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Basis of Accounting and Consolidation | 9 Months Ended
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Sep. 30, 2021
Organization Consolidation And Presentation Of Financial Statements [Abstract] |
Basis of Accounting and Consolidation | Note 1 -- Basis of Accounting and Consolidation The unaudited condensed consolidated financial statements include the accounts of First Mid Bancshares, Inc. (“Company”) formerly known as First Mid-Illinois Bancshares, Inc., and its wholly owned subsidiaries: First Mid Bank & Trust, N.A. (“First Mid Bank”), First Mid Wealth Management Company, First Mid Insurance Group, Inc. (“First Mid Insurance”), and First Mid Captive, Inc. The Company’s wholly owned subsidiary, Providence Bank, was merged into First Mid Bank on May 15, 2021. All significant intercompany balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended September 30, 2021 and 2020, and all such adjustments are of a normal recurring nature. Certain amounts in the prior year’s consolidated financial statements may have been reclassified to conform to the September 30, 2021 presentation and there was no impact on net income or stockholders’ equity. The results of the interim period ended September 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021. The Company operates as a one-segment entity for financial reporting purposes. The 2020 year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and related footnote disclosures although the Company believes that the disclosures made are adequate to make the information not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on Form 10-K. COVID-19 The COVID-19 outbreak is an unprecedented event that provides significant economic uncertainty for a broad spectrum of industries. The Company is focused on supporting its customers, communities and employees during this unique operating environment. Throughout this document, the Company describes the impact COVID-19 is having, actions taken as a result of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation. Delta Bancshares Company On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Delta Bancshares Company, a Missouri corporation (“Delta”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a business combination whereby Delta will merge with and into Merger Sub, whereupon the separate corporate existence of Delta will cease and Merger Sub will continue as the surviving company and a wholly-owned subsidiary of First Mid (the “Merger”). Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $10.00 per share, of Delta issued and outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by Delta) will be converted into and become the right to receive cash and shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration payable by the Company at the closing of the Merger to Delta’s shareholders and option holders is approximately $15.2 million in cash and 2,282,511 shares of Company common stock. Delta’s outstanding stock options will fully vest upon consummation of the Merger, and all outstanding Delta options that are unexercised prior to the effective time of the Merger will be cashed out. It is anticipated that Delta’s wholly owned bank subsidiary, Jefferson Bank and Trust Company (“Jefferson Bank”), will be merged with and into First Mid Bank at a date following completion of the Merger. At the time of the bank merger, Jefferson Bank’s banking offices will become branches of First Mid Bank. As of September 30, 2021, Jefferson Bank had total consolidated assets of approximately $668 million, loans of approximately, $448 million and total deposits of approximately $511 million. The Merger is anticipated to be completed in the fourth quarter of 2021 and is subject to the approval of the appropriate regulatory authorities and the shareholders of Delta. The shareholders of Delta voted in favor of the Merger on October 28, 2021. 10 Subordinated Debt Offering On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the Company and the Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes are unsecured, subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding October 15, 2025, the Notes will bear interest at an initial rate of 3.95% per annum. From and including October 15, 2025 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 383 basis points, or such other rate as determined pursuant to the Supplemental Indenture, provided that in no event shall the applicable floating interest rate be less than zero per annum. The Company may, beginning with the interest payment date of October 15, 2025, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the Notes at any time, including prior to October 15, 2025, at the Company’s option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding the redemption date. Website The Company maintains a website at www.firstmid.com. All periodic and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission (“SEC”) can be accessed, free of charge, through this website as soon as reasonably practicable after these materials are filed with the SEC. General Litigation The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company. 2020 Loan Purchase On April 21, 2020, First Mid Bank completed an acquisition of loans in the St. Louis Metro market totaling $183,000,000. There were no loans purchased with deteriorated credit. First Mid Bank also assumed $60,000,000 of related customer deposits 2021 Loan Purchase On September 10, 2021, First Mid Bank completed an acquisition of loans in the St. Louis Metro market totaling $208,000,000. There were no loans purchased with deteriorated credit. First Mid Bank also assumed $215,000,000 of related customer deposits and recorded a core deposit intangible asset of approximately $4,848,000 that is being amortized on an accelerated basis over ten years. 11 Stock Plans At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the First Mid-Illinois Bancshares, Inc. 2017 Stock Incentive Plan (“SI Plan”). The SI Plan was implemented to succeed the Company’s 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of common stock of the Company on the terms and conditions established in the SI Plan. Following the stockholders’ approval at the 2021 annual meeting of the Company, a maximum of 399,983 shares of common stock may be issued under the SI Plan. There have been no stock options awarded under any Company plan since 2008. The Company has awarded 27,750 and 25,200 shares of restricted stock during 2021 and 2020, respectively, and 35,400 and 16,950 restricted stock units during 2021 and 2020, respectively. Employee Stock Purchase Plan At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 600,000 shares of common stock may be issued under the ESPP. As of September 30, 2021 and 2020, 8,439 shares and 11,037 shares, respectively, were issued pursuant to the ESPP. Captive Insurance Company First Mid Captive, Inc. (the “Captive"), a wholly owned subsidiary of the Company which was formed and began operations in December 2019, is a Nevada-based captive insurance company. The Captive insures against certain risks unique to operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today's insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,300,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company's consolidated financial statements and its federal income return. Bank Owned Life Insurance First Mid Bank has purchased life insurance policies on certain senior management. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts that are probable at settlement. Revenue Recognition Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), establishes a revenue recognition model for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. Most of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans and investment securities, and revenue related to mortgage servicing activities, which are subject to other accounting standards. A description of the revenue-generating activities that are within the scope of ASC 606, and included in other income in the Company’s condensed consolidated statements of income are as follows: Trust revenues. The Company generates fee income from providing fiduciary services through its subsidiary, First Mid Wealth Management Company. Fees are billed in arrears based upon the preceding period account balance. Revenue from farm management services is recorded when the service is complete, for example when crops are sold. Brokerage commissions. Revenue is recorded at the beginning of each quarter through billing to customers based on the account asset size on the last day of the previous quarter. If a withdrawal of funds takes place, a prorated refund may occur; this is reflected within the same quarter as the original billing occurred. All performance obligations are met within the same quarter that the revenue is recorded. 12 Insurance commissions. The Company’s insurance agency subsidiary, First Mid Insurance, receives commissions on premiums of new and renewed business policies. First Mid Insurance records commission revenue on direct bill policies as the cash is received. For agency bill policies, First Mid Insurance retains its commission portion of the customer premium payment and remits the balance to the carrier. In both cases, the entire performance obligation is held by the carriers. Service charges on deposits. The Company generates revenue from fees charged for deposit account maintenance, overdrafts, wire transfers, and check fees. The revenue related to deposit fees is recognized at the time the performance obligation is satisfied. ATM/debit card revenue. The Company generates revenue through service charges on the use of its ATM machines and interchange income from the use of Company issued credit and debit cards. The revenue is recognized at the time the service is used and the performance obligation is satisfied. Other income. Treasury management fees and lock box fees are received and recorded after the service performance obligation is completed. Merchant bank card fees are received from various vendors; however, the performance obligation is with the vendors. The Company records gains on the sale of loans and the sale of OREO properties after the transactions are complete and transfer of ownership has occurred. As each of the Company’s facilities is in markets with similar economies, no disaggregation of revenue is necessary. Accumulated Other Comprehensive Income The components of accumulated other comprehensive income included in stockholders’ equity as of September 30, 2021 and December 31, 2020 are as follows (in thousands):
|  | Unrealized Gain (Loss) on Securities |
September 30, 2021 |  |  |  |
Net unrealized gains on securities available-for-sale |  | $ | 7,934 |
Tax expense |  |  | (2,301 | )
Balance at September 30, 2021 |  | $ | 5,633 |
December 31, 2020 |  |  |  |
Net unrealized gains on securities available-for-sale |  | $ | 24,077 |
Tax expense |  |  | (6,982 | )
Balance at December 31, 2020 |  | $ | 17,095 |
Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the three and nine months ended September 30, 2021 and 2020, were as follows (in thousands):
|  | Amounts Reclassified from Other Comprehensive Income |  |  |
|  | Three months ended September 30, |  |  | Nine months ended September 30, |  |  |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |  |  | Affected Line Item in the Statements of Income
Realized gains on available-for-sale securities |  | $ | 11 |  |  | $ | 95 |  |  | $ | 88 |  |  | $ | 913 |  |  | Securities gains, net
Tax effect |  |  | (3 | ) |  |  | (28 | ) |  |  | (26 | ) |  |  | (265 | ) |  | Income taxes
Total reclassifications out of accumulated other comprehensive income |  | $ | 8 |  |  | $ | 67 |  |  | $ | 62 |  |  | $ | 648 |  |  | Net reclassified amount
See “Note 3 – Investment Securities” for more detailed information regarding unrealized losses on available-for-sale securities. 13 Adoption of New Accounting Guidance Accounting Standards Update 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). In August 2018, FASB issued ASU 2018-13. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, an entity will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. As ASU 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s consolidated financial statements. Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”). In June 2016, FASB issued ASU 2016-13. The provisions of ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for sale debt securities. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Management formed an internal, cross functional committee in 2017 to evaluate implementation steps and assess the impact ASU 2016-13 would have on the Company’s consolidated financial statements. The committee assigned roles and responsibilities, key tasks to complete, and established a general time-line for implementation. The Company also engaged an outside consultant to assist with the methodology review and data validation, as well as other key aspects of implementing the standard. The committee met periodically to discuss the latest developments and ensure progress was being made. In addition, the committee kept current on evolving interpretations and industry practices related to ASU 2016-13. The committee evaluated and validated data resources and different loss methodologies. Key implementation activities for 2019 included finalization of models, establishing processes and controls, development of supporting analytics and documentation, policies and disclosure, and implementing parallel processing. The Company adopted ASU 2016-13 using the modified retrospective method for financial assets measured at amortized cost-effective January 1, 2020. Results for the periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of approximately $717,000 upon adoption of ASU 2016-13. The transition adjustment included an increase to the allowance for credit losses on loans of $1.7 million and an increase to the allowance for credit losses on off-balance sheet credit exposure of $69,000. There was no allowance for credit losses recorded for held-to- maturity debt securities. The transition adjustment included corresponding increases in deferred tax assets. The Company adopted ASU 2016-13 using the prospective transition approach for financial assets considered purchased credit deteriorated ("PCD") that were previously classified as purchase credit impaired ("PCI") and accounted for under ASC 310-30 effective January 1, 2020. In accordance with the standard, the Company did not reassess whether the PCI assets met the criteria of PCD assets as of the adoption date. The amortized cost of the PCD assets were adjusted to reflect the addition of $833,000 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost) will be accreted into interest income at the effective interest rate over the remaining life of the assets. The following table illustrates the impact of ASU 2016-13 adoption (in thousands):
|  | January 1, 2020 |
|  | As reported |  |  | Pre-ASU |  |  | Impact of ASU |
|  | under ASU |  |  | 2016-13 |  |  | 2016-13 |
|  | 2016-13 |  |  | Adoption |  |  | Adoption |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 1,033 |  |  | $ | 1,146 |  |  | $ | (113 | )
Agricultural real estate |  |  | 1,323 |  |  |  | 1,093 |  |  |  | 230 |
1-4 family residential properties |  |  | 2,142 |  |  |  | 1,386 |  |  |  | 756 |
Commercial real estate |  |  | 11,739 |  |  |  | 11,198 |  |  |  | 541 |
Agricultural |  |  | 1,023 |  |  |  | 1,386 |  |  |  | (363 | )
Commercial and industrial |  |  | 9,428 |  |  |  | 9,273 |  |  |  | 155 |
Consumer |  |  | 1,895 |  |  |  | 1,429 |  |  |  | 466 |
Allowance for credit losses for all loans |  | $ | 28,583 |  |  | $ | 26,911 |  |  | $ | 1,672 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Allowance for credit losses on off-balance sheet exposures |  | $ | 69 |  |  | $ | — |  |  | $ | 69 |
14 The following table illustrates the impact of ASU 2013-13 adoption for PCD assets previously classified as PCI included in the table above (in thousands):
|  | January 1, 2020 |
|  | As reported |  |  | Pre-ASU |  |  | Impact of ASU |
|  | under ASU |  |  | 2016-13 |  |  | 2016-13 |
|  | 2016-13 |  |  | Adoption |  |  | Adoption |
Construction and land development |  | $ | 291 |  |  | $ | — |  |  | $ | 291 |
1-4 family residential properties |  |  | 48 |  |  |  | 6 |  |  |  | 42 |
Commercial real estate |  |  | 818 |  |  |  | 359 |  |  |  | 459 |
Commercial and industrial |  |  | 41 |  |  |  | — |  |  |  | 41 |
Allowance for credit losses for PCD loans |  | $ | 1,198 |  |  | $ | 365 |  |  | $ | 833 |

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