

 

$

7,669

 

 

$

156

 

 

$

16

 

 

$

7,841

 

 

$

264

 

Credit Quality

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

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

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

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

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

20

 

The following tables present the credit risk profile of the Company’s loan portfolio on amortized cost basis based on risk rating category and year of origination as of March 31, 2023 (in thousands):

 

 

 

Term Loans by Origination Year

 

 

Revolving

 

 

 

 

Risk rating

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Loans

 

 

Total

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development loans

 

Pass

 

$

9,251

 

 

$

79,695

 

 

$

35,078

 

 

$

7,325

 

 

$

15,864

 

 

$

11,465

 

 

$

—

 

 

$

158,678

 

Special mention

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Substandard

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

14

 

 

 

465

 

 

 

—

 

 

 

479

 

Total

 

$

9,251

 

 

$

79,695

 

 

$

35,078

 

 

$

7,325

 

 

$

15,878

 

 

$

11,930

 

 

$

—

 

 

$

159,157

 

Current period gross writeoffs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Agricultural real estate loans

 

Pass

 

$

3,716

 

 

$

167,382

 

 

$

64,522

 

 

$

57,166

 

 

$

22,731

 

 

$

80,117

 

 

$

—

 

 

$

395,634

 

Special mention

 

 

—

 

 

 

112

 

 

 

—

 

 

 

251

 

 

 

1,240

 

 

 

3,499

 

 

 

—

 

 

 

5,102

 

Substandard

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,221

 

 

 

—

 

 

 

1,221

 

Total

 

$

3,716

 

 

$

167,494

 

 

$

64,522

 

 

$

57,417

 

 

$

23,971

 

 

$

84,837

 

 

$

—

 

 

$

401,957

 

Current period gross writeoffs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

1-4 family residential property loans

 

Pass

 

$

8,069

 

 

$

86,712

 

 

$

83,578

 

 

$

75,367

 

 

$

26,755

 

 

$

85,754

 

 

$

42,060

 

 

$

408,295

 

Special mention

 

 

—

 

 

 

186

 

 

 

123

 

 

 

—

 

 

 

43

 

 

 

4,172

 

 

 

—

 

 

 

4,524

 

Substandard

 

 

51

 

 

 

970

 

 

 

501

 

 

 

523

 

 

 

280

 

 

 

9,401

 

 

 

—

 

 

 

11,726

 

Total

 

$

8,120

 

 

$

87,868

 

 

$

84,202

 

 

$

75,890

 

 

$

27,078

 

 

$

99,327

 

 

$

42,060

 

 

$

424,545

 

Current period gross writeoffs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

40

 

 

$

—

 

 

$

40

 

Commercial real estate loans

 

Pass

 

$

11,117

 

 

$

555,543

 

 

$

502,596

 

 

$

314,461

 

 

$

235,766

 

 

$

658,790

 

 

$

—

 

 

$

2,278,273

 

Special mention

 

 

—

 

 

 

2,163

 

 

 

1,089

 

 

 

761

 

 

 

1,281

 

 

 

7,933

 

 

 

—

 

 

 

13,227

 

Substandard

 

 

—

 

 

 

3,717

 

 

 

471

 

 

 

55

 

 

 

891

 

 

 

8,821

 

 

 

—

 

 

 

13,955

 

Total

 

$

11,117

 

 

$

561,423

 

 

$

504,156

 

 

$

315,277

 

 

$

237,938

 

 

$

675,544

 

 

$

—

 

 

$

2,305,455

 

Current period gross writeoffs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Agricultural loans

 

Pass

 

$

39,064

 

 

$

78,918

 

 

$

18,652

 

 

$

4,669

 

 

$

2,184

 

 

$

1,969

 

 

$

—

 

 

$

145,456

 

Special mention

 

 

22

 

 

 

744

 

 

 

—

 

 

 

—

 

 

 

74

 

 

 

65

 

 

 

—

 

 

 

905

 

Substandard

 

 

—

 

 

 

379

 

 

 

102

 

 

 

—

 

 

 

5

 

 

 

—

 

 

 

—

 

 

 

486

 

Total

 

$

39,086

 

 

$

80,041

 

 

$

18,754

 

 

$

4,669

 

 

$

2,263

 

 

$

2,034

 

 

$

—

 

 

$

146,847

 

Current period gross writeoffs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Commercial and industrial loans

 

Pass

 

$

60,676

 

 

$

423,532

 

 

$

208,003

 

 

$

169,864

 

 

$

61,133

 

 

$

286,309

 

 

$

—

 

 

$

1,209,517

 

Special mention

 

 

49

 

 

 

409

 

 

 

7,972

 

 

 

7,760

 

 

 

587

 

 

 

6,470

 

 

 

—

 

 

 

23,247

 

Substandard

 

 

—

 

 

 

385

 

 

 

328

 

 

 

156

 

 

 

7

 

 

 

600

 

 

 

—

 

 

 

1,476

 

Total

 

$

60,725

 

 

$

424,326

 

 

$

216,303

 

 

$

177,780

 

 

$

61,727

 

 

$

293,379

 

 

$

—

 

 

$

1,234,240

 

Current period gross writeoffs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

13

 

 

$

—

 

 

$

13

 

Consumer loans

 

Pass

 

$

2,434

 

 

$

43,310

 

 

$

18,614

 

 

$

10,484

 

 

$

6,019

 

 

$

6,964

 

 

$

—

 

 

$

87,825

 

Special mention

 

 

—

 

 

 

—

 

 

 

17

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17

 

Substandard

 

 

2

 

 

 

155

 

 

 

303

 

 

 

39

 

 

 

37

 

 

 

52

 

 

 

—

 

 

 

588

 

Total

 

$

2,436

 

 

$

43,465

 

 

$

18,934

 

 

$

10,523

 

 

$

6,056

 

 

$

7,016

 

 

$

—

 

 

$

88,430

 

Current period gross writeoffs

 

$

—

 

 

$

50

 

 

$

61

 

 

$

1

 

 

$

9

 

 

$

306

 

 

$

—

 

 

$

427

 

Total loans

 

Pass

 

$

134,327

 

 

$

1,435,092

 

 

$

931,043

 

 

$

639,336

 

 

$

370,452

 

 

$

1,131,368

 

 

$

42,060

 

 

$

4,683,678

 

Special mention

 

 

71

 

 

 

3,614

 

 

 

9,201

 

 

 

8,772

 

 

 

3,225

 

 

 

22,139

 

 

 

—

 

 

 

47,022

 

Substandard

 

 

53

 

 

 

5,606

 

 

 

1,705

 

 

 

773

 

 

 

1,234

 

 

 

20,560

 

 

 

—

 

 

 

29,931

 

Total

 

$

134,451

 

 

$

1,444,312

 

 

$

941,949

 

 

$

648,881

 

 

$

374,911

 

 

$

1,174,067

 

 

$

42,060

 

 

$

4,760,631

 

Current period gross writeoffs

 

$

—

 

 

$

50

 

 

$

61

 

 

$

1

 

 

$

9

 

 

$

359

 

 

$

—

 

 

$

480

 

 

21

 

The following tables present the credit risk profile of the Company’s loan portfolio based on risk rating category as of December 31, 2022 (in thousands):

 

 

 

Term Loans by Origination Year

 

 

Revolving

 

 

 

 

Risk rating

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Loans

 

 

Total

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development loans

 

Pass

 

$

63,846

 

 

$

39,790

 

 

$

12,558

 

 

$

15,787

 

 

$

1,210

 

 

$

10,601

 

 

$

—

 

 

$

143,792

 

Special mention

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Substandard

 

 

—

 

 

 

—

 

 

 

—

 

 

 

14

 

 

 

—

 

 

 

458

 

 

 

—

 

 

 

472

 

Total

 

$

63,846

 

 

$

39,790

 

 

$

12,558

 

 

$

15,801

 

 

$

1,210

 

 

$

11,059

 

 

$

—

 

 

$

144,264

 

Current period gross writeoffs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

2

 

 

$

—

 

 

$

2

 

Agricultural real estate loans

 

Pass

 

$

171,833

 

 

$

67,115

 

 

$

58,283

 

 

$

23,820

 

 

$

27,573

 

 

$

52,799

 

 

$

—

 

 

$

401,423

 

Special mention

 

 

1,123

 

 

 

—

 

 

 

490

 

 

 

1,240

 

 

 

273

 

 

 

3,121

 

 

 

—

 

 

 

6,247

 

Substandard

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,383

 

 

 

1,274

 

 

 

—

 

 

 

2,657

 

Total

 

$

172,956

 

 

$

67,115

 

 

$

58,773

 

 

$

25,060

 

 

$

29,229

 

 

$

57,194

 

 

$

—

 

 

$

410,327

 

Current period gross writeoffs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

1-4 family residential property loans

 

Pass

 

$

94,377

 

 

$

86,717

 

 

$

78,977

 

 

$

27,580

 

 

$

30,809

 

 

$

63,050

 

 

$

43,722

 

 

$

425,232

 

Special mention

 

 

169

 

 

 

218

 

 

 

1

 

 

 

44

 

 

 

238

 

 

 

1,000

 

 

 

—

 

 

 

1,670

 

Substandard

 

 

1,060

 

 

 

566

 

 

 

529

 

 

 

295

 

 

 

2,749

 

 

 

8,079

 

 

 

—

 

 

 

13,278

 

Total

 

$

95,606

 

 

$

87,501

 

 

$

79,507

 

 

$

27,919

 

 

$

33,796

 

 

$

72,129

 

 

$

43,722

 

 

$

440,180

 

Current period gross writeoffs

 

$

—

 

 

$

—

 

 

$

67

 

 

$

13

 

 

$

—

 

 

$

111

 

 

$

—

 

 

$

191

 

Commercial real estate loans

 

Pass

 

$

558,921

 

 

$

509,614

 

 

$

319,049

 

 

$

239,564

 

 

$

211,505

 

 

$

453,076

 

 

$

—

 

 

$

2,291,729

 

Special mention

 

 

2,187

 

 

 

1,287

 

 

 

769

 

 

 

1,508

 

 

 

952

 

 

 

8,503

 

 

 

—

 

 

 

15,206

 

Substandard

 

 

3,783

 

 

 

478

 

 

 

794

 

 

 

873

 

 

 

5,394

 

 

 

6,100

 

 

 

—

 

 

 

17,422

 

Total

 

$

564,891

 

 

$

511,379

 

 

$

320,612

 

 

$

241,945

 

 

$

217,851

 

 

$

467,679

 

 

$

—

 

 

$

2,324,357

 

Current period gross writeoffs

 

$

250

 

 

$

22

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

142

 

 

$

—

 

 

$

414

 

Agricultural loans

 

Pass

 

$

137,327

 

 

$

18,783

 

 

$

3,433

 

 

$

3,918

 

 

$

915

 

 

$

254

 

 

$

—

 

 

$

164,630

 

Special mention

 

 

1,178

 

 

 

—

 

 

 

—

 

 

 

756

 

 

 

66

 

 

 

109

 

 

 

—

 

 

 

2,109

 

Substandard

 

 

53

 

 

 

—

 

 

 

—

 

 

 

46

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

99

 

Total

 

$

138,558

 

 

$

18,783

 

 

$

3,433

 

 

$

4,720

 

 

$

981

 

 

$

363

 

 

$

—

 

 

$

166,838

 

Current period gross writeoffs

 

$

—

 

 

$

93

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

93

 

Commercial and industrial loans

 

Pass

 

$

450,001

 

 

$

226,038

 

 

$

172,208

 

 

$

63,906

 

 

$

61,929

 

 

$

247,404

 

 

$

—

 

 

$

1,221,486

 

Special mention

 

 

469

 

 

 

640

 

 

 

10,095

 

 

 

570

 

 

 

7,280

 

 

 

158

 

 

 

—

 

 

 

19,212

 

Substandard

 

 

346

 

 

 

418

 

 

 

184

 

 

 

35

 

 

 

157

 

 

 

633

 

 

 

—

 

 

 

1,773

 

Total

 

$

450,816

 

 

$

227,096

 

 

$

182,487

 

 

$

64,511

 

 

$

69,366

 

 

$

248,195

 

 

$

—

 

 

$

1,242,471

 

Current period gross writeoffs

 

$

39

 

 

$

311

 

 

$

39

 

 

$

439

 

 

$

23

 

 

$

19

 

 

$

—

 

 

$

870

 

Consumer loans

 

Pass

 

$

48,600

 

 

$

21,088

 

 

$

12,101

 

 

$

7,968

 

 

$

1,945

 

 

$

5,630

 

 

$

—

 

 

$

97,332

 

Special mention

 

 

—

 

 

 

18

 

 

 

1

 

 

 

—

 

 

 

5

 

 

 

—

 

 

 

—

 

 

 

24

 

Substandard

 

 

69

 

 

 

246

 

 

 

3

 

 

 

43

 

 

 

52

 

 

 

6

 

 

 

—

 

 

 

419

 

Total

 

$

48,669

 

 

$

21,352

 

 

$

12,105

 

 

$

8,011

 

 

$

2,002

 

 

$

5,636

 

 

$

—

 

 

$

97,775

 

Current period gross writeoffs

 

$

22

 

 

$

177

 

 

$

89

 

 

$

10

 

 

$

7

 

 

$

1,075

 

 

$

—

 

 

$

1,380

 

Total loans

 

Pass

 

$

1,524,905

 

 

$

969,145

 

 

$

656,609

 

 

$

382,543

 

 

$

335,886

 

 

$

832,814

 

 

$

43,722

 

 

$

4,745,624

 

Special mention

 

 

5,126

 

 

 

2,163

 

 

 

11,356

 

 

 

4,118

 

 

 

8,814

 

 

 

12,891

 

 

 

—

 

 

 

44,468

 

Substandard

 

 

5,311

 

 

 

1,708

 

 

 

1,510

 

 

 

1,306

 

 

 

9,735

 

 

 

16,550

 

 

 

—

 

 

 

36,120

 

Total

 

$

1,535,342

 

 

$

973,016

 

 

$

669,475

 

 

$

387,967

 

 

$

354,435

 

 

$

862,255

 

 

$

43,722

 

 

$

4,826,212

 

Current period gross writeoffs

 

$

311

 

 

$

603

 

 

$

195

 

 

$

462

 

 

$

30

 

 

$

1,349

 

 

$

—

 

 

$

2,950

 

 

22

 

The following table presents the Company’s loan portfolio aging analysis at March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

30-59
Days Past
Due

 

 

60-89
Days Past
Due

 

 

90 Days or
More
Past Due

 

 

Total Past
Due

 

 

Current

 

 

Total Loans
Receivable

 

 

Total Loans
> 90 Days and
Accruing

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

17

 

 

$

—

 

 

$

463

 

 

$

480

 

 

$

158,677

 

 

$

159,157

 

 

$

—

 

Agricultural real estate

 

 

—

 

 

 

—

 

 

 

1

 

 

 

1

 

 

 

401,956

 

 

 

401,957

 

 

 

—

 

1-4 family residential properties

 

 

2,182

 

 

 

13

 

 

 

936

 

 

 

3,131

 

 

 

421,414

 

 

 

424,545

 

 

 

—

 

Multifamily residential properties

 

 

—

 

 

 

—

 

 

 

550

 

 

 

550

 

 

 

301,258

 

 

 

301,808

 

 

 

—

 

Commercial real estate

 

 

268

 

 

 

77

 

 

 

3,107

 

 

 

3,452

 

 

 

2,000,195

 

 

 

2,003,647

 

 

 

—

 

Loans secured by real estate

 

 

2,467

 

 

 

90

 

 

 

5,057

 

 

 

7,614

 

 

 

3,283,500

 

 

 

3,291,114

 

 

 

—

 

Agricultural loans

 

 

—

 

 

 

2

 

 

 

481

 

 

 

483

 

 

 

146,364

 

 

 

146,847

 

 

 

—

 

Commercial and industrial loans

 

 

71

 

 

 

—

 

 

 

930

 

 

 

1,001

 

 

 

1,077,020

 

 

 

1,078,021

 

 

 

—

 

Consumer loans

 

 

420

 

 

 

118

 

 

 

194

 

 

 

732

 

 

 

87,698

 

 

 

88,430

 

 

 

—

 

All other loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

156,219

 

 

 

156,219

 

 

 

—

 

Total loans

 

$

2,958

 

 

$

210

 

 

$

6,662

 

 

$

9,830

 

 

$

4,750,801

 

 

$

4,760,631

 

 

$

—

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

20

 

 

$

14

 

 

$

449

 

 

$

483

 

 

$

143,781

 

 

$

144,264

 

 

$

—

 

Agricultural real estate

 

 

20

 

 

 

6

 

 

 

1

 

 

 

27

 

 

 

410,300

 

 

 

410,327

 

 

 

—

 

1-4 family residential properties

 

 

1,706

 

 

 

1,092

 

 

 

896

 

 

 

3,694

 

 

 

436,486

 

 

 

440,180

 

 

 

—

 

Multifamily residential properties

 

 

—

 

 

 

—

 

 

 

548

 

 

 

548

 

 

 

293,798

 

 

 

294,346

 

 

 

—

 

Commercial real estate

 

 

494

 

 

 

205

 

 

 

3,654

 

 

 

4,353

 

 

 

2,025,658

 

 

 

2,030,011

 

 

 

—

 

Loans secured by real estate

 

 

2,240

 

 

 

1,317

 

 

 

5,548

 

 

 

9,105

 

 

 

3,310,023

 

 

 

3,319,128

 

 

 

—

 

Agricultural loans

 

 

—

 

 

 

53

 

 

 

29

 

 

 

82

 

 

 

166,756

 

 

 

166,838

 

 

 

—

 

Commercial and industrial loans

 

 

716

 

 

 

24

 

 

 

854

 

 

 

1,594

 

 

 

1,081,366

 

 

 

1,082,960

 

 

 

—

 

Consumer loans

 

 

326

 

 

 

195

 

 

 

278

 

 

 

799

 

 

 

96,976

 

 

 

97,775

 

 

 

—

 

All other loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

159,511

 

 

 

159,511

 

 

 

—

 

Total loans

 

$

3,282

 

 

$

1,589

 

 

$

6,709

 

 

$

11,580

 

 

$

4,814,632

 

 

$

4,826,212

 

 

$

—

 

 

Individually Evaluated Loans

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

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

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

 

23

 

Non-Accrual Loans

The following table presents the amortized cost basis of loans on nonaccrual status and of nonaccrual loans individually evaluated for which no allowance was recorded as of March 31, 2023 and December 31, 2022 (in thousands). There were no loans past due over eighty-nine days that were still accruing.

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Nonaccrual
with no
Allowance for

 

 

Total

 

 

Nonaccrual
with no
Allowance for

 

 

Total

 

 

 

Credit Loss

 

 

Nonaccrual

 

 

Credit Loss

 

 

Nonaccrual

 

Construction and land development

 

$

14

 

 

$

14

 

 

$

14

 

 

$

14

 

Agricultural real estate

 

 

1,246

 

 

 

1,246

 

 

 

1,258

 

 

 

1,258

 

1-4 family residential properties

 

 

3,167

 

 

 

3,442

 

 

 

4,532

 

 

 

4,943

 

Multifamily residential properties

 

 

1,162

 

 

 

1,162

 

 

 

672

 

 

 

672

 

Commercial real estate

 

 

6,076

 

 

 

6,076

 

 

 

7,640

 

 

 

7,640

 

Loans secured by real estate

 

 

11,665

 

 

 

11,940

 

 

 

14,116

 

 

 

14,527

 

Agricultural loans

 

 

483

 

 

 

483

 

 

 

57

 

 

 

57

 

Commercial and industrial loans

 

 

1,012

 

 

 

1,136

 

 

 

1,098

 

 

 

1,098

 

Consumer loans

 

 

239

 

 

 

239

 

 

 

274

 

 

 

274

 

All other loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total loans

 

$

13,399

 

 

$

13,798

 

 

$

15,545

 

 

$

15,956

 

Interest income that would have been recorded under the original terms of such nonaccrual loans totaled $79,000 and $95,000 for the three months ended March 31, 2023 and 2022, respectively.

Loan Modification Disclosures Pursuant to ASU 2022-02

The following table shows the amortized cost of loans at March 31, 2023 that were both experiencing financial difficulty and modified segregated by portfolio segment and type of modification. The percentage of the amortized cost of loans that were modified to borrowers in financial distress as compared to outstanding loans is also presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

Payment

 

 

Term

 

 

Interest

 

Class of

 

 

 

Principal

 

 

Delay

 

 

Extension

 

 

Rate

 

Financing

 

 

 

Forgiveness

 

 

Investment

 

 

Modifications

 

 

Reduction

 

Receivable

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

0.00

%

Agricultural real estate

 

 

—

 

 

 

347

 

 

 

—

 

 

 

—

 

 

0.09

%

1-4 family residential properties

 

 

—

 

 

 

62

 

 

 

880

 

 

 

—

 

 

0.22

%

Multifamily residential properties

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

0.00

%

Commercial real estate

 

 

—

 

 

 

826

 

 

 

91

 

 

 

—

 

 

0.05

%

Loans secured by real estate

 

 

—

 

 

 

1,235

 

 

 

971

 

 

 

—

 

 

0.07

%

Agricultural loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

0.00

%

Commercial and industrial loans

 

 

—

 

 

 

421

 

 

 

319

 

 

 

—

 

 

0.07

%

Consumer loans

 

 

—

 

 

 

8

 

 

 

45

 

 

 

—

 

 

0.06

%

Other Loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

0.00

%

Total

 

$

—

 

 

$

1,664

 

 

$

1,335

 

 

$

—

 

 

0.06

%

The Company closely monitors the performance of loans that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of such loans that have been modified in the last twelve months ended March 31, 2023.

 

 

30-59
Days Past
Due

 

 

60-89
Days Past
Due

 

 

90 Days or
More
Past Due

 

 

Total Past
Due

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

—

 

 

$

55

 

 

$

—

 

 

$

55

 

Loans secured by real estate

 

 

—

 

 

 

55

 

 

 

—

 

 

 

55

 

Total loans

 

$

—

 

 

$

55

 

 

$

—

 

 

$

55

 

 

24

 

The following table shows the financial effect of loan modifications during the current quarter to borrowers experiencing financial difficulty for the three months ended March 31, 2023.

 

 

Weighted Average

 

 

Weighted Average

 

 

 

Interest Rate

 

 

Term Extension

 

 

 

Reduction

 

 

(in months)

 

Commercial and industrial loans

 

 

4.75

%

 

 

5.13

 

Consumer loans

 

 

0.00

%

 

 

3.00

 

 

 

 

4.75

%

 

 

4.93

 

A loan is considered to be in payment default once it is 90 days past due under the modified terms. There were no loans modified during the prior twelve months that experienced defaults for three months ended March 31, 2023.

Troubled Debt Restructuring (TDR) Disclosures Prior to the Adoption of ASU 2022-02

There were no loan and lease modifications classified as a TDR during the three months ended March 31, 2022. The classification between nonperforming and performing is determined at the time of modification. Modification programs focus on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. Modifications do not result in the contractual forgiveness of principal or interest. There were no modifications during the three months ended March 31, 2022 that resulted in an interest rate below market rate.

There were three loans modified as trouble debt restructuring during the prior twelve months that experienced defaults for the three months ended March 31, 2022. Default occurs when a loan is 90 days or more past due under the modified terms.

The following table shows the recorded investment of loans classified as troubled debt restructurings as of December 31, 2022.

 

 

 

December 31, 2022

 

Performing TDRs

 

$

3,214

 

Nonperforming TDRs

 

 

1,850

 

Total TDRs

 

$

5,064

 

 

Purchased Credit Deteriorated (PCD) Loans

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

 

 

2022

 

 

 

Delta
Acquisition

 

Purchase price of purchase credit deteriorated loans at acquisition

 

$

18,796

 

Allowance for credit losses at acquisition

 

 

(863

)

Non-credit discount/(premium) at acquisition

 

 

(523

)

Fair value of purchased credit deteriorated loans at acquisition

 

$

17,410

 

 

 

 

 

 

Note 5 -- Goodwill and Intangible Assets

The Company has goodwill from business combinations, intangible assets from branch acquisitions, identifiable intangible assets assigned to core deposit relationships and customer lists of First Mid Wealth Management Company and First Mid Insurance. The following table presents gross carrying value and accumulated amortization by major intangible asset class as of March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Gross Carrying
Value

 

 

Accumulated
Amortization

 

 

Gross Carrying
Value

 

 

Accumulated
Amortization

 

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

 

$

144,172

 

 

$

3,760

 

 

$

144,172

 

 

$

3,760

 

Intangibles from branch acquisition

 

 

3,015

 

 

 

3,015

 

 

 

3,015

 

 

 

3,015

 

Core deposit intangibles

 

 

45,355

 

 

 

29,481

 

 

 

45,355

 

 

 

28,432

 

Other intangibles

 

 

20,782

 

 

 

9,007

 

 

 

20,782

 

 

 

8,551

 

 

$

213,324

 

 

$

45,263

 

 

$

213,324

 

 

$

43,758

 

 

25

 

During the first quarter of 2022, goodwill of $28.6 million was provisionally recorded for the acquisition and merger of Delta Bancshares Company. This goodwill was subsequently adjusted to $28.2 million to reflect proper tax treatment of the Delta assets and liabilities. All this goodwill was assigned to the banking unit of the Company.

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

Unallocated purchase price

 

 

 

$

29,791

 

Less purchase accounting adjustments:

 

 

 

 

 

Fair value of securities

$

(2,836

)

 

 

 

Fair value of loans, net

 

(3,399

)

 

 

 

Fair value of premises and equipment

 

3,508

 

 

 

 

Fair value of time deposits

 

(1,759

)

 

 

 

Fair value of FHLB advances

 

(75

)

 

 

 

Core deposit intangible

 

5,920

 

 

 

 

Other assets

 

(570

)

 

 

 

Other liabilities

 

444

 

 

 

 

 

 

 

 

 

1,233

 

 

 

 

 

$

28,558

 

 

 

 

 

 

 

The Company has mortgage servicing rights acquired in previous acquisitions. The following table summarizes the activity pertaining to mortgage servicing rights included in intangible assets as of March 31, 2023, March 31, 2022 and December 31, 2022 (in thousands):

 

 

 

March 31, 2023

 

 

March 31, 2022

 

 

December 31, 2022

 

Beginning balance

 

$

331

 

 

$

420

 

 

$

420

 

Adjustment to valuation reserve

 

 

—

 

 

 

106

 

 

 

108

 

Mortgage servicing rights amortized

 

 

(17

)

 

 

(101

)

 

 

(200

)

Interest only strip

 

 

(2

)

 

 

7

 

 

 

3

 

Ending balance

 

$

312

 

 

$

432

 

 

$

331

 

Total amortization expense for three months ended March 31, 2023 and 2022 was as follows (in thousands):

 

 

 

Three months ended March 31,

 

 

 

2023

 

 

2022

 

Core deposit intangibles

 

$

1,049

 

 

$

989

 

Customer list intangibles

 

 

456

 

 

 

432

 

Mortgage servicing rights

 

 

17

 

 

 

101

 

 

 

$

1,522

 

 

$

1,522

 

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

 

Aggregate amortization expense:

 

 

 

For period 01/01/23 - 03/31/23

 

$

1,522

 

Estimated amortization expense:

 

 

 

For period 04/01/23 - 12/31/23

 

 

5,862

 

For year ended 12/31/24

 

 

5,371

 

For year ended 12/31/25

 

 

4,736

 

For year ended 12/31/26

 

 

3,835

 

For year ended 12/31/27

 

 

3,254

 

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” codified within ASC 350, the Company performed testing of goodwill for impairment as of September 30, 2022 and determined that, as of that date, goodwill was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets.

Note 6 -- Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase were $228.7 million at March 31, 2023, an increase of $7.3 million from $221.4

26

 

million at December 31, 2022. The increase during the first three months of 2023 was primarily due to changes in business cash flow needs. All the transactions have overnight maturities with a weighted average rate of 2.83%.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third-party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Company in a segregated custodial account under a tri-party agreement. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained, while mitigating the potential of over-collateralization in the event of counterparty default.

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

 

 

 

March 31, 2023

 

 

December 31, 2022

 

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

 

$

57,723

 

 

$

47,775

 

Mortgage-backed securities: GSE: residential

 

 

170,941

 

 

 

173,639

 

Total

 

$

228,664

 

 

$

221,414

 

 

 

 

 

 

 

 

FHLB borrowings, were $594.7 million and $464.7 million at March 31, 2023 and December 31, 2022, respectively. At March 31, 2023 the advances were as follows:

 

Advance

 

 

Term (in years)

 

Interest Rate

 

Maturity Date

$

110,000,000

 

 

overnight

 

4.86%

 

April 1, 2023

 

5,000,000

 

 

4.0

 

2.44%

 

May 30, 2023

 

5,000,000

 

 

1.0

 

2.00%

 

May 31, 2023

 

25,000,000

 

 

9 months

 

4.34%

 

June 30, 2023

 

5,000,000

 

 

3.5

 

1.51%

 

July 31, 2023

 

5,000,000

 

 

3.5

 

0.77%

 

September 11, 2023

 

25,000,000

 

 

1.0

 

4.81%

 

November 10, 2023

 

25,000,000

 

 

1.5

 

4.69%

 

May 10, 2024

 

25,000,000

 

 

2.0

 

4.59%

 

November 8, 2024

 

10,000,000

 

 

5.0

 

1.45%

 

December 31, 2024

 

5,000,000

 

 

5.0

 

0.91%

 

March 10, 2025

 

4,746,475

 

 

10.0

 

2.64%

 

December 23, 2025

 

50,000,000

 

 

4.0

 

2.98%

 

December 8, 2027

 

50,000,000

 

 

4.0

 

3.49%

 

December 8, 2027

 

50,000,000

 

 

4.0

 

3.28%

 

December 8, 2027

 

25,000,000

 

 

5.0

 

3.56%

 

March 10, 2028

 

25,000,000

 

 

5.0

 

3.35%

 

March 13, 2028

 

25,000,000

 

 

5.0

 

3.47%

 

March 13, 2028

 

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

 

50,000,000

 

 

10.0

 

2.77%

 

December 13, 2032

 

25,000,000

 

 

10.0

 

2.60%

 

March 14, 2033

 

25,000,000

 

 

10.0

 

2.40%

 

March 15, 2033

 

 

 

 

 

 

 

 

 

27

 

 

Note 7 -- Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

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

Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

Available-for-Sale Securities. The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independent sources of market parameters, including but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

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

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

28

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of March 31, 2023 and December 31, 2022 (in thousands):

 

 

Fair Value Measurements Using

 

 

 

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

223,545

 

 

$

—

 

 

$

223,545

 

 

$

—

 

Obligations of states and political subdivisions

 

 

284,997

 

 

 

—

 

 

 

284,997

 

 

 

—

 

Mortgage-backed securities

 

 

624,272

 

 

 

—

 

 

 

624,272

 

 

 

—

 

Other securities

 

 

79,884

 

 

 

—

 

 

 

69,874

 

 

 

10,010

 

Total available-for-sale securities

 

 

1,212,698

 

 

 

—

 

 

 

1,202,688

 

 

 

10,010

 

Equity securities

 

 

362

 

 

 

362

 

 

 

—

 

 

 

—

 

Derivative assets: interest rate swaps

 

 

3,353

 

 

 

—

 

 

 

3,353

 

 

 

—

 

Total assets

 

$

1,216,413

 

 

$

362

 

 

$

1,206,041

 

 

$

10,010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities: interest rate swaps

 

$

2,525

 

 

$

—

 

 

$

2,525

 

 

$

—

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

220,527

 

 

$

—

 

 

$

220,527

 

 

$

—

 

Obligations of states and political subdivisions

 

 

287,698

 

 

 

—

 

 

 

287,698

 

 

 

—

 

Mortgage-backed securities

 

 

627,880

 

 

 

—

 

 

 

627,880

 

 

 

—

 

Other securities

 

 

82,880

 

 

 

—

 

 

 

73,630

 

 

 

9,250

 

Total available-for-sale securities

 

 

1,218,985

 

 

 

—

 

 

 

1,209,735

 

 

 

9,250

 

Equity securities

 

 

311

 

 

 

311

 

 

 

—

 

 

 

—

 

Derivative assets: interest rate swaps

 

 

4,253

 

 

 

—

 

 

 

4,253

 

 

 

—

 

Total assets

 

$

1,223,549

 

 

$

311

 

 

$

1,213,988

 

 

$

9,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities: interest rate swaps

 

$

3,100

 

 

$

—

 

 

$

3,100

 

 

$

—

 

 

29

 

The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2023 and 2022 is summarized as follows (in thousands):

 

 

Three months ended March 31, 2023

 

 

 

Obligation of State and Political Subdivisions

 

 

Other

 

 

Total

 

Beginning balance

 

$

—

 

 

$

10,000

 

 

$

10,000

 

Transfers into Level 3

 

 

—

 

 

 

10

 

 

 

10

 

Transfers out of Level 3

 

 

—

 

 

 

—

 

 

 

—

 

Total gains or losses:

 

 

 

 

 

 

 

 

 

Included in net income

 

 

—

 

 

 

—

 

 

 

—

 

Included in other comprehensive income (loss)

 

 

—

 

 

 

—

 

 

 

—

 

Purchases, issuances, sales and settlements:

 

 

 

 

 

 

 

 

 

Purchases

 

 

—

 

 

 

—

 

 

 

—

 

Issuances

 

 

—

 

 

 

—

 

 

 

—

 

Sales

 

 

—

 

 

 

—

 

 

 

—

 

Settlements

 

 

—

 

 

 

—

 

 

 

—

 

Ending balance

 

$

—

 

 

$

10,010

 

 

$

10,010

 

Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date

 

$

—

 

 

$

—

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2022

 

 

 

Obligation of State and Political Subdivisions

 

 

Other

 

 

Total

 

Beginning balance

 

$

99

 

 

$

—

 

 

$

99

 

Transfers into Level 3

 

 

—

 

 

 

—

 

 

 

—

 

Transfers out of Level 3

 

 

—

 

 

 

—

 

 

 

—

 

Total gains or losses:

 

 

 

 

 

 

 

 

 

Included in net income

 

 

—

 

 

 

—

 

 

 

—

 

Included in other comprehensive income (loss)

 

 

—

 

 

 

—

 

 

 

—

 

Purchases, issuances, sales and settlements:

 

 

 

 

 

 

 

 

 

Purchases

 

 

—

 

 

 

—

 

 

 

—

 

Issuances

 

 

—

 

 

 

—

 

 

 

—

 

Sales

 

 

—

 

 

 

—

 

 

 

—

 

Settlements

 

 

(99

)

 

 

—

 

 

 

(99

)

Ending balance

 

$

—

 

 

$

—

 

 

$

—

 

Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date

 

$

—

 

 

$

—

 

 

$

—

 

 

30

 

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

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

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

Management establishes a specific allowance for individually evaluated loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a change in specific allowance has occurred as of March 31, 2023 was $1.4 million and a fair value of $1.2 million resulting in specific loss exposures of $0.3 million.

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

Foreclosed Assets Held For Sale. Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned, or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real estate owned as of March 31, 2023 was $4.0 million. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $0.2 million.

Mortgage Servicing Rights. As of March 31, 2023, mortgage servicing rights had a carrying value of $0.3 million and a fair value of $0.5 million resulting in a valuation reserve of $0. The fair value used to determine the valuation reserve for mortgage servicing rights was estimated using the discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the fair value hierarchy.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2023 and December 31, 2022 (in thousands):

 

 

Fair Value Measurements Using

 

 

 

 

 

 

Quoted Prices in
Active Markets
for Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans

 

$

1,158

 

 

$

—

 

 

$

—

 

 

$

1,158

 

Foreclosed assets held for sale

 

 

151

 

 

 

—

 

 

 

—

 

 

 

151

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans

 

$

2,548

 

 

$

—

 

 

$

—

 

 

$

2,548

 

Foreclosed assets held for sale

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

Sensitivity of Significant Unobservable Inputs

The following table presents quantitative information about unobservable inputs used in Level 3 fair value measurements other than goodwill at March 31, 2023 and December 31, 2022.

 

March 31, 2023

 

Fair Value

 

 

Valuation
Technique

 

Unobservable Inputs

 

Range

 

Weighted Average

Collateral dependent loans

 

$

1,158

 

 

Third party
valuations

 

Discount to reflect realizable value

 

0% - 40%

 

20%

Foreclosed assets held for sale

 

 

151

 

 

Third party
valuations

 

Discount to reflect realizable value less estimated selling costs

 

0% - 40%

 

35%

 

December 31, 2022

 

Fair Value

 

 

Valuation
Technique

 

Unobservable Inputs

 

Range

 

Weighted Average

Collateral dependent loans

 

$

2,548

 

 

Third party
valuations

 

Discount to reflect realizable value

 

0% - 40%

 

20%

 

32

 

The following tables present estimated fair values of the Company’s financial instruments at March 31, 2023 and December 31, 2022 in accordance with ASC 825 (in thousands):

 

 

 

Carrying
Amount

 

 

Fair
Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

161,236

 

 

$

161,236

 

 

$

161,236

 

 

$

—

 

 

$

—

 

Federal funds sold

 

 

7,898

 

 

 

7,898

 

 

 

7,898

 

 

 

—

 

 

 

—

 

Certificates of deposit investments

 

 

1,715

 

 

 

1,715

 

 

 

—

 

 

 

1,715

 

 

 

—

 

Available-for-sale securities

 

 

1,212,698

 

 

 

1,212,698

 

 

 

—

 

 

 

1,202,698

 

 

 

10,000

 

Held-to-maturity securities

 

 

2,979

 

 

 

2,979

 

 

 

2,979

 

 

 

—

 

 

 

—

 

Equity securities

 

 

362

 

 

 

362

 

 

 

362

 

 

 

—

 

 

 

—

 

Loans held for sale

 

 

999

 

 

 

999

 

 

 

—

 

 

 

999

 

 

 

—

 

Loans net of allowance for credit losses

 

 

4,701,409

 

 

 

4,497,336

 

 

 

—

 

 

 

—

 

 

 

4,497,336

 

Interest receivable

 

 

28,729

 

 

 

28,729

 

 

 

—

 

 

 

28,729

 

 

 

—

 

Federal Reserve Bank stock

 

 

17,050

 

 

 

17,050

 

 

 

—

 

 

 

17,050

 

 

 

—

 

Federal Home Loan Bank stock

 

 

23,365

 

 

 

23,365

 

 

 

—

 

 

 

23,365

 

 

 

—

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

5,030,778

 

 

$

5,024,415

 

 

$

—

 

 

$

4,200,115

 

 

$

824,300

 

Securities sold under agreements to repurchase

 

 

228,664

 

 

 

228,486

 

 

 

—

 

 

 

228,486

 

 

 

—

 

Interest payable

 

 

4,732

 

 

 

4,732

 

 

 

—

 

 

 

4,732

 

 

 

—

 

Federal Home Loan Bank borrowings

 

 

595,021

 

 

 

591,398

 

 

 

—

 

 

 

591,398

 

 

 

—

 

Subordinated debt, net

 

 

94,593

 

 

 

89,944

 

 

 

—

 

 

 

89,944

 

 

 

—

 

Junior subordinated debentures, net

 

 

19,406

 

 

 

17,186

 

 

 

—

 

 

 

17,186

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

144,806

 

 

$

144,806

 

 

$

144,806

 

 

$

—

 

 

$

—

 

Federal funds sold

 

 

7,627

 

 

 

7,627

 

 

 

7,627

 

 

 

—

 

 

 

—

 

Certificates of deposit investments

 

 

1,470

 

 

 

1,470

 

 

 

—

 

 

 

1,470

 

 

 

—

 

Available-for-sale securities

 

 

1,218,986

 

 

 

1,218,986

 

 

 

—

 

 

 

1,209,736

 

 

 

9,250

 

Held-to-maturity securities

 

 

2,953

 

 

 

2,953

 

 

 

2,953

 

 

 

—

 

 

 

—

 

Equity securities

 

 

311

 

 

 

311

 

 

 

311

 

 

 

—

 

 

 

—

 

Loans held for sale

 

 

338

 

 

 

338

 

 

 

—

 

 

 

338

 

 

 

—

 

Loans net of allowance for credit losses

 

 

4,766,780

 

 

 

4,460,661

 

 

 

—

 

 

 

—

 

 

 

4,460,661

 

Interest receivable

 

 

28,357

 

 

 

28,357

 

 

 

—

 

 

 

28,357

 

 

 

—

 

Federal Reserve Bank stock

 

 

17,050

 

 

 

17,050

 

 

 

—

 

 

 

17,050

 

 

 

—

 

Federal Home Loan Bank stock

 

 

18,440

 

 

 

18,440

 

 

 

—

 

 

 

18,440

 

 

 

—

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

5,257,001

 

 

$

5,257,748

 

 

$

—

 

 

$

4,550,222

 

 

$

707,526

 

Federal funds purchased

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Securities sold under agreements to repurchase

 

 

221,414

 

 

 

221,260

 

 

 

—

 

 

 

221,260

 

 

 

—

 

Interest payable

 

 

3,346

 

 

 

3,346

 

 

 

—

 

 

 

3,346

 

 

 

—

 

Federal Home Loan Bank borrowings

 

 

465,071

 

 

 

459,327

 

 

 

—

 

 

 

459,327

 

 

 

—

 

Other borrowings

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Subordinated debt, net

 

 

94,553

 

 

 

87,977

 

 

 

—

 

 

 

87,977

 

 

 

—

 

Junior subordinated debentures, net

 

 

19,364

 

 

 

17,164

 

 

 

—

 

 

 

17,164

 

 

 

—

 

 

 

 

33

 

Note 8 – Business Combinations

On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Delta Merger Sub”), entered into an Agreement and Plan of Merger (the “Delta Merger Agreement”) with Delta Bancshares Company, a Missouri corporation (“Delta”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a business combination whereby Delta merged with and into Delta Merger Sub, whereupon the separate corporate existence of Delta ceased and Delta Merger Sub continued as the surviving company and a wholly-owned subsidiary of First Mid (the “Delta Merger”). The Delta Merger was completed on February 14, 2022.

Subject to the terms and conditions of the Delta Merger Agreement, at the effective time of the Delta Merger, each share of common stock, par value $10.00 per share, of Delta issued and outstanding immediately prior to the effective time of the Delta Merger (other than shares held in treasury by Delta) converted into and became the right to receive cash and shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the Delta Merger to Delta’s shareholders and option holders was approximately $15.15 million in cash and 2,292,270 shares of Company common stock. Delta’s outstanding stock options vested upon consummation of the Delta Merger, and all outstanding Delta options that were unexercised prior to the effective time of the Delta Merger were cashed out.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations ("ASC 805"),” and accordingly the assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Fair values are subject to refinement for up to one year after the closing date of February 14, 2022 as additional information regarding the closing date fair values become available. The total consideration paid was used to determine the amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets acquired, goodwill of $28.2 million was recorded for the acquisition. Goodwill recorded in the transaction, which reflects the synergies and economies of scale expected from combining operations and the enhanced revenue opportunities from the Company’s service capabilities, is not tax deductible, and was all assigned to the banking segment of the Company.

 

 

Acquired

 

 

Fair Value

 

 

As Recorded by

 

(In thousands)

 

Book Value

 

 

Adjustments

 

 

Jefferson Bank

 

Assets

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

82,473

 

 

$

—

 

 

$

82,473

 

Investment securities

 

 

184,959

 

 

 

(2,836

)

 

 

182,123

 

Loans

 

 

426,433

 

 

 

(7,924

)

 

 

418,509

 

Allowance for credit losses

 

 

(5,388

)

 

 

4,525

 

 

 

(863

)

Premises and equipment

 

 

5,522

 

 

 

3,508

 

 

 

9,030

 

Goodwill

 

 

14

 

 

 

28,544

 

 

 

28,558

 

Core deposit intangible

 

 

—

 

 

 

5,920

 

 

 

5,920

 

Bank owned life insurance

 

 

15,822

 

 

 

 

 

 

15,822

 

Right of use asset

 

 

—

 

 

 

717

 

 

 

717

 

Other assets

 

 

9,061

 

 

 

(1,287

)

 

 

7,774

 

Total assets acquired

 

$

718,896

 

 

$

31,167

 

 

$

750,063

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits

 

$

558,619

 

 

$

1,759

 

 

$

560,378

 

Securities sold under agreements to repurchase

 

 

35,523

 

 

 

—

 

 

 

35,523

 

FHLB advances

 

 

45,000

 

 

 

75

 

 

 

45,075

 

Lease liability

 

 

—

 

 

 

717

 

 

 

717

 

Other liabilities

 

 

2,209

 

 

 

(1,161

)

 

 

1,048

 

Total liabilities assumed

 

 

641,351

 

 

 

1,390

 

 

 

642,741

 

Net assets acquired

 

$

77,545

 

 

$

29,777

 

 

$

107,322

 

 

 

 

 

 

 

 

 

 

 

Consideration paid

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

$

15,150

 

Common stock

 

 

 

 

 

 

 

 

92,172

 

 

 

 

 

 

 

 

 

$

107,322

 

 

 

 

 

 

 

 

 

 

 

 

34

 

The Company has recognized approximately $2.6 million, pre-tax, of acquisition costs for the Delta Merger. Of this amount, $2.1 million was recognized during 2022. These costs are included in salaries and benefits, legal and professional and other expense. Of the $7.9 million adjustment to loans, $8.2 million is being accreted to interest income over the remaining term of the loans. The remaining $300,000 was the elimination of deferred fees and unearned discounts previously recorded by Jefferson Bank. The Company also recorded approximately $863,000 directly to the allowance for credit losses for loans identified as PCD. Of the $426 million of loans acquired, approximately $18.8 million was identified as PCD.

The differences between fair value and acquired value of the assumed time deposits of $1.8 million and the assumed FHLB advances of $75,000, are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible asset, with a fair value of $5.9 million, is being amortized on an accelerated basis over its estimated life of 10 years.

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

 

 

Three months ended

 

 

 

March 31, 2022

 

 

 

 

 

Net interest income

 

$

44,200

 

Provision for loan losses

 

 

2,952

 

Non-interest income

 

 

21,088

 

Non-interest expense

 

 

40,575

 

Income before taxes

 

 

21,761

 

Income tax expense

 

 

4,797

 

Net income

 

$

16,964

 

 

 

 

 

Earnings per share

 

 

 

Basic

 

$

0.88

 

Diluted

 

 

0.88

 

 

 

 

 

Basic weighted average shares o/s

 

 

19,295,860

 

Diluted weighted average shares o/s

 

 

19,358,457

 

 

Note 9 -- Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of March 31, 2023, substantially all the Company's leases are operating leases for real estate property for bank branches, ATM locations, and office space.

These leases are generally for periods of 1 to 25 years with various renewal options. The Company elected the optional transition method permitted by Topic 842. Under this method, the Company recognizes and measures leases that exist at the application date and prior comparative periods are not adjusted. In addition, the Company elected the package of practical expedients:

1.
An entity need not reassess whether any expired or existing contracts contain leases.
2.
An entity need not reassess the lease classification for any expired or existing leases.
3.
An entity need not reassess initial direct costs for any existing leases.

The Company has also elected the practical expedient, which may be elected separately or in conjunction with the package noted above, to use hindsight in determining the lease term and in assessing the right-of-use assets. This expedient must be applied consistently to all leases. Lastly, the Company has elected to use the practical expedient to include both lease and non-lease components as a single component and account for it as a lease. In addition, the Company has elected to not include short-term leases (i.e. leases with terms of twelve months or less) or equipment leases (primarily copiers) deemed immaterial, on the consolidated balance sheets.

For leases in effect at January 1, 2019 and for leases commencing thereafter, the Company recognizes a lease liability and a right-of-use asset, based on the present value of lease payments over the lease term. The discount rate used in determining present value was the Company's incremental borrowing rate which is the FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the commencement date for leases subsequently entered into.

35

 

The following table contains supplemental balance sheet information related to leases (dollars in thousands):

 

 

 

March 31, 2023

 

 

March 31, 2022

 

 

December 31, 2022

 

Operating lease right-of-use assets

 

$

15,092

 

 

$

15,242

 

 

$

15,774

 

Operating lease liabilities

 

 

15,353

 

 

 

15,458

 

 

 

16,035

 

Weighted-average remaining lease term (in years)

 

 

5.6

 

 

 

6.9

 

 

 

5.8

 

Weighted-average discount rate

 

 

2.68

%

 

 

2.67

%

 

 

2.67

%

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

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

Year ending December 31,

 

 

 

2023

 

$

2,282

 

2024

 

 

2,610

 

2025

 

 

2,178

 

2026

 

 

2,067

 

2027

 

 

3,557

 

Thereafter

 

 

4,488

 

Total lease payments

 

 

17,182

 

Less imputed interest

 

 

(1,829

)

Total lease liability

 

$

15,353

 

The components of lease expense for the three months ended March 31, 2023 and 2022 were as follows (in thousands):

 

 

Three months ended March 31,

 

 

 

2023

 

 

2022

 

Operating lease cost

 

$

753

 

 

$

629

 

Short-term lease cost

 

 

30

 

 

 

27

 

Variable lease cost

 

 

223

 

 

 

266

 

Total lease cost

 

 

1,006

 

 

 

922

 

Income from subleases

 

 

(94

)

 

 

(100

)

Net lease cost

 

$

912

 

 

$

822

 

As the Company elected not to separate lease and non-lease components, the variable lease cost primarily represents variable payment such as common area maintenance and copier expense. The Company does not have any material sub-lease agreements. Cash paid for amounts included in the measurement of lease liabilities was (in thousands):

 

 

March 31, 2023

 

 

March 31, 2022

 

Operating cash flows from operating leases

 

$

781

 

 

$

722

 

Note 10 – Derivatives

The Company utilizes an interest rate swap, designated as a fair value hedge, to mitigate the risk of changing interest rates on the fair value of a fixed rate commercial real estate loan. For derivative instruments that are designed and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting loss or gain in the hedged asset attributable to the hedged risk, is recognized in current earnings.

36

 

Derivatives Designated as Hedging Instruments

The following table provides the outstanding notional balances and fair values of outstanding derivatives designated as hedging instruments as of March 31, 2023 and December 31, 2022 (in thousands):

 

 

Balance
Sheet
Location

 

Weighted
Average
Remaining
Maturity
(Years)

 

Notional
Amount

 

 

Estimated
Value

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other liabilities

 

6.1

 

$

13,384

 

 

$

(2,525

)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other liabilities

 

6.3

 

$

13,448

 

 

$

(3,100

)

The effects of the fair value hedges on the Company's income statement during the three months ended March 31, 2023 and 2022 were as follows (in thousands):

 

 

 

 

 

Three months ended March 31,

 

Derivative

 

Location of Gain (Loss) on Derivatives

 

2023

 

 

2022

 

Interest rate swap agreements

 

Interest income on loans

 

$

(325

)

 

$

(785

)

 

 

 

 

 

Three months ended March 31,

 

Derivative

 

Location of Gain (Loss) on Hedged Items

 

2023

 

 

2022

 

Interest rate swap agreements

 

Interest income on loans

 

$

325

 

 

$

785

 

As of March 31, 2023, the following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustment for fair value hedges (in thousands):

 

Line Item in the Balance Sheet in Which
the Hedge Item is Included

 

Carrying Amount of the
Hedged Asset

 

 

Cumulative Amount of Fair Value Hedging
Adjustment Included in the Carrying
Amount of the Hedged Asset

 

Loans

 

$

12,556

 

 

$

(828

)

Derivatives Not Designated as Hedging Instruments

The following amounts represent the notional amounts and gross fair value of derivative contracts not designated as hedging instruments outstanding during the three months ended March 31, 2023 (dollars in thousands):

 

March 31, 2023

 

Balance
Sheet
Location

 

Weighted
Average
Remaining
Maturity
(Years)

 

Notional
Amount

 

 

Estimated
Value

 

Interest rate swap agreements

 

Other assets

 

4.8

 

$

38,579

 

 

$

3,353

 

Interest rate swap agreements

 

Other liabilities

 

4.8

 

 

38,579

 

 

 

(3,353

)

 

37

 

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

The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries as of, and for the three months ended March 31, 2023 and 2022. 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 Blackhawk, such as discussions of First Mid’s and Blackhawk’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 Blackhawk, 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 Blackhawk will not be realized or will not be realized within the expected time period; the risk that integration of the operations of Blackhawk 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 Blackhawk; legislative and/or regulatory changes; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of First Mid’s and Blackhawk’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 Blackhawk; accounting principles, policies and guidelines; and the impact of the global COVID-19 pandemic on First Mid’s or Blackhawk’s businesses, the ability to complete the proposed transactions or any of the other foregoing risks. Additional information concerning First Mid, including additional factors and risks that could materially affect First Mid’s financial results, are included in First Mid’s filings with the SEC, including its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. Forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

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 $19.2 million and $16.6 million for the three months ended March 31, 2023 and 2022, respectively. Diluted net income per common share was $0.93 and $0.86 for the three months ended March 31, 2023 and 2022, respectively.

The following table shows the Company’s annualized performance ratios for three months ended March 31, 2023 and 2022, compared to the performance ratios for the year ended December 31, 2022:

 

 

Three months ended

 

 

Year ended

 

 

March 31, 2023

 

 

March 31, 2022

 

 

December 31, 2022

 

Return on average assets

 

1.15

%

 

 

1.05

%

 

 

1.11

%

Return on average common equity

 

12.11

%

 

 

9.95

%

 

 

11.38

%

Average equity to average assets

 

9.47

%

 

 

10.56

%

 

 

9.77

%

Total assets were $6.7 billion at March 31, 2023, compared to $6.7 billion as of December 31, 2022. From December 31, 2022 to March 31, 2023, cash and cash equivalents increased $16.7 million, net loan balances decreased $65.4 million and investment securities decreased $6.2 million. Net loan balances were $4.70 billion at March 31, 2023 compared to $4.77 billion at December 31, 2022.

38

 

Net interest margin, on a tax equivalent basis, defined as net interest income divided by average interest-earning assets, was 2.94% for the three months ended March 31, 2023, down from 3.07% for the same period in 2022. This decrease was primarily due to increased rates on interest-bearing deposits and borrowings partially offset by an increase in earning asset yields. Net interest income before the provision for loan losses was $43.2 million compared to net interest income of $43.5 million for the same period in 2022. The decrease in net interest income was primarily due to organic growth and the acquisition of Jefferson Bank during the first quarter of 2022, offset by higher funding costs.

Total non-interest income of $22.5 million increased $1.4 million or 6.6% from $21.1 million for the same period last year. The increase in non-interest income resulted primarily from an increase in insurance commissions and income from Jefferson Bank.

Total non-interest expense of $41.6 million increased $1.2 million or 2.9% from $40.4 million for the same period last year. The increased was primarily due to variable costs tied to the increased revenues, inflationary impacts, and expenses from the acquisition of Delta during February of 2022.

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

 

 

 

Change in
Net Income

 

 

 

2023 versus 2022

 

 

 

Three months ended

 

 

 

March 31, 2023

 

Net interest income

 

$

(331

)

Provision for credit losses

 

 

3,769

 

Other income, including securities transactions

 

 

1,391

 

Other expenses

 

 

(1,189

)

Income taxes

 

 

(1,076

)

Increase (decrease) in net income

 

$

2,564

 

Credit quality is an area of importance to the Company. Total nonperforming loans were $15.2 million at March 31, 2023, compared to $22.5 million at March 31, 2022 and $19.2 million at December 31, 2022. See the discussion under the heading “Loan Quality and Allowance for Loan Losses” for a detailed explanation of these balances. Repossessed asset balances totaled $4.1 million at March 31, 2023 compared to $4.8 million at March 31, 2022 and $4.4 million at December 31, 2022.

The Company’s provision for credit losses for the three months ended March 31, 2023 and 2022 was ($0.8) million and $3.0 million, respectively. The provision expense during the first three months of 2022 included recording an initial provision for credit losses for Jefferson Bank of $2.0 million. Total loans past due 30 days or more were 0.21% of loans at March 31, 2023 compared to 0.53% at March 31, 2022, and 0.24% of loans at December 31, 2022. Loans secured by both commercial and residential real estate comprised approximately 69.1% of the loan portfolio as of March 31, 2023 and 68.8% as of December 31, 2022.

The Company’s capital position remains strong, and the Company has consistently maintained regulatory capital ratios above the “well-capitalized” standards. The Company’s Tier 1 capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at March 31, 2023 and 2022 and December 31, 2022 was 12.88%, 12.42% and 12.40%, respectively. The Company’s total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at March 31, 2023 and 2022, and December 31, 2022 was 15.74%, 15.41% and 15.20%, respectively. The increase in Tier 1 capital and total to risk weighted assets ratio from December 31, 2022 was primarily due to net income added to retained earnings.

39

 

On March 27, 2020, the federal banking regulatory agencies, issued an interim final rule which provided an option to delay the estimated impact on regulatory capital of ASU 2016-13, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13, as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 ("CECL adjustments"), was be delayed for two years. The cumulative amount of these adjustments is being phased out of the regulatory capital calculation over a three-year period, with 75% of the adjustments included in 2022, 50% of the adjustments included in 2023 and 25% of the adjustments included in 2024. 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’s liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company maintains various sources of liquidity to fund its cash needs. See the discussion under the heading “Liquidity” for a full listing of sources and anticipated significant contractual obligations.

The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. The total outstanding commitments at March 31, 2023 and 2022, were $1.2 billion and $1.2 billion, respectively.

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

The Company expensed $0.5 million and $0.4 million for the assessment during the first three months of 2023 and 2022, respectively.

Critical Accounting Policies and Use of Significant Estimates

The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Company’s consolidated financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements included in the Company’s 2023 Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

Investment in Debt and Equity Securities. The Company classifies its investments in debt and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which was codified into ASC 320. Securities classified as held-to-maturity are recorded at amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of the Company.

If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income (loss).

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.

40

 

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.

 

To determine the allowance, the loan portfolio is segmented based on similar risk characteristics. The allowance for credit losses is estimated using a discounted cash flow (DCF) methodology. The DCF projects future cash flows over the life of the loan portfolio. Probability of default (PD) and loss given default (LGD) are key components in calculating expected losses in this model. The PD is forecasted using a regression model that determines the likelihood of default with a forward-looking forecast of unemployment rates. The LGD is the percentage of defaulted loans that is ultimately charged off. The allowance is calculated as the net present value of the expected cash flows less the amortized cost basis of the loans. Prior to 2022, the allowance for credit losses was measured on a collective (pool) basis for non-individually evaluated loans with similar risk characteristics. Historical credit loss experience provided the basis for the estimate of expected credit losses. Adjustments to expected losses are made using qualitative factors for relevant to each loan segment including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. In addition, a forecast, using reasonable and supportable future conditions, is prepared that is used to estimate expected changes to existing and historical conditions in the current period.

 

The Company 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 record mortgage servicing rights under the amortization method. Using this method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type.

Impairment is recognized through a valuation reserve, to the extent that fair value is less than the carrying amount of the servicing assets. Fair value in excess of the carrying amount of servicing assets is not recognized.

Deferred Income Tax Assets/Liabilities. The Company’s net deferred income tax asset arises from differences in the dates that items of income and expense enter our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If the Company were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve.

Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes,” codified within ASC 740. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.

41

 

Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the Company’s consolidated balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment as of September 30, 2021 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 2023 and 2022 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 $755,000 and $770,000 for 2023 and 2022, respectively were 2.89% and 3.03% at March 31, 2023 and 2022, respectively.

 

42

 

The Company’s average balances, fully tax equivalent interest income and interest expense, and rates earned or paid for major balance sheet categories are set forth for the three months ended March 31, 2023 and 2022 in the following table (dollars in thousands):

 

 

 

Three months ended March 31, 2023

 

 

Three months ended March 31, 2022

 

 

 

Average

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

Average

 

 

 

Balance

 

 

Interest

 

 

Rate

 

 

Balance

 

 

Interest

 

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits with other financial institutions

 

$

15,688

 

 

$

209

 

 

 

5.40

%

 

$

135,176

 

 

$

55

 

 

 

0.16

%

Federal funds sold

 

 

7,753

 

 

 

85

 

 

 

4.44

%

 

 

3,714

 

 

 

1

 

 

 

0.13

%

Certificates of deposit

 

 

1,789

 

 

 

14

 

 

 

3.09

%

 

 

2,238

 

 

 

11

 

 

 

2.04

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

957,951

 

 

 

5,163

 

 

 

2.16

%

 

 

1,111,109

 

 

 

4,905

 

 

 

1.77

%

Tax-exempt (1)

 

 

280,828

 

 

 

2,486

 

 

 

3.54

%

 

 

382,909

 

 

 

2,867

 

 

 

2.99

%

Loans net of unearned income (TE) (2)

 

 

4,788,255

 

 

 

56,469

 

 

 

4.78

%

 

 

4,182,606

 

 

 

40,076

 

 

 

3.88

%

Total earning assets

 

 

6,052,264

 

 

 

64,426

 

 

 

4.32

%

 

 

5,817,752

 

 

 

47,915

 

 

 

3.33

%

Cash and due from banks

 

 

135,145

 

 

 

 

 

 

 

 

 

114,257

 

 

 

 

 

 

 

Premises and equipment

 

 

90,345

 

 

 

 

 

 

 

 

 

83,883

 

 

 

 

 

 

 

Other assets

 

 

475,022

 

 

 

 

 

 

 

 

 

367,966

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(59,558

)

 

 

 

 

 

 

 

 

(58,462

)

 

 

 

 

 

 

Total assets

 

$

6,693,218

 

 

 

 

 

 

 

 

$

6,325,396

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

2,504,073

 

 

$

9,655

 

 

 

1.56

%

 

$

2,610,573

 

 

$

1,321

 

 

 

0.21

%

Savings deposits

 

 

640,347

 

 

 

191

 

 

 

0.12

%

 

 

658,038

 

 

 

119

 

 

 

0.07

%

Time deposits

 

 

699,328

 

 

 

2,921

 

 

 

1.69

%

 

 

615,142

 

 

 

708

 

 

 

0.47

%

Total interest-bearing deposits

 

 

3,843,748

 

 

 

12,767

 

 

 

1.35

%

 

 

3,883,753

 

 

 

2,148

 

 

 

0.22

%

Securities sold under agreements to repurchase

 

 

231,012

 

 

 

1,463

 

 

 

2.57

%

 

 

173,491

 

 

 

67

 

 

 

0.16

%

FHLB advances

 

 

540,156

 

 

 

4,874

 

 

 

3.66

%

 

 

115,852

 

 

 

276

 

 

 

0.97

%

Federal funds purchased

 

 

778

 

 

 

9

 

 

 

4.69

%

 

 

44

 

 

 

—

 

 

 

—

%

Subordinated debt

 

 

94,567

 

 

 

987

 

 

 

4.23

%

 

 

94,413

 

 

 

986

 

 

 

4.24

%

Junior subordinated debentures

 

 

19,385

 

 

 

379

 

 

 

7.93

%

 

 

19,210

 

 

 

146

 

 

 

3.08

%

Other debt

 

 

—

 

 

 

—

 

 

 

—

%

 

 

—

 

 

 

—

 

 

 

—

%

Total borrowings

 

 

885,898

 

 

 

7,712

 

 

 

3.53

%

 

 

403,010

 

 

 

1,475

 

 

 

1.48

%

Total interest-bearing liabilities

 

 

4,729,646

 

 

 

20,479

 

 

 

1.76

%

 

 

4,286,763

 

 

 

3,623

 

 

 

0.34

%

Non interest-bearing demand deposits

 

 

1,273,527

 

 

 

 

 

 

1.38

%

 

 

1,329,554

 

 

 

 

 

 

0.26

%

Other liabilities

 

 

56,456

 

 

 

 

 

 

 

 

 

41,345

 

 

 

 

 

 

 

Stockholders' equity

 

 

633,589

 

 

 

 

 

 

 

 

 

667,734

 

 

 

 

 

 

 

Total liabilities and equity

 

$

6,693,218

 

 

 

 

 

 

 

 

$

6,325,396

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

43,947

 

 

 

 

 

 

 

 

$

44,292

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

2.56

%

 

 

 

 

 

 

 

 

2.99

%

Impact of non interest-bearing funds

 

 

 

 

 

 

 

 

0.38

%

 

 

 

 

 

 

 

 

0.08

%

TE net yield on interest-earning assets

 

 

 

 

 

 

 

 

2.94

%

 

 

 

 

 

 

 

 

3.07

%

 

1.
The tax-exempt income is shown on a tax equivalent basis.
2.
Nonaccrual loans and loans held for sale are included in the average balances. Balances are net of unaccreted discount related to loans acquired.

 

 

 

43

 

Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for the three months ended March 31, 2023, compared to the same period in 2022 (in thousands):

 

 

Three months ended March 31, 2023
Compared to 2022 Increase / (Decrease)

 

 

Total

 

 

 

 

 

 

 

 

Change

 

 

Volume (1)

 

 

Rate (1)

 

Earning assets:

 

 

 

 

 

 

 

 

Interest-bearing deposits

$

154

 

 

$

(368

)

 

$

522

 

Federal funds sold

 

84

 

 

 

3

 

 

 

81

 

Certificates of deposit investments

 

3

 

 

 

(12

)

 

 

15

 

Investment securities:

 

 

 

 

 

 

 

 

Taxable

 

258

 

 

 

(3,236

)

 

 

3,494

 

Tax-exempt (2)

 

(381

)

 

 

(847

)

 

 

466

 

Loans (2) (3)

 

16,393

 

 

 

6,300

 

 

 

10,093

 

Total interest income

$

16,511

 

 

$

1,840

 

 

$

14,671

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

 

 

 

 

 

 

Demand deposits

$

8,334

 

 

$

(393

)

 

$

8,727

 

Savings deposits

 

72

 

 

 

(21

)

 

 

93

 

Time deposits

 

2,213

 

 

 

111

 

 

 

2,102

 

Securities sold under agreements to repurchase

 

1,396

 

 

 

30

 

 

 

1,366

 

FHLB advances

 

4,598

 

 

 

2,617

 

 

 

1,981

 

Federal funds purchased

 

9

 

 

 

—

 

 

 

9

 

Subordinated debt

 

1

 

 

 

8

 

 

 

(7

)

Junior subordinated debentures

 

233

 

 

 

1

 

 

 

232

 

Total interest expense

 

16,856

 

 

 

2,353

 

 

 

14,503

 

Net interest income

$

(345

)

 

$

(513

)

 

$

168

 

 

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 decreased $0.3 million, or 0.8%, to $43.9 million for the three months ended March 31, 2023, from $44.3 million for the same period in 2022. Net interest income and net interest margin decreased primarily due to an increase in deposit and borrowing rates more than offsetting the increase in earning asset yields.

For the three months ended March 31, 2023, average earning assets increased $234.5 million, or 4.0%, and average interest-bearing liabilities increased $442.9 million or 10.3% compared with average balances for the same period in 2022.

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

•
Average interest-bearing deposits with other financial institutions decreased $119.5 million or 88.4%.
•
Average federal funds sold increased $4.0 million or 108.8%.
•
Average certificates of deposits investments decreased $0.4 million or 20.1%.
•
Average loans increased by $605.6 million or 14.5%.
•
Average securities decreased by $255.2 million or 17.1%.
•
Average interest-bearing customer deposits decreased by $40.0 million or -1.0%.
•
Average securities sold under agreements to repurchase increased by $57.5 million or 33.2%.
•
Average borrowings and other debt increased by $425.4 million or 185.3%.
•
Net interest margin decreased to 2.94% for the first three months of 2023 from 3.07% for the first three months of 2022.

 

44

 

Provision for Loan Losses

The provision for credit losses for the three months ended March 31, 2023 and 2022 was ($0.8) million and $3.0 million, respectively. The provision expense during the first three months of 2022 included recording an initial provision for credit losses for Jefferson Bank of $2.0 million. Net charge-offs were $53,000 for the three months ended March 31, 2023, compared to net recoveries of $4,000 for March 31, 2022. Nonperforming loans were $15.2 million and $22.5 million as of March 31, 2023 and 2022, respectively. For information on loan loss experience and nonperforming loans, see discussion under the “Nonperforming Loans” and “Loan Quality and Allowance for Loan Losses” sections below.

Other Income

An important source of the Company’s revenue is other income. The following table sets forth the major components of other income for the three months ended March 31, 2023 and 2022 (in thousands):

 

 

 

Three months ended March 31,

 

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

Wealth management revenues

 

$

5,514

 

 

$

5,975

 

 

$

(461

)

 

 

-7.7

%

Insurance commissions

 

 

8,480

 

 

 

7,104

 

 

 

1,376

 

 

 

19.4

%

Service charges

 

 

2,203

 

 

 

2,056

 

 

 

147

 

 

 

7.1

%

Security gains, net

 

 

(46

)

 

 

—

 

 

 

(46

)

 

 

0.0

%

Mortgage banking revenue, net

 

 

150

 

 

 

444

 

 

 

(294

)

 

 

-66.2

%

ATM / debit card revenue

 

 

3,083

 

 

 

2,898

 

 

 

185

 

 

 

6.4

%

Bank owned life insurance

 

 

1,641

 

 

 

844

 

 

 

797

 

 

 

94.4

%

Other

 

 

1,454

 

 

 

1,767

 

 

 

(313

)

 

 

-17.7

%

Total other income

 

$

22,479

 

 

$

21,088

 

 

$

1,391

 

 

 

6.6

%

Following are explanations of the changes in these other income categories for the three months ended March 31, 2023 compared to the same period in 2022:

•
Wealth management revenues decreased due to lower market prices reducing fee based income.
•
Insurance commissions increased primarily due to an increase in commission income and contingency income during 2023 compared to the same period last year.
•
Fees from service charges increased during the first three months of 2023 primarily due to an increase in overdraft fees and transaction account service charges during the period and the acquisition of Jefferson Bank.
•
Net loss from the sale of securities during 2023 and 2022 were $46,000 and $0, respectively.
•
The decrease in mortgage banking income was due to a decrease in mortgage refinancing activity and fees from loans sold in the secondary market.
•
$11.5 million (representing 75 loans) for the three months ended March 31, 2023.
•
$19.6 million (representing 139 loans) for the three months ended March 31, 2022.

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

•
Revenue from ATMs and debit cards increased due to an increase in activity during the period and the acquisition of Jefferson Bank.
•
Bank owned life insurance income increased approximately $797,000 during the first three months of 2023 compared to the same period in 2022 primarily due to a claim payout, higher rates, and $15.8 million of insurance added through the acquisition of Jefferson Bank.
•
Other income decreased primarily due to a gain realized on the termination of derivatives in March of 2022.

 

45

 

Other Expense

The following table sets forth the major components of other expense for the three months ended March 31, 2023 and 2022 (dollars in thousands):

 

 

Three months ended March 31,

 

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

26,071

 

 

$

24,302

 

 

$

1,769

 

 

 

7.3

%

Net occupancy and equipment expense

 

 

6,005

 

 

 

6,155

 

 

 

(150

)

 

 

-2.4

%

Net other real estate owned expense

 

 

133

 

 

 

(33

)

 

 

166

 

 

 

-503.0

%

FDIC insurance

 

 

463

 

 

 

426

 

 

 

37

 

 

 

8.7

%

Amortization of intangible assets

 

 

1,522

 

 

 

1,522

 

 

 

—

 

 

 

0.0

%

Stationery and supplies

 

 

292

 

 

 

311

 

 

 

(19

)

 

 

-6.1

%

Legal and professional

 

 

1,690

 

 

 

1,734

 

 

 

(44

)

 

 

-2.5

%

Marketing and donations

 

 

654

 

 

 

873

 

 

 

(219

)

 

 

-25.1

%

ATM/debit card expense

 

 

1,223

 

 

 

1,078

 

 

 

145

 

 

 

13.5

%

Other operating expenses

 

 

3,524

 

 

 

4,020

 

 

 

(496

)

 

 

-12.3

%

Total other expense

 

$

41,577

 

 

$

40,388

 

 

$

1,189

 

 

 

2.9

%

Following are explanations for the changes in these other expense categories for the three months ended March 31, 2023 compared to the same period in 2022:

•
The increase in salaries and employee benefits, the largest component of other expense, is primarily due to an increase in incentive compensation and commissions, share-based compensation expense, increases for merit raises and applicable payroll taxes, and the addition of Jefferson Bank, offset by declines in bonus accrual expense and group insurance expense, during the first three months of 2023. There were 988 and 1,050 full-time equivalent employees at March 31, 2023 and 2022, respectively.
•
The decrease in occupancy and equipment expense was due to decreases in building maintenance and uncapitalized equipment.
•
The increase net other real estate owned expense was primarily due to properties sold at a net gain during 2022.
•
Expense for amortization of intangible assets was flat for the three months ended March 31, 2023 compared to 2022. Core deposit intangibles increased, while mortgage servicing rights decreased.
•
The decrease in other operating expenses was primarily due to less acquisition costs in 2023 due to the acquisition of Delta in the first quarter of 2022.
•
On a net basis, all other categories of operating expenses decreased during the period compared to last year primarily due to the the Company's ongoing efficiency improvement efforts.

Income Taxes

Total income tax expense amounted to $5.7 million (23.0% effective tax rate) for the three months ended March 31, 2023, compared to $4.6 million (21.9% effective tax rate) for the same period in 2022. The increase in effective rate is related to increased pre-tax net income while permanent items were relatively stable.

The Company files U.S. federal and state of Illinois, Indiana, Missouri and Texas income tax returns. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2019.

 

46

 

Analysis of Consolidated Balance Sheets

Securities

The Company’s overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the available-for-sale and held-to-maturity securities as of March 31, 2023 and December 31, 2022 (dollars in thousands)

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Amortized
Cost

 

 

Weighted
Average Yield

 

 

Amortized
Cost

 

 

Weighted
Average Yield

 

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

 

$

253,228

 

 

 

1.29

%

 

$

252,934

 

 

 

1.28

%

Obligations of states and political subdivisions

 

 

339,808

 

 

 

2.30

%

 

 

347,409

 

 

 

2.31

%

Mortgage-backed securities: GSE residential

 

 

730,036

 

 

 

1.69

%

 

 

744,636

 

 

 

1.69

%

Other securities

 

 

86,830

 

 

 

3.36

%

 

 

90,347

 

 

 

3.41

%

Total securities

 

$

1,409,902

 

 

 

1.87

%

 

$

1,435,326

 

 

 

1.87

%

At March 31, 2023, the Company’s investment portfolio decreased by $25.4 million from December 31, 2022 primarily due to securities sold and securities maturing in the period. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed. The table below presents the credit ratings as of March 31, 2023 for investment securities (in thousands):

 

 

 

 

 

 

 

 

 

Average Credit Rating of Fair Value at March 31, 2023 (1)

 

 

 

Amortized
Cost

 

 

Estimated
Fair Value

 

 

AAA

 

 

AA +/-

 

 

A +/-

 

 

BBB +/-

 

 

< BBB -

 

 

Not rated

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

253,228

 

 

$

223,545

 

 

$

26,161

 

 

$

197,384

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Obligations of state and political subdivisions

 

 

339,808

 

 

 

284,997

 

 

 

45,756

 

 

 

193,560

 

 

 

45,280

 

 

 

—

 

 

 

—

 

 

 

401

 

Mortgage-backed securities (2)

 

 

730,036

 

 

 

624,272

 

 

 

959

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

623,313

 

Other securities

 

 

83,851

 

 

 

79,884

 

 

 

—

 

 

 

15,661

 

 

 

22,936

 

 

 

6,532

 

 

 

—

 

 

 

34,755

 

Total available-for-sale

 

$

1,406,923

 

 

$

1,212,698

 

 

$

72,876

 

 

$

406,605

 

 

$

68,216

 

 

$

6,532

 

 

$

—

 

 

$

658,469

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other securities

 

 

2,979

 

 

 

2,979

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,979

 

Total held-to-maturity

 

$

2,979

 

 

$

2,979

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

2,979

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Agricultural Mtg Corp

 

$

85

 

 

$

362

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

362

 

 

1.
Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency.
2.
Mortgage-backed securities include mortgage-backed securities (MBS) and collateralized mortgage obligation (CMO) issues from the following government sponsored enterprises: FHLMC, FNMA, GNMA and FHLB. While MBS and CMOs are no longer explicitly rated by credit rating agencies, the industry recognizes that they are backed by agencies which have an implied government guarantee.

 

47

 

Loans

The loan portfolio is the largest category of the Company’s earning assets. The following table summarizes the composition of the loan portfolio at amortized cost, including loans held for sale, as of March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Amortized
Cost

 

 

% Outstanding
Loans

 

 

Amortized
Cost

 

 

% Outstanding
Loans

 

Construction and land development

 

$

159,157

 

 

 

3.3

%

 

$

144,264

 

 

 

3.0

%

Agricultural real estate

 

 

401,957

 

 

 

8.4

%

 

 

410,327

 

 

 

8.5

%

1-4 family residential properties

 

 

424,545

 

 

 

8.9

%

 

 

440,180

 

 

 

9.1

%

Multifamily residential properties

 

 

301,808

 

 

 

6.3

%

 

 

294,346

 

 

 

6.1

%

Commercial real estate

 

 

2,003,647

 

 

 

42.2

%

 

 

2,030,011

 

 

 

42.1

%

Loans secured by real estate

 

 

3,291,114

 

 

 

69.1

%

 

 

3,319,128

 

 

 

68.8

%

Agricultural loans

 

 

146,847

 

 

 

3.1

%

 

 

166,838

 

 

 

3.5

%

Commercial and industrial loans

 

 

1,078,021

 

 

 

22.6

%

 

 

1,082,960

 

 

 

22.4

%

Consumer loans

 

 

88,430

 

 

 

1.9

%

 

 

97,775

 

 

 

2.0

%

All other loans

 

 

156,219

 

 

 

3.3

%

 

 

159,511

 

 

 

3.3

%

Total loans

 

$

4,760,631

 

 

 

100.0

%

 

$

4,826,212

 

 

 

100.0

%

Loan balances decreased $65.6 million, or (1.4%). The decrease was primarily due to less loan demand and lower line of credit draws. The balance of real estate loans held for sale, included in the balances shown above, amounted to $1.0 million and $0.3 million as of March 31, 2023 and December 31, 2022, 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, central Missouri, and Texas. While these regions have experienced some economic stress during 2023 and 2022, the Company does not consider these locations high risk areas since these regions have not experienced the significant changes in real estate values seen in some other areas in the United States.

The Company does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage of total risk-based capital for the periods shown above. At March 31, 2023 and December 31, 2022, the Company did have industry loan concentrations that exceeded 25% of total risk-based capital in the following industries (dollars in thousands):

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Principal
balance

 

 

% Outstanding
 Loans

 

 

Principal
balance

 

 

% Outstanding
Loans

 

Other grain farming

 

$

422,417

 

 

 

8.87

%

 

$

445,241

 

 

 

9.23

%

Lessors of non-residential buildings

 

 

945,733

 

 

 

19.87

%

 

 

956,120

 

 

 

19.81

%

Lessors of residential buildings and dwellings

 

 

462,809

 

 

 

9.72

%

 

 

453,219

 

 

 

9.39

%

Hotels and motels

 

 

211,395

 

 

 

4.44

%

 

 

209,837

 

 

 

4.35

%

The Company had no further industry loan concentrations in excess of 25% of total risk-based capital.

 

48

 

The following table presents the balance of loans outstanding as of March 31, 2023, by contractual maturities (in thousands):

 

 

 

Maturity (1)

 

 

 

One year
or less(2)

 

 

Over 1 through
5 years

 

 

Over 5
years

 

 

Total

 

Construction and land development

 

$

36,125

 

 

$

66,540

 

 

$

56,492

 

 

$

159,157

 

Agricultural real estate

 

 

12,687

 

 

 

128,861

 

 

 

260,409

 

 

 

401,957

 

1-4 family residential properties

 

 

11,362

 

 

 

118,826

 

 

 

294,357

 

 

 

424,545

 

Multifamily residential properties

 

 

16,742

 

 

 

226,867

 

 

 

58,199

 

 

 

301,808

 

Commercial real estate

 

 

119,912

 

 

 

1,013,790

 

 

 

869,945

 

 

 

2,003,647

 

Loans secured by real estate

 

 

196,828

 

 

 

1,554,884

 

 

 

1,539,402

 

 

 

3,291,114

 

Agricultural loans

 

 

96,434

 

 

 

43,677

 

 

 

6,736

 

 

 

146,847

 

Commercial and industrial loans

 

 

353,335

 

 

 

476,963

 

 

 

247,723

 

 

 

1,078,021

 

Consumer loans

 

 

7,687

 

 

 

58,726

 

 

 

22,017

 

 

 

88,430

 

All other loans

 

 

23,087

 

 

 

24,783

 

 

 

108,349

 

 

 

156,219

 

Total loans

 

$

677,371

 

 

$

2,159,033

 

 

$

1,924,227

 

 

$

4,760,631

 

 

1.
Based upon remaining contractual maturity.
2.
Includes demand loans, past due loans and overdrafts.

As of March 31, 2023, loans with maturities over one year consisted of approximately $2.4 billion in fixed rate loans and approximately $1.6 billion in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding renewals and borrower requests, which are handled on a case-by-case basis.

Nonperforming Loans and Nonperforming Other Assets

Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and (c) loans not included in (a) and (b) above which are defined as “modified”. Repossessed assets include primarily repossessed real estate and automobiles.

The Company’s policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due. The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal.

Restructured loans are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven. Repossessed assets represent property acquired as the result of borrower defaults on loans. These assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure or repossession. Write-downs occurring at foreclosure are charged against the allowance for loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs for subsequent declines in value are recorded in non-interest expense in other real estate owned along with other expenses related to maintaining the properties.

The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets at March 31, 2023 and December 31, 2022 (dollars in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Nonaccrual loans

 

$

13,798

 

 

$

15,956

 

Modified loans which are performing in accordance with revised terms

 

 

1,365

 

 

 

3,214

 

Total nonperforming loans

 

 

15,163

 

 

 

19,170

 

Repossessed assets

 

 

4,062

 

 

 

4,369

 

Total nonperforming loans and repossessed assets

 

$

19,225

 

 

$

23,539

 

Nonperforming loans to loans, before allowance for loan losses

 

 

0.32

%

 

 

0.40

%

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

 

 

0.40

%

 

 

0.49

%

 

49

 

The $2.2 million decrease in nonaccrual loans during 2023 resulted from the net of $0.8 million of loans put on nonaccrual status offset by $2.3 million of loans becoming current or paid-off, $0.6 million of loans transferred to other real estate and $0.1 million of loans charged off. The following table summarizes the composition of nonaccrual loans (dollars in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Balance

 

 

% of Total

 

 

Balance

 

 

% of Total

 

Construction and land development

 

$

14

 

 

 

0.1

%

 

$

14

 

 

 

0.1

%

Agricultural real estate

 

 

1,246

 

 

 

9.0

%

 

 

1,258

 

 

 

7.9

%

1-4 family residential properties

 

 

3,442

 

 

 

24.9

%

 

 

4,943

 

 

 

31.0

%

Multifamily residential properties

 

 

1,162

 

 

 

8.4

%

 

 

672

 

 

 

4.2

%

Commercial real estate

 

 

6,076

 

 

 

44.1

%

 

 

7,640

 

 

 

47.9

%

Loans secured by real estate

 

 

11,940

 

 

 

86.5

%

 

 

14,527

 

 

 

91.0

%

Agricultural loans

 

 

483

 

 

 

3.5

%

 

 

57

 

 

 

0.4

%

Commercial and industrial loans

 

 

1,136

 

 

 

8.2

%

 

 

1,098

 

 

 

6.9

%

Consumer loans

 

 

239

 

 

 

1.8

%

 

 

274

 

 

 

1.7

%

Total loans

 

$

13,798

 

 

 

100.0

%

 

$

15,956

 

 

 

100.0

%

Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $0.1 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.

The $0.3 million decrease in repossessed assets during the first three months of 2023 resulted from $682,000 of additional assets repossessed and $0.8 million of repossessed assets sold, $0.2 million of writedowns, and approximately $0 of change in fair value premiums and discounts. The following table summarizes the composition of repossessed assets (dollars in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Balance

 

 

% of Total

 

 

Balance

 

 

% of Total

 

Construction and land development

 

$

2,688

 

 

 

66.2

%

 

$

2,763

 

 

 

63.2

%

1-4 family residential properties

 

 

38

 

 

 

0.9

%

 

 

108

 

 

 

2.5

%

Commercial real estate

 

 

1,298

 

 

 

32.0

%

 

 

1,390

 

 

 

31.8

%

Total real estate

 

 

4,024

 

 

 

99.1

%

 

 

4,261

 

 

 

97.5

%

Consumer loans

 

 

38

 

 

 

0.9

%

 

 

108

 

 

 

2.5

%

Total repossessed collateral

 

$

4,062

 

 

 

100.0

%

 

$

4,369

 

 

 

100.0

%

Repossessed assets sold during the first three months of 2023 resulted in net gains of $0.1 million related to real estate asset sales and net losses of $17,000 related to other asset sales. The Company also recognized no deferred losses and recorded $0.2 million of writedowns on three real estate properties owned. Repossessed assets sold during the same period in 2022 resulted in net gains of $21,000 related to real estate asset sales and net gains of $0 related to other asset sales. The company also recognized $0.1 million of deferred gains and recorded $0 of writedowns on real estate properties owned.

 

50

 

Loan Quality and Allowance for Credit Losses

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

Management reviews economic factors including the potential for reduced cash flow for commercial operating loans from reduction in sales or increased operating costs, decreased occupancy rates for commercial buildings, reduced levels of home sales for commercial land developments, the uncertainty regarding grain prices, increased operating costs for farmers, and increased levels of unemployment and bankruptcy impacting consumer’s ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. Management considers the allowance for loan losses a critical accounting policy.

Management recognizes there are risk factors that are inherent in the Company’s loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company’s operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company’s success. At March 31, 2023, the Company’s loan portfolio included $548.8 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $422.4 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased $28.4 million from $577.2 million at December 31, 2022 while loans concentrated in other grain farming decreased $22.8 million from $445.2 million at December 31, 2022. 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 $211.4 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 $945.7 million of loans to lessors of non-residential buildings, and $462.8 million of loans to lessors of residential buildings and dwellings.

The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the Board of Directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; 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.

51

 

Analysis of the allowance for credit losses as of March 31, 2023 and 2022, and of changes in the allowance for the three months ended March 31, 2023 and 2022, is as follows (dollars in thousands):

 

 

 

Three months ended March 31,

 

 

 

2023

 

 

2022

 

Average loans outstanding, net of unearned income

 

$

4,728,697

 

 

$

4,182,606

 

Allowance-prior year end of period

 

 

59,093

 

 

 

54,655

 

Adjustment for adoption of ASU 2013-16

 

 

—

 

 

 

—

 

Allowance - beginning of period

 

 

59,093

 

 

 

54,655

 

Initial allowance on loans purchased with credit deterioration

 

 

—

 

 

 

863

 

Charge-offs:

 

 

 

 

 

 

Construction and land development

 

 

—

 

 

 

2

 

Agricultural real estate

 

 

—

 

 

 

—

 

1-4 family residential

 

 

40

 

 

 

72

 

Commercial real estate

 

 

—

 

 

 

339

 

Agricultural

 

 

—

 

 

 

—

 

Commercial and industrial

 

 

13

 

 

 

3

 

Consumer

 

 

427

 

 

 

358

 

Total charge-offs

 

 

480

 

 

 

774

 

Recoveries:

 

 

 

 

 

 

Construction and land development

 

 

—

 

 

 

—

 

Agricultural real estate

 

 

—

 

 

 

—

 

1-4 family residential

 

 

24

 

 

 

203

 

Commercial real estate

 

 

4

 

 

 

347

 

Agricultural

 

 

3

 

 

 

—

 

Commercial and industrial

 

 

256

 

 

 

61

 

Consumer

 

 

140

 

 

 

167

 

Total recoveries

 

 

427

 

 

 

778

 

Net charge-offs (recoveries)

 

 

53

 

 

 

(4

)

Provision for loan losses

 

 

(817

)

 

 

2,952

 

Allowance-end of period

 

$

58,223

 

 

$

58,474

 

Ratio of annualized net charge-offs to average loans

 

 

0.00

%

 

 

0.00

%

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

 

 

1.22

%

 

 

1.31

%

Ratio of allowance for credit losses to nonperforming loans

 

 

384

%

 

 

260

%

The increase in the allowance for credit losses to nonperforming loans ratio is primarily due to a decline in nonperforming loans at March 31, 2023 compared to March 31, 2022.

During the first three months of 2023, the Company had net charge offs of $53,000 compared to net recoveries of $4,000 in 2022. During the first three months of 2023, there were no significant charge-offs. During the first three months of 2022, there were significant charge-offs of two commercial real estate loan to one borrower totaling $0.3 million.

Deposits

Funding of the Company’s earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates for the three months ended March 31, 2023 and 2022 and for the year ended December 31, 2022 (dollars in thousands):

 

 

 

Three months ended
March 31, 2023

 

 

Three months ended
March 31, 2022

 

 

Year ended
December 31, 2022

 

 

 

Average
Balance

 

 

Weighted
Average
Rate

 

 

Average
Balance

 

 

Weighted
Average
Rate

 

 

Average
Balance

 

 

Weighted
Average
Rate

 

Demand deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing

 

$

1,273,527

 

 

—%

 

 

$

1,329,554

 

 

—%

 

 

$

1,356,912

 

 

—%

 

Interest-bearing

 

 

2,504,073

 

 

 

1.56

%

 

 

2,610,573

 

 

 

0.21

%

 

 

2,598,480

 

 

 

0.53

%

Savings

 

 

640,347

 

 

 

0.12

%

 

 

658,038

 

 

 

0.07

%

 

 

666,334

 

 

 

0.09

%

Time deposits

 

 

699,328

 

 

 

1.69

%

 

 

615,142

 

 

 

0.47

%

 

 

655,240

 

 

 

0.69

%

Total average deposits

 

$

5,117,275

 

 

 

1.01

%

 

$

5,213,307

 

 

 

0.17

%

 

$

5,276,966

 

 

 

0.36

%

 

52

 

During the first three months of 2023, the average balance of deposits decreased by $159.7 million from the average balance for the year ended December 31, 2022. Average non-interest-bearing deposits decreased by $83.4 million, average interest-bearing balances decreased by $94.4 million, savings account balances decreased $26.0 million and balances of time deposits increased $44.1 million. A majority of the overall deposit decline in the period was attributable to one customer. As previously mentioned, the Company received approximately $225 million of deposits in the third quarter of last year related to a customer’s sale of certain assets. These funds were known to be temporary deposits on the Company’s balance sheet as they would be deployed for capital and operating needs of the customer. Most of this outflow occurred during the period with approximately $50 million of the balance remaining as of March 31, 2023. The Company has no other large customer deposit concentrations similar to this one. The Company has not lost a customer related to the industry’s deposit security concerns subsequent to the bank failures in March. Approximately 99% of the Company’s deposit accounts are less than $250,000. The average account balance for all deposit customers is approximately $25,000. The percentage of deposits that were uninsured at quarter end was 25.9%.

Outside of the previously mentioned customer, deposit flows throughout the quarter were relatively similar to prior periods where rate competition was a key determinant to the migration. Late in the first quarter, the Company saw an increase in the competitive landscape resulting in higher matching and promotional rates to normalize deposit flows. In addition, deposit security became a more common discussion topic, and the Company met customer needs and maintained deposit relationships by moving approximately $93 million of deposits into the Intrafi Network for the FDIC insurance coverage.

The following table sets forth the high and low month-end balances for the three months ended March 31, 2023 and 2022 and for the year ended December 31, 2022 (in thousands):

 

 

Three months ended
March 31, 2023

 

 

Three months ended
March 31, 2022

 

 

Year ended
December 31, 2022

 

High month-end balances of total deposits

$

5,165,594

 

 

$

5,487,305

 

 

$

5,487,305

 

Low month-end balances of total deposits

 

5,030,778

 

 

 

4,904,973

 

 

 

4,904,973

 

Balances of time deposits of $100,000 or more include time deposits maintained for public fund entities and consumer time deposits. The following table sets forth the maturity of time deposits of $100,000 or more at March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

3 months or less

 

$

65,202

 

 

$

80,856

 

Over 3 through 6 months

 

 

96,152

 

 

 

31,771

 

Over 6 through 12 months

 

 

212,488

 

 

 

127,405

 

Over 12 months

 

 

186,600

 

 

 

183,597

 

Total

 

$

560,442

 

 

$

423,629

 

 

53

 

Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. These obligations are collateralized with certain government securities that are direct obligations of the United States or one of its agencies. These retail repurchase agreements are offered as a cash management service to its corporate customers. Other borrowings consist of Federal Home Loan Bank (“FHLB”) advances, federal funds purchased, loans (short-term or long-term debt) that the Company has outstanding and junior subordinated debentures. Information relating to securities sold under agreements to repurchase and other borrowings as of March 31, 2023 and December 31, 2022 is presented below (dollars in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Securities sold under agreements to repurchase

 

$

228,664

 

 

$

221,414

 

Federal Home Loan Bank advances:

 

 

 

 

 

 

FHLB – overnite

 

 

110,000

 

 

 

65,000

 

Fixed term – due in one year or less

 

 

70,016

 

 

 

110,040

 

Fixed term – due after one year

 

 

415,005

 

 

 

290,031

 

Other borrowings:

 

 

 

 

 

 

Subordinated debt

 

 

94,593

 

 

 

94,553

 

Junior subordinated debentures

 

 

19,406

 

 

 

19,364

 

Total

 

$

937,684

 

 

$

800,402

 

Average interest rate at end of period

 

 

3.36

%

 

 

2.52

%

 

 

 

 

 

 

 

Maximum outstanding at any month-end:

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

231,650

 

 

$

257,061

 

Federal Home Loan Bank advances:

 

 

 

 

 

 

FHLB – overnite

 

 

130,000

 

 

 

310,000

 

Fixed term – due in one year or less

 

 

105,024

 

 

 

160,048

 

Fixed term – due after one year

 

 

415,005

 

 

 

290,031

 

Other borrowings:

 

 

 

 

 

 

Federal funds purchased

 

 

—

 

 

 

10,000

 

Subordinated debt

 

 

94,593

 

 

 

94,553

 

Junior subordinated debentures

 

 

19,406

 

 

 

19,364

 

 

 

 

 

 

 

 

Averages for the period (YTD):

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

$

231,012

 

 

$

202,242

 

Federal Home Loan Bank advances:

 

 

 

 

 

 

FHLB – overnite

 

 

118,389

 

 

 

100,084

 

Fixed term – due in one year or less

 

 

120,000

 

 

 

94,247

 

Fixed term – due after one year

 

 

301,767

 

 

 

82,070

 

Other borrowings:

 

 

 

 

 

 

Federal funds purchased

 

 

778

 

 

 

481

 

Loans due in one year or less

 

 

—

 

 

 

14

 

Subordinated debt

 

 

94,567

 

 

 

94,471

 

Junior subordinated debentures

 

 

19,385

 

 

 

19,275

 

Total

 

$

885,898

 

 

$

592,884

 

Average interest rate during the period

 

 

3.48

%

 

 

2.16

%

 

54

 

Securities sold under agreements to repurchase increased $7.3 million during the first three months of 2023 primarily due to the cash flow needs of various customers. FHLB advances represent borrowings by First Mid Bank to economically fund loan demand. At March 31, 2023 the fixed term advances, consisted of $594.7 million as follows:

 

Advance

 

 

Term (in years)

 

Interest Rate

 

Maturity Date

$

110,000,000

 

 

overnight

 

4.86%

 

April 1, 2023

 

5,000,000

 

 

4.0

 

2.44%

 

May 30, 2023

 

5,000,000

 

 

1.0

 

2.00%

 

May 31, 2023

 

25,000,000

 

 

9 months

 

4.34%

 

June 30, 2023

 

5,000,000

 

 

3.5

 

1.51%

 

July 31, 2023

 

5,000,000

 

 

3.5

 

0.77%

 

September 11, 2023

 

25,000,000

 

 

1.0

 

4.81%

 

November 10, 2023

 

25,000,000

 

 

1.5

 

4.69%

 

May 10, 2024

 

25,000,000

 

 

2.0

 

4.59%

 

November 8, 2024

 

10,000,000

 

 

5.0

 

1.45%

 

December 31, 2024

 

5,000,000

 

 

5.0

 

0.91%

 

March 10, 2025

 

4,746,475

 

 

10.0

 

2.64%

 

December 23, 2025

 

50,000,000

 

 

4.0

 

2.98%

 

December 8, 2027

 

50,000,000

 

 

4.0

 

3.49%

 

December 8, 2027

 

50,000,000

 

 

4.0

 

3.28%

 

December 8, 2027

 

25,000,000

 

 

5.0

 

3.56%

 

March 10, 2028

 

25,000,000

 

 

5.0

 

3.35%

 

March 13, 2028

 

25,000,000

 

 

5.0

 

3.47%

 

March 13, 2028

 

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

 

50,000,000

 

 

10.0

 

2.77%

 

December 13, 2032

 

25,000,000

 

 

10.0

 

2.60%

 

March 14, 2033

 

25,000,000

 

 

10.0

 

2.40%

 

March 15, 2033

 

 

 

 

 

 

 

 

The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $15 million. There was no balance on this line of credit as of March 31, 2023. This loan was renewed on April 7, 2023 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The Company and First Mid Bank were in compliance with the existing covenants at March 31, 2023 and 2022, and December 31, 2022.

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

The Company may, beginning with the interest payment date of October 15, 2025, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the Notes at any time, including prior to October 15, 2025, at the Company’s option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding the redemption date.

On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through First Mid-Illinois Statutory Trust II (“Trust II”), a statutory business trust and wholly owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common

55

 

equity of Trust II, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points, 6.47% and 6.37% at March 31, 2023 and December 31, 2022, respectively).

On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First Clover Financial. The $4,000,000 of trust preferred securities and an additional $124,000 additional investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (6.72% and 6.47% at March 31, 2023 and December 31, 2022, respectively) and resets quarterly.

On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First BancTrust Corporation. The $6,000,000 of trust preferred securities and an additional $186,000 additional investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (6.57% and 6.62% at March 31, 2023 and December 31, 2022, respectively) and resets quarterly.

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

Similarly, the final rule implementing the Basel III reforms allows holding companies with less than $15 billion in consolidated assets as of December 31, 2009 to continue to count toward Tier 1 capital any trust preferred securities issued before May 19, 2010. New issuances of trust preferred securities, however, would not count as Tier 1 regulatory capital.

In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt certain rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This rule is generally referred to as the “Volcker Rule.” The rules permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets (such as the Company) if (1) the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the offering proceeds received by the collateralized debt obligation were invested primarily in qualifying trust preferred collateral, and (3) the banking entity’s interests in the collateralized debt obligation was acquired on or prior to December 10, 2013. The Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company or First Mid Bank. On June 25, 2020, the agencies announced that certain restrictions under the Volcker Rule applicable to large banking entities will be eased commencing October 1, 2020.

Interest Rate Sensitivity

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

56

 

In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as “static GAP” analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet. The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at March 31, 2023 (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

 

$

17,289

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

17,289

 

 

$

17,289

 

Certificates of deposit investments

 

 

245

 

 

 

1,225

 

 

 

245

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,715

 

 

 

1,715

 

Taxable investment securities

 

 

17,775

 

 

 

97,821

 

 

 

97,583

 

 

 

73,366

 

 

 

118,229

 

 

 

530,162

 

 

 

934,936

 

 

 

934,936

 

Nontaxable investment securities

 

 

(47,345

)

 

 

4,115

 

 

 

3,041

 

 

 

8,101

 

 

 

8,938

 

 

 

304,253

 

 

 

281,103

 

 

 

281,103

 

Loans

 

 

1,668,065

 

 

 

705,110

 

 

 

634,729

 

 

 

815,672

 

 

 

585,662

 

 

 

351,393

 

 

 

4,760,631

 

 

 

4,497,336

 

Total

 

$

1,656,029

 

 

$

808,271

 

 

$

735,598

 

 

$

897,139

 

 

$

712,829

 

 

$

1,185,808

 

 

$

5,995,674

 

 

$

5,732,379

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and NOW accounts

 

$

519,844

 

 

$

178,039

 

 

$

178,039

 

 

$

178,039

 

 

$

178,039

 

 

$

827,482

 

 

$

2,059,482

 

 

$

2,059,482

 

Money market accounts

 

 

567,713

 

 

 

45,926

 

 

 

45,926

 

 

 

45,926

 

 

 

45,926

 

 

 

127,035

 

 

 

878,452

 

 

 

878,452

 

Other time deposits

 

 

558,648

 

 

 

188,627

 

 

 

22,977

 

 

 

15,049

 

 

 

45,031

 

 

 

331

 

 

 

830,663

 

 

 

824,300

 

Short-term borrowings/debt

 

 

228,664

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

228,664

 

 

 

338,486

 

Long-term borrowings/debt

 

 

199,422

 

 

 

65,024

 

 

 

99,573

 

 

 

—

 

 

 

225,000

 

 

 

120,001

 

 

 

709,020

 

 

 

588,528

 

Total

 

$

2,074,291

 

 

$

477,616

 

 

$

346,515

 

 

$

239,014

 

 

$

493,996

 

 

$

1,074,849

 

 

$

4,706,281

 

 

$

4,689,248

 

Rate sensitive assets – rate sensitive liabilities

 

$

(418,262

)

 

$

330,655

 

 

$

389,083

 

 

$

658,125

 

 

$

218,833

 

 

$

110,959

 

 

$

1,289,393

 

 

 

 

Cumulative GAP

 

 

(418,262

)

 

 

(87,607

)

 

 

301,476

 

 

 

959,601

 

 

 

1,178,434

 

 

 

1,289,393

 

 

 

 

 

 

 

Cumulative amounts as % of total Rate sensitive assets

 

 

-7.0

%

 

 

5.5

%

 

 

6.5

%

 

 

11.0

%

 

 

3.6

%

 

 

1.9

%

 

 

 

 

 

 

Cumulative Ratio

 

 

-7.0

%

 

 

-1.5

%

 

 

5.0

%

 

 

16.0

%

 

 

19.7

%

 

 

21.5

%

 

 

 

 

 

 

The static GAP analysis shows that at March 31, 2023, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis. The Company’s ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank’s historical experience and with known industry trends. ALCO meets at least monthly to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities.

Capital Resources

At March 31, 2023, the Company’s stockholders' equity increased $28.7 million or 4.5%, to $661.9 million from $633.2 million as of December 31, 2022. During the first three months of 2023, net income contributed $19.2 million to equity before the payment of dividends to stockholders. The change in market value of available-for-sale investment securities increased stockholders' equity by $13.6 million, net of tax. Dividends of $4.7 million were paid during the first three months of 2023.

The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Board of Governors of the Federal Reserve System (“Federal Reserve System”), First Mid Bank follows similar minimum regulatory requirements established for banks by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation, as applicable. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and its subsidiary bank to maintain minimum capital amounts and ratios (set forth in the table below). Management believes that, as of March 31, 2023 and December 31, 2022, the Company and First Mid Bank met all capital adequacy requirements.

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, the Company elected the option to delay the estimated impact on regulatory capital of adopting ASU 2016-13, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13, as well as 25% of the quarterly increases in allowance for credit losses subsequent to adoption of ASU 2016-13 was delayed for two years. After two years, the cumulative amount of these adjustments is being phased out of the regulatory capital calculation over a three-year period, with 75% of the adjustments included in 2022, 50% of the adjustments included in 2023 and 25% of the adjustments included in 2024. After five years, the temporary delay of ASU 2016-13 adoption will be fully reversed.

 

57

 

To be categorized as well-capitalized, total risk-based capital, Tier 1 risk-based capital, common equity Tier 1 risk-based capital and Tier 1 leverage ratios must be maintained as set forth in the following table (dollars in thousands):

 

 

 

Actual

 

 

Required Minimum For
Capital Adequacy
Purposes

 

To Be Well-Capitalized
Under Prompt Corrective
Action Provisions

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Amount

 

 

Ratio

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

817,545

 

 

 

15.74

%

 

$

545,260

 

 

> 10.50%

 

N/A

 

 

N/A

First Mid Bank

 

 

762,009

 

 

 

14.72

%

 

 

543,584

 

 

> 10.50%

 

$

517,700

 

 

> 10.00%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

668,971

 

 

 

12.88

%

 

 

441,401

 

 

> 8.50%

 

N/A

 

 

N/A

First Mid Bank

 

 

708,028

 

 

 

13.68

%

 

 

440,045

 

 

> 8.50%

 

 

414,160

 

 

> 8.00%

Common equity tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

649,565

 

 

 

12.51

%

 

 

363,507

 

 

> 7.00%

 

N/A

 

 

N/A

First Mid Bank

 

 

708,028

 

 

 

13.68

%

 

 

362,390

 

 

> 7.00%

 

 

336,505

 

 

> 6.50%

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

668,971

 

 

 

12.88

%

 

 

270,608

 

 

> 4.00%

 

N/A

 

 

N/A

First Mid Bank

 

 

708,028

 

 

 

13.68

%

 

 

269,533

 

 

> 4.00%

 

 

336,916

 

 

> 5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

801,966

 

 

 

15.20

%

 

$

554,164

 

 

>10.50%

 

N/A

 

 

N/A

First Mid Bank

 

 

745,624

 

 

 

14.18

%

 

 

552,161

 

 

>10.50%

 

$

525,868

 

 

> 10.00%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

654,453

 

 

 

12.40

%

 

 

448,609

 

 

> 8.50%

 

N/A

 

 

N/A

First Mid Bank

 

 

692,664

 

 

 

13.17

%

 

 

446,987

 

 

> 8.50%

 

 

420,694

 

 

> 8.00%

Common equity tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

635,089

 

 

 

12.03

%

 

 

369,442

 

 

> 7.00%

 

N/A

 

 

N/A

First Mid Bank

 

 

692,664

 

 

 

13.17

%

 

 

368,107

 

 

> 7.00%

 

 

341,814

 

 

> 6.50%

Tier 1 capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

654,453

 

 

 

9.68

%

 

 

268,875

 

 

> 4.00%

 

N/A

 

 

N/A

First Mid Bank

 

 

692,664

 

 

 

10.22

%

 

 

270,990

 

 

> 4.00%

 

 

338,738

 

 

> 5.00%

The Company's risk-weighted assets, capital, and capital ratios for March 31, 2023 are computed in accordance with Basel III capital rules which were effective January 1, 2015. See heading "Basel III" in the Overview section of this report for a more detailed description of the Basel III rules. As of March 31, 2023, 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.

 

58

 

Stock Plans

Participants may purchase Company stock under the following four plans of the Company: The Deferred Compensation Plan, the First Retirement and Savings Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan. For more detailed information on these plans, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to succeed the Company’s 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan.

Following the stockholders’ approval at the 2021 annual meeting of the Company, a maximum of 399,983 shares of common stock may be issued under the SI Plan. The Company awarded 60,550 and 26,000 restricted stock awards during 2023 and 2022, respectively and 37,900 and 37,150 as stock unit awards during 2023 and 2022, respectively.

Employee Stock Purchase Plan

At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 15% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 600,000 shares of common stock may be issued under the ESPP. As of March 31, 2023, 54,739 shares have been issued pursuant to the ESPP. During the three months ended March 31, 2023 and 2022, 7,963 shares and 3,149 shares, respectively, were issued pursuant to the ESPP.

Stock Repurchase Program

Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock. During 2022, the Company repurchased 170 shares. All of these shares were a result of shares withheld for taxes on vested employee stock incentives. The Company has approximately $4.1 million in remaining capacity under its existing repurchase program.

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

Liquidity

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

Details of the Company's liquidity sources include:

•
First Mid Bank has $100 million available in overnight federal fund lines, including $30 million from First Horizon Bank, N.A., $20 million from U.S. Bank, N.A., $10 million from Wells Fargo Bank, N.A., $15 million from The Northern Trust Company and $25 million from Zions Bank. As of June 30, 2022, First Mid had purchased $10 million of federal funds from The Northern Trust Company. Availability of the funds is subject to First Mid Bank meeting minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total average assets. As of March 31, 2023, First Mid Bank met these regulatory requirements.
•
First Mid Bank can borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the Federal Home Loan Bank. Collateral that can be pledged includes one-to-four family residential real estate loans and securities. At March 31, 2023, the excess collateral at the FHLB would support approximately $416 million of additional advances for First Mid Bank.

59

 

•
First Mid Bank is a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged.
•
In addition, as of March 31, 2023, the Company had a revolving credit agreement in the amount of $15 million with The Northern Trust Company with an outstanding balance of $0 million and $15 million in available funds. This loan was renewed on April 7, 2023 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is unsecured. The Company and its subsidiary bank were in compliance with the existing covenants at March 31, 2023 and 2022 and December 31, 2022.

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

•
lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions;
•
deposit activities, including seasonal demand of private and public funds;
•
investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Treasury and government agency securities; and
•
operating activities, including scheduled debt repayments and dividends to stockholders.

The following table summarizes significant contractual obligations and other commitments at March 31, 2023 (in thousands):

 

 

 

 

 

 

Less than

 

 

 

 

 

 

 

 

More than

 

 

 

Total

 

 

1 year

 

 

1-3 years

 

 

3-5 years

 

 

5 years

 

Time deposits

 

$

830,663

 

 

$

558,648

 

 

$

211,604

 

 

$

60,080

 

 

$

331

 

Debt

 

 

113,999

 

 

 

—

 

 

 

3,943

 

 

 

—

 

 

 

110,056

 

Other borrowing

 

 

823,685

 

 

 

408,680

 

 

 

70,005

 

 

 

225,000

 

 

 

120,000

 

Operating leases

 

 

17,183

 

 

 

2,967

 

 

 

4,614

 

 

 

3,731

 

 

 

5,871

 

Supplemental retirement

 

 

1,828

 

 

 

50

 

 

 

100

 

 

 

150

 

 

 

1,528

 

 

 

$

1,787,358

 

 

$

970,345

 

 

$

290,266

 

 

$

288,961

 

 

$

237,786

 

For the three months ended March 31, 2023, net cash of $20.3 million was provided by operating activities, $89.7 million was provided by investing activities, and $93.3 million was used in financing activities. In total, cash and cash equivalents increased by $16.7 million since year-end 2022.

Off-Balance Sheet Arrangements

First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments. The off-balance sheet financial instruments whose contract amounts represent credit risk at March 31, 2023 and December 31, 2022 were as follows (in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Unused commitments and lines of credit:

 

 

 

 

 

 

Commercial real estate

 

$

174,593

 

 

$

147,702

 

Commercial operating

 

 

657,253

 

 

 

655,676

 

Home equity

 

 

64,938

 

 

 

63,570

 

Other

 

 

314,181

 

 

 

307,030

 

Total

 

$

1,210,965

 

 

$

1,173,978

 

Standby letters of credit

 

$

9,389

 

 

$

10,162

 

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.

60

 

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.

61

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the market risk faced by the Company since December 31, 2022. For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 4. CONTROLS AND PROCEDURES

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

62

 

PART II

From time to time the Company and its subsidiaries may be involved in litigation that the Company believes is a type common to our industry. None of any such existing claims are believed to be individually material at this time to the Company, although the outcome of any such existing claims cannot be predicted with certainty.

ITEM 1A. RISK FACTORS

Various risks and uncertainties, some of which are difficult to predict and beyond the Company’s control, could negatively impact the Company. As a financial institution, the Company is exposed to interest rate risk, liquidity risk, credit risk, operational risk, risks from economic or market conditions, and general business risks among others. Adverse experience with these or other risks could have a material impact on the Company’s financial condition and results of operations, as well as the value of its common stock. See the risk factors and “Supervision and Regulation” described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

(a)
Total
Number
of Shares
Purchased

 

 

(b)
Average
Price Paid
per Share

 

 

(c)
Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs

 

 

(d)
Approximate
Dollar Value
of Shares
that May
Yet Be
Purchased
Under the
Plans or
Programs

 

January 1, 2023 - January 31, 2023

 

 

—

 

 

$

—

 

 

 

—

 

 

$

4,066,000

 

February 1, 2023 - February 28, 2023

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,066,000

 

March 1, 2023 - March 31, 2023

 

 

170

 

 

 

27.64

 

 

 

170

 

 

 

4,061,000

 

Total

 

 

170

 

 

$

27.64

 

 

 

170

 

 

$

4,061,000

 

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 

63

 

ITEM 6. EXHIBITS

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

 

Exhibit

Number

 

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

 

 

 

2.1

 

Agreement and Plan of Merger by and among First Mid Bancshares, Inc., Eagle Sub LLC, Blackhawk Bancorp, Inc., and the sellers as defined therein, dated March 20, 2023

Incorporated by reference to Exhibit 2.1 to First Mid Bancshares, Inc.’s Form 8-K filed with the Securities and Exchange Commission on March 21, 2023

 

10.1

 

Sixth Amendment to the Sixth Amended and Restated Credit Agreement by and between First Mid Bancshares, Inc. and The Northern Trust Company, dated April 7, 2023

Incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on April 11, 2023

31.1

 

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

 

31.2

 

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

 

32.1

 

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

 

32.2

 

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

 

101.INS

 

Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (formatted as Inline XBRL and contained in Exhibits 101)

 

 

 
Exhibits omitted pursuant to Item 601(a)(5) of Regulation S-K. Copies of any omitted exhibit will be furnished to the SEC upon request.

 

 

64

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST MID BANCSHARES, INC.

(Registrant)

 

Date: May 9, 2023

 

 

/s/ Joseph R. Dively

 

Joseph R. Dively

President and Chief Executive Officer

 

/s/ Matthew K. Smith

 

Matthew K. Smith

Chief Financial Officer

 

65

 

Exhibit 31.1

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

I, Joseph R. Dively, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of First Mid Bancshares, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2023

 

By:

 

/s/ Joseph R. Dively

 

 

 

Joseph R. Dively

President and Chief Executive Officer

 

Exhibit 31.2

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

I, Matthew K. Smith, certify that:

1.
I have reviewed this report on Form 10-Q of First Mid Bancshares, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2023

 

By:

 

/s/ Matthew K. Smith

 

 

 

Matthew K. Smith

Chief Financial Officer

 

Exhibit 32.1

Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to

section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of First Mid Bancshares, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph R. Dively, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 9, 2023

 

/s/ Joseph R. Dively

Joseph R. Dively

President and Chief Executive Officer

 

Exhibit 32.2

Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to

In connection with the Quarterly Report of First Mid Bancshares, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew K. Smith, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 9, 2023

 

/s/ Matthew K. Smith

Matthew K. Smith

Chief Financial Officer