# FIRST MID BANCSHARES, INC. (FMBH) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FIRST MID BANCSHARES, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/700565/000095017023005975/fmbh-20221231.htm
Accession: 0000950170-23-005975
Filing date: 2023-03-03
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FMBH/
All MD&A years: /company/FMBH/mda/
Previous year: /company/FMBH/mda/fy2021/ (FY 2021)
Next year: /company/FMBH/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis are intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries years ended December 31, 2022, 2021, and 2020. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report.

Forward-Looking Statements

This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses, and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1955. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are identified by use of the words “believe,” ”expect,” ”intend,” ”anticipate,” ”estimate,” ”project,” or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties, including those described in Item 1A. “Risk Factors” and other sections of the Company’s Annual Report on Form 10-K and the Company’s other filings with the SEC, and changes in interest rates, general economic conditions and those in the Company’s market area, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios and the valuation of the investment portfolio, the Company’s success in raising capital, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

For the Years Ended December 31, 2022, 2021, and 2020 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, you should carefully read this entire document. These have an impact on the Company’s consolidated financial condition and results of consolidated operations.

Net income was $73.0 million, $51.5 million, and $45.3 million and diluted earnings per share were $3.60, $2.87, and $2.70 for the years ended December 31, 2022, 2021, and 2020, respectively. The following table shows the Company’s annualized performance ratios for the years ended December 31, 2022, 2021, and 2020:

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[[/GREPCENT_TABLE]]

Total assets at December 31, 2022, 2021, and 2020 were $6.74 billion, $5.99 billion, and $4.73 billion, respectively. Net loan balances increased to $4.77 billion at December 31, 2022, from $3.94 billion at December 31, 2021, and from $3.10 billion at December 31, 2020. The increase in 2022 was primarily due to approximately $418.5 million of loans acquired from Jefferson Bank. The increase in 2021 was primarily due to approximately $829 million of loans acquired from Providence Bank and $208 million of loans purchased from Stifel Bank. Of the increase in 2020, approximately $183 million was loans purchased from Stifel Bank and $168 million was PPP loans.

Total deposit balances increased to $5.26 billion at December 31, 2022 from $4.96 billion at December 31, 2021 and from $3.69 billion at December 31, 2020. The increase in 2022 was primarily due to $560 million of deposits acquired from Jefferson Bank. The increase in 2021 was primarily due to $990 million of deposits acquired from Providence Bank and $219 million of deposits acquired in association with loans purchased from Stifel Bank. The increase in 2020 was primarily due to approximately $62 million of deposits acquired from Stifel Bank for customer accounts in connection with loans acquired, increases in customers deposits for stimulus payments and PPP loan proceeds.

Net interest margin (tax effected), defined as net interest income divided by average interest-earning assets, was 3.13% for 2022, 3.21% for 2021 and 3.27% for 2020. In 2022 the decrease was primarily due to an increase in rates on interest-bearing deposits and borrowings. In 2021 the decrease was primarily due to less accretion income and a decline in interest rates.

Net interest income increased to $184.3 million in 2022 from $167.8 million in 2021 and $127.4 million in 2020. During 2022, the increase in net interest income was primarily due to the acquisition of Jefferson Bank. During 2021, the increase in net interest income resulted from growth in earning assets, primarily through acquisitions offset by growth in interest bearing liabilities with lower interest rates. During 2020, the increase in net interest income was primarily due to growth in earning assets offset by a decline in interest rates.

Non-interest income increased to $74.7 million in 2022 compared to $69.8 million in 2021 and $59.5 million in 2020. The increase in 2022 was primarily due to growth in wealth management and insurnace revenues and the acquisition of Jefferson Bank. The increase in 2021 was primarily due to the acquisition of Providence Bank. The increase in 2020 was primarily due to increases in wealth management revenues, insurance commissions and mortgage banking income.

Non-interest expenses increased to $162.9 million in 2022 compared to $155.6 million in 2021, and $111.1 million in 2020. The increase in 2022 was primarily due to the acquisition of Jefferson Bank. The increase in 2021 was primarily due to the acquisition of Providence Bank.

18

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

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Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $19.2 million at December 31, 2022 compared to $22.0 million at December 31, 2021, and $28.1 million at December 31, 2020. Repossessed Assets balances totaled $4.4 million at December 31, 2022 compared to $5.0 million at December 31, 2021, and $2.5 million at December 31, 2020. The Company’s provision for loan losses was $4.8 million for 2022, compared to $15.2 million for 2021, and $16.1 million for 2020. The decrease of provision expense in 2022 and 2021 is primarily due to a decrease in classified loans and improved economic outlook. The increase in provision in 2020 was due to the adoption of ASU 2016-13 and impacts of COVID-19 on the operations and earnings of borrowers.

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 ratio to risk weighted assets ratio at December 31, 2022, 2021, and 2020 was 12.40%, 12.51%, and 14.63%, respectively. The Company’s total capital to risk weighted assets ratio at December 31, 2022, 2021, and 2020 was 15.20%, 15.79% and 18.82%, respectively. The decrease in 2022 was primarily due to the increase in assets following the acquisition of Jefferson Bank. The decrease in these ratios during 2021 was primarily due to the increase in assets following the acquisition of Providence Bank.

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 “Liquidity” herein for a full listing of its 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 December 31, 2022, 2021, and 2020 were $1.2 billion, $1.0 billion, and $615.5 million, respectively. See Note 17 – “Commitments and Contingent Liabilities” herein for further information.

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 financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements. 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 securities as either held-to-maturity or available-for-sale. Securities classified as held-to-maturity are recorded at amortized cost. Available-for-sale and equity 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.

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

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

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

19

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

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

Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for 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 temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.

Mortgage Servicing Rights. The Company has elected to measure mortgage servicing rights under the amortization method. Using this method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation reserve, to the extent that fair value is less than the carrying amount of 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 into 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. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.

Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the Company’s consolidated balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment during 2019 as part of the goodwill impairment test and no impairment was deemed necessary.

As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the 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.

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.

20

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 11 – “Disclosures of Fair Values of Financial Instruments.”

Results of Operations

Net Interest Income

The largest source of operating 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% was used for all years. 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 $3,164,000, $2,624,000, and $2,223,000 for 2022, 2021, and 2020, respectively, were 3.08%, 3.17%, and 3.20% at December 31, 2022, 2021, and 2020, respectively. The Company’s average balances, fully tax equivalent interest income and interest expense, and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands):

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[[/GREPCENT_TABLE]]

(1)
Tax-exempt income is shown on a fully tax equivalent basis.

(2)
Nonaccrual loans have been included in the average balances. Balances are net of unaccreted discount related to loans acquired.

(3)
Includes loans held for sale

21

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 past two years (in thousands):

[[GREPCENT_TABLE]]
[["","","2022 Compared to 2021","","","2021 Compared to 2020"],["","","Increase (Decrease)","","","Increase (Decrease)"],["","","Total","","","","","","","","","Total"],["","","Change","","","Volume (1)","","","Rate (1)","","","Change","","","Volume (1)","","","Rate (1)"],["Earning assets:"],["Interest-bearing deposits","","$","135","","","$","(468",")","","$","603","","","$","83","","","$","187","","","$","(104",")"],["Federal funds sold","","","113","","","","4","","","","109","","","","(3",")","","","\u2014","","","","(3",")"],["Certificates of deposit investments","","","(19",")","","","(18",")","","","(1",")","","","(28",")","","","(24",")","","","(4",")"],["Investment securities:"],["Taxable","","","4,997","","","","2,387","","","","2,610","","","","4,222","","","","6,728","","","","(2,506",")"],["Tax-exempt","","","1,857","","","","939","","","","918","","","","2,189","","","","3,171","","","","(982",")"],["Loans (2)","","","26,335","","","","30,596","","","","(4,261",")","","","32,810","","","","31,257","","","","1,553"],["Total interest income","","","33,418","","","","33,440","","","","(22",")","","","39,273","","","","41,319","","","","(2,046",")"],["Interest-bearing liabilities:"],["Deposits:"],["Demand deposits, interest-bearing","","","9,451","","","","828","","","","8,623","","","","526","","","","1,397","","","","(871",")"],["Savings deposits","","","83","","","","35","","","","48","","","","61","","","","113","","","","(52",")"],["Time deposits","","","242","","","","(99",")","","","341","","","","(4,301",")","","","1,849","","","","(6,150",")"],["Total interest-bearing deposits","","","9,776","","","","764","","","","9,012","","","","(3,714",")","","","3,359","","","","(7,073",")"],["Securities sold under agreements to repurchase","","","1,564","","","","43","","","","1,521","","","","(257",")","","","(87",")","","","(170",")"],["FHLB advances","","","4,670","","","","3,397","","","","1,273","","","","(337",")","","","14","","","","(351",")"],["Federal funds purchased","","","9","","","","6","","","","3","","","","(10",")","","","(5",")","","","(5",")"],["Subordinated debt","","","6","","","","6","","","","\u2014","","","","3,008","","","","3,004","","","","4"],["Junior subordinated debentures","","","327","","","","5","","","","322","","","","(141",")","","","6","","","","(147",")"],["Other debt","","","\u2014","","","","\u2014","","","","\u2014","","","","(16",")","","","(8",")","","","(8",")"],["Total borrowings","","","6,576","","","","3,457","","","","3,119","","","","2,247","","","","2,924","","","","(677",")"],["Total interest expense","","","16,352","","","","4,221","","","","12,131","","","","(1,467",")","","","6,283","","","","(7,750",")"],["Net interest income","","$","17,066","","","$","29,219","","","$","(12,153",")","","$","40,740","","","$","35,036","","","$","5,704"]]
[[/GREPCENT_TABLE]]

(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)
Nonaccrual loans have been included in the average balances. Balances are net of unaccreted discount related to loans acquired.

Net interest income on a tax-effected basis increased $17.1 million or 10.0% in 2022 compared to an increase of $40.7 million or 31.4% in 2021. Net interest income on a tax-effected basis increased primarily due to the growth in average earnings assets including loans and interest-bearing deposits. The tax-effected net interest margin decreased primarily due to higher interest-bearing liability costs.

In 2022, average earning assets increased by $690.9 million, or 13.1%, and average interest-bearing liabilities increased by $618.5 million or 15.9%. These increases were primarily due to assets and liabilities acquired from Jefferson Bank. Changes in average balances are shown below:

•
Average interest-bearing cash deposits held by the Company decreased $212.0 million or 79.0% in 2022 compared to 2021. In 2021, average interest-bearing cash deposits held by the Company increased $128.1 million or 91.2% compared to 2020.

•
Average federal funds sold increased $4.4 million or 332.4% in 2022 compared to 2021. In 2021, average federal funds sold increased $0.2 million or 16.2% compared to 2020.

•
Average certificates of deposit investments decreased $0.9 million or 32.6% in 2022 compared to 2021. In 2021, average certificates of deposit investments decreased $1.2 million or 30.9% compared to 2020.

•
Average loans increased by $740.4 million or 19.6% in 2022 compared to 2021. In 2021, average loans increased by $731.4 million or 24.0% compared to 2020.

•
Average securities increased by $158.9 million or 13.0% in 2022 compared to 2021. In 2021, average securities increased by $477.8 million or 64.1% compared to 2020.

•
Average interest-bearing deposits increased by $420.3 million or 12.0% in 2022 compared to 2021. In 2021, average deposits increased by $941.3 million or 36.8% compared to 2020.

•
Average securities sold under agreements to repurchase increased by $28.5 million or 16.40% in 2022 compared to 2021. In 2021, average securities sold under agreements to repurchase decreased by $45.5 million or 20.8% compared to 2020.

•
Average borrowings and other debt increased by $169.7 million or 76.8% in 2022 compared to 2021. In 2021, average borrowings and other debt increased by $71.7 million or 48.1% compared to 2020.

22

•
Net interest margin decreased to 3.13% compared to 3.21% in 2021 and 3.27% in 2020. Asset yields increased by 16 basis points in 2022, and interest- bearing liabilities increased by 31 basis points.

Provision for Loan Losses

The provision for loan losses in 2022 was $4.8 million compared to $15.2 million in 2021 and $16.1 million in 2020. Nonperforming loans decreased to $19.2 million at December 31, 2022 from $22.0 million at December 31, 2021 and $28.1 million at December 31, 2020. The decrease in provision expense in 2022 and 2021 was primarily due to a decrease in classified loans and improved economic outlook. Net charge-offs were $1.2 million during 2022, $4.5 million during 2021 and $2.8 million during 2020. For information on loan loss experience and nonperforming loans, see “Nonperforming Loans and Repossessed Assets” and “Loan Quality and Allowance for credit losses” herein.

Other Income

An important source of the Company’s revenue is derived from other income. The following table sets forth the major components of other income for the last three years (in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Change From Prior Year"],["","","","","","","","","","","","2022","","","2021"],["","","2022","","","2021","","","2020","","","$","","","%","","","$","","","%"],["Wealth management revenues","","$","22,492","","","$","20,407","","","$","16,153","","","$","2,085","","","","10.2","%","","$","4,254","","","","26.3","%"],["Insurance commissions","","","21,622","","","","18,927","","","","17,477","","","","2,695","","","","14.2","%","","","1,450","","","","8.3","%"],["Service charges","","","9,112","","","","6,808","","","","5,862","","","","2,304","","","","33.8","%","","","946","","","","16.1","%"],["Securities gains","","","33","","","","124","","","","1,106","","","","(91",")","","","-73.4","%","","","(982",")","","","-88.8","%"],["Mortgage banking","","","1,190","","","","4,718","","","","5,075","","","","(3,528",")","","","-74.8","%","","","(357",")","","","-7.0","%"],["ATM / debit card revenue","","","12,422","","","","11,974","","","","8,962","","","","448","","","","3.7","%","","","3,012","","","","33.6","%"],["Bank owned life insurance","","","3,559","","","","3,039","","","","1,730","","","","520","","","","17.1","%","","","1,309","","","","75.7","%"],["Other","","","4,252","","","","3,770","","","","3,155","","","","482","","","","12.8","%","","","615","","","","19.5","%"],["Total other income","","$","74,682","","","$","69,767","","","$","59,520","","","$","4,915","","","","7.0","%","","$","10,247","","","","17.2","%"]]
[[/GREPCENT_TABLE]]

Total non-interest income increased to $74.7 million in 2022 compared to $69.8 million in 2021 and $59.5 million in 2020. The primary reasons for the more significant year-to-year changes in other income components are as follows:

•
Wealth management revenues increased in 2022 due to growth in customer accounts and assets under management as well as rising commodity prices, which drove higher farm management fee income. The increase in 2021 was primarily due to increases in all business lines. Total assets under management were $5.3 billion at December 31, 2022 compared to $5.1 billion at December 31, 2021 and $4.5 billion at December 31, 2020.

•
Insurance commissions increased in 2022 primarily due to an increase in commission and contingency income. During 2021 the increase was primarily due to increases in commission and fee income offset by a decline in contingency income.

•
Fees from service charges increased in 2022 was primarily due to an increase in overdraft fees and transaction account service charges and the acquisition of Jefferson Bank. The increase in 2021 was primarily due to the acquisition of Providence Bank.

•
Net securities gains in 2022 were $33,000 compared to $124,000 in 2021 and $1,106,000 in 2020. Net securities gains were less in 2022 and 2021 due to less securities being sold during the year.

•
The decrease in mortgage banking income during 2022 was due to a decline in mortgage refinancing activity and fees from loans sold in the secondary market. Loans sold balances were as follows:

•
$62.3 million (representing 422 loans) in 2022

•
$149.0 million (representing 1,011 loans) in 2021

•
$196.0 million (representing 1,315 loans) in 2020

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

•
Revenue from ATMs and debit cards increased in 2022 primarily due to the acquisition of Jefferson Bank and in 2021 primarily due to the acquisition of Providence Bank.

•
Bank owned life insurance increased during 2022 due to $15.8 million of bank owned life insurance added through the acquisition of Jefferson Bank. The increase in 2021 was due to $30 million of bank owned life insurance added by First Mid Bank and $30.3 million of bank owned life insurance acquired in the acquisition of Providence Bank.

•
Other income increased during 2022 primarily due to the acquisition of Jefferson Bank and a gain realized on the termination of derivatives. Other income increased during 2021 primarily due to the acquisition of Providence Bank offset by a swap upfront fee received in 2020 that did not recur in 2021.

23

Other Expense

The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations. The following table sets forth the major components of other expense for the last three years (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Change From Prior Year"],["","","","","","","","","","","","2022","","","2020"],["","","2022","","","2021","","","2020","","","$","","","%","","","$","","","%"],["Salaries and benefits","","$","98,594","","","$","89,660","","","$","66,452","","","$","8,934","","","","10.0","%","","$","23,208","","","","34.9","%"],["Occupancy and equipment","","","24,257","","","","21,546","","","","16,708","","","","2,711","","","","12.6","%","","","4,838","","","","29.0","%"],["Other real estate owned, net","","","330","","","","3,866","","","","42","","","","(3,536",")","","","-91.5","%","","","3,824","","","","9104.8","%"],["FDIC insurance assessment expense","","","1,805","","","","1,604","","","","1,309","","","","201","","","","12.5","%","","","295","","","","22.5","%"],["Amortization of other intangibles","","","6,290","","","","5,391","","","","5,062","","","","899","","","","16.7","%","","","329","","","","6.5","%"],["Stationery and supplies","","","1,295","","","","1,161","","","","1,080","","","","134","","","","11.5","%","","","81","","","","7.5","%"],["Legal and professional","","","6,996","","","","6,730","","","","5,427","","","","266","","","","4.0","%","","","1,303","","","","24.0","%"],["Marketing and promotion","","","2,999","","","","3,603","","","","1,616","","","","(604",")","","","-16.8","%","","","1,987","","","","123.0","%"],["ATM / debit card expense","","","4,300","","","","3,116","","","","2,290","","","","1,184","","","","38.0","%","","","826","","","","36.1","%"],["Other operating expenses","","","15,995","","","","18,902","","","","11,101","","","","(2,907",")","","","-15.4","%","","","7,801","","","","70.3","%"],["Total other expense","","$","162,861","","","$","155,579","","","$","111,087","","","$","7,282","","","","4.7","%","","$","44,492","","","","40.1","%"]]
[[/GREPCENT_TABLE]]

Total non-interest expense increased to $162.9 million in 2022 from $155.6 million in 2021 and $111.1 million in 2020. The primary reasons for the more significant year-to-year changes in other expense components are as follows:

•
Salaries and employee benefits, the largest component of other expense, increased primarily due to an increase in incentive compensation and commission, 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. The increase in 2021 was due to additional employees from the acquisition of Providence Bank, merit increases in 2021 for continuing employees and an increase in incentive compensation, commissions, and share-based compensation. There were 1,043 full-time equivalent employees at December 31, 2022, compared to 965 at December 31, 2021, and 824 at December 31, 2020.

•
Occupancy and equipment expense increased primarily due to increases in depreciation, equipment and other property related expenses from the acquisition of Jefferson Bank, offset by decreases in data processing expense. The increase in 2021 was primarily due to additional properties added in the acquisition of Providence Bank and increases in expense for software and data processing.

•
Net other real estate owned expense decreased in 2022 primarily due to more properties sold at a net gain compared to properties sold at a net loss or written down during 2021. The increase in 2021 was primarily due to properties added in the acquisition of Providence Bank that were sold at prices lower than recorded book value and properties from branch operations that were closed during 2021 and moved to ORE and subsequently written down.

•
FDIC insurance expense increased due to the additional assets added with the acquisition of Jefferson Bank. The increase in 2021 was due to the additional assets added with the acquisition of Providence Bank offset by lower assessment rates.

•
Amortization of other intangibles increased during 2022 primarily due to additional core deposit intangibles added from the acquisition of Jefferson Bank. The increase in 2021 was primarily due to additional core deposit intangibles added from the acquisition of Providence Bank and deposits added associated with the Stifel loan purchase.

•
ATM and debit card expenses increased primarily due to an increase in electronic transactions following the acquisition of Jefferson Bank. The increase during 2022 was primarily due to an increase in electronic transactions following the acquisition of Providence Bank.

•
Other operating expenses decreased during 2022 due to less costs to acquire Delta compared to costs to acquire LINCO offset by additional expenses from the operation of Jefferson Bank. Other operation expenses increased during 2021 primarily due to the acquisition of Providence Bank.

•
On a net basis, all other categories of operating expenses increased during 2022 primarily due to increased costs associated with the operation of Jefferson Bank. The increase during 2021 was primarily due to an increase in fees associated with the acquisition of Providence Bank.

Income Taxes

Income tax expense amounted to $18.3 million in 2022 compared to $15.3 million in 2021, and $14.5 million in 2020. Effective tax rates were 20.1% for 2022, 22.9% for 2021, and 24.2% for 2020. The Company files U.S. federal and state of Illinois, Indiana, and Missouri income tax returns. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2019.

24

Analysis of 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 for the last three years (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2022","","","2021","","","2020"],["","","","","","Weighted","","","","","","Weighted","","","","","","Weighted"],["","","Amortized","","","Average","","","Amortized","","","Average","","","Amortized","","","Average"],["","","Cost","","","Yield","","","Cost","","","Yield","","","Cost","","","Yield"],["U.S. Treasury securities and obligations of U.S. government corporations and agencies","","$","252,934","","","","1.28","%","","$","213,599","","","","1.22","%","","$","132,083","","","","1.25","%"],["Obligations of states and political subdivisions","","","347,409","","","","2.31","%","","","383,991","","","","2.40","%","","","237,886","","","","2.72","%"],["Mortgage-backed securities: GSE residential","","","744,636","","","","1.69","%","","","799,456","","","","1.58","%","","","479,470","","","","1.92","%"],["Other securities","","","90,347","","","","3.41","%","","","32,575","","","","4.30","%","","","10,740","","","","5.22","%"],["Total securities","","$","1,435,326","","","","1.87","%","","$","1,429,621","","","","1.80","%","","$","860,179","","","","2.08","%"]]
[[/GREPCENT_TABLE]]

At December 31, 2022, the amortized cost of the Company’s investment portfolio increased by $5.7 million from December 31, 2021 primarily due to securities obtained in the acquisition of Jefferson Bank. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed.

The table below presents the credit ratings as of December 31, 2022 for certain investment securities (in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","Average Credit Rating of Fair Value at December 31, 2022 (1)"],["","","Amortized","","","Estimated","","","","","","","","","","","","","","","","","","Not"],["","","Cost","","","Fair Value","","","AAA","","","AA +/-","","","A +/-","","","BBB +/-","",""," BBB -","","","Rated"],["Available-for-sale:"],["U.S. Treasury securities and obligations of U.S. government corporations and agencies","","$","252,934","","","$","220,527","","","$","25,510","","","$","194,274","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","744"],["Obligations of state and political subdivisions","","","347,409","","","","287,698","","","","36,436","","","","206,106","","","","44,757","","","","\u2014","","","","\u2014","","","","400"],["Mortgage-backed securities (2)","","","744,636","","","","627,880","","","","988","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","626,892"],["Other securities","","","87,393","","","","82,880","","","","3,000","","","","10,071","","","","28,595","","","","4,600","","","","\u2014","","","","36,613"],["Total available-for-sale","","$","1,432,372","","","$","1,218,985","","","$","65,934","","","$","410,451","","","$","73,352","","","$","4,600","","","$","\u2014","","","$","664,649"],["Held-to-maturity:"],["Other securities","","$","2,954","","","$","2,954","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","2,954"],["Equity securities:"],["Federal Agricultural Mtg Corp","","$","84","","","$","311","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","311"],["(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."]]
[[/GREPCENT_TABLE]]

25

Loans

The loan portfolio (net of unearned interest) is the largest category of the Company’s earning assets. The following table summarizes the composition of the loan portfolio, including loans held for sale, for the last five years (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","","","% Outstanding"],["","","2022","","","Loans","","","2021","","","2020","","","2019","","","2018"],["Construction and land development","","$","144,264","","","","3.0","%","","$","145,118","","","$","122,479","","","$","94,142","","","$","50,619"],["Agricultural real estate","","","410,327","","","","8.5","%","","","279,272","","","","254,341","","","","240,241","","","","231,700"],["1-4 family residential properties","","","440,180","","","","9.1","%","","","400,313","","","","325,762","","","","336,427","","","","373,518"],["Multifamily residential properties","","","294,346","","","","6.1","%","","","298,942","","","","189,632","","","","153,948","","","","184,051"],["Commercial real estate","","","2,030,011","","","","42.1","%","","","1,666,198","","","","1,174,300","","","","995,702","","","","906,850"],["Loans secured by real estate","","","3,319,128","","","","68.8","%","","","2,789,843","","","","2,066,514","","","","1,820,460","","","","1,746,738"],["Agricultural loans","","","166,838","","","","3.5","%","","","151,484","","","","137,352","","","","136,124","","","","135,877"],["Commercial and industrial loans","","","1,082,960","","","","22.4","%","","","832,008","","","","738,313","","","","528,973","","","","557,011"],["Consumer loans","","","97,775","","","","2.0","%","","","78,442","","","","78,002","","","","83,183","","","","91,516"],["All other loans","","","159,511","","","","3.3","%","","","143,746","","","","118,238","","","","126,607","","","","113,377"],["Total loans","","$","4,826,212","","","","100.0","%","","$","3,995,523","","","$","3,138,419","","","$","2,695,347","","","$","2,644,519"]]
[[/GREPCENT_TABLE]]

Loan balances increased by $830.7 million or 20.8% from December 31, 2021 to December 31, 2022 which included approximately $418.5 million of loans acquired, before purchase accounting adjustments, from Jefferson Bank. Loan balances increased by $857.1 million or 27.3% from December 31, 2020 to December 31, 2021 of which approximately $829 million were loans acquired from Providence Bank and $208 million were loans purchases from Stifel Bank. The balances of loans sold into the secondary market were $62.3 million in 2022 compared to $149.0 million in 2021. The balance of real estate loans held for sale, included in the balances shown above, amounted to $338,000 and $2,748,000 as of December 31, 2022 and 2021, 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.

First Mid Bank 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 December 31, 2022 and 2021, First Mid Bank did have industry loan concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","","December 31, 2021"],["","","Principal","","","% Outstanding","","","Principal","","","% Outstanding"],["","","balance","","","Loans","","","balance","","","Loans"],["Other grain farming","","$","445,241","","","","9.23","%","","$","297,394","","","","7.44","%"],["Lessors of non-residential buildings","","","956,120","","","","19.81","%","","","696,730","","","","17.44","%"],["Lessors of residential buildings and dwellings","","","453,219","","","","9.39","%","","","468,362","","","","11.72","%"],["Hotels and motels","","","209,837","","","","4.35","%","","","159,410","","","","3.99","%"]]
[[/GREPCENT_TABLE]]

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

The following table presents the balance of loans outstanding as of December 31, 2022, by contractual maturities (in thousands):

[[GREPCENT_TABLE]]
[["","","Maturity (1)"],["","","One year or less(2)","","","Over 1 through 5 years","","","Over 5 years","","","Total"],["Construction and land development","","$","37,079","","","$","58,531","","","$","48,654","","","$","144,264"],["Agricultural real estate","","","12,103","","","","130,561","","","","267,663","","","","410,327"],["1-4 family residential properties","","","14,229","","","","123,451","","","","302,500","","","","440,180"],["Multifamily residential properties","","","16,705","","","","218,583","","","","59,058","","","","294,346"],["Commercial real estate","","","118,619","","","","1,016,935","","","","894,457","","","","2,030,011"],["Loans secured by real estate","","","198,735","","","","1,548,061","","","","1,572,332","","","","3,319,128"],["Agricultural loans","","","128,848","","","","33,365","","","","4,625","","","","166,838"],["Commercial and industrial loans","","","245,615","","","","548,070","","","","289,275","","","","1,082,960"],["Consumer loans","","","7,909","","","","62,287","","","","27,579","","","","97,775"],["All other loans","","","30,234","","","","24,439","","","","104,838","","","","159,511"],["Total loans","","$","611,341","","","$","2,216,222","","","$","1,998,649","","","$","4,826,212"]]
[[/GREPCENT_TABLE]]

(1)
Based upon remaining contractual maturity.

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

26

As of December 31, 2022, loans with maturities over one year consisted of approximately $2.9 billion in fixed rate loans and approximately $1.3 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 “troubled debt restructurings”. Repossessed assets include primarily repossessed real estate and automobiles.

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

Troubled debt restructurings 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 credit 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 (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2022","","","2021","","","2020","","","2019","","","2018"],["Nonaccrual loans","","$","15,956","","","$","18,105","","","$","23,750","","","$","25,118","","","$","27,298"],["Troubled debt restructurings which are performing in accordance with revised terms","","","3,214","","","","3,931","","","","4,373","","","","2,700","","","","2,451"],["Total nonperforming loans","","","19,170","","","","22,036","","","","28,123","","","","27,818","","","","29,749"],["Repossessed assets","","","4,369","","","","5,019","","","","2,493","","","","3,720","","","","2,595"],["Total nonperforming loans and repossessed assets","","$","23,539","","","$","27,055","","","$","30,616","","","$","31,538","","","$","32,344"],["Nonperforming loans to loans, before allowance for credit losses","","","0.40","%","","","0.55","%","","","0.90","%","","","1.03","%","","","1.12","%"],["Nonperforming loans and repossessed assets to loans, before allowance for credit losses","","","0.49","%","","","0.68","%","","","0.98","%","","","1.17","%","","","1.22","%"]]
[[/GREPCENT_TABLE]]

The $2.1 million decrease in nonaccrual loans during 2022 resulted from the net of $5.4 million of loans put on nonaccrual status, offset by $0.4 million of loans transferred to other real estate owned, $0.3 million of loans charged off and $6.8 million of loans becoming current or paid-off.

The following table summarizes the composition of nonaccrual loans (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","","December 31, 2021"],["","","Balance","","","% of Total","","","Balance","","","% of Total"],["Construction and land development","","$","14","","","","0.1","%","","$","25","","","","0.1","%"],["Agricultural real estate","","","1,258","","","","7.9","%","","","336","","","","1.9","%"],["1-4 family residential properties","","","4,943","","","","31.0","%","","","5,252","","","","29.0","%"],["Multifamily residential properties","","","672","","","","4.2","%","","","1,982","","","","11.0","%"],["Commercial real estate","","","7,640","","","","47.8","%","","","7,920","","","","43.7","%"],["Loans secured by real estate","","","14,527","","","","91.0","%","","","15,515","","","","85.7","%"],["Agricultural loans","","","57","","","","0.4","%","","","560","","","","3.1","%"],["Commercial and industrial loans","","","1,098","","","","6.9","%","","","1,851","","","","10.2","%"],["Consumer loans","","","274","","","","1.7","%","","","179","","","","1.0","%"],["Total loans","","$","15,956","","","","100.0","%","","$","18,105","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

27

Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $103,000, $308,000 and $575,000 for the years ended December 31, 2022, 2021, and 2020, respectively.

The $0.7 million decrease in repossessed assets during 2022 resulted from the net of $.5 million of additional assets repossessed, $1 million of repossessed assets sold and a $0.2 million of writedowns on existing assets. The following table summarizes the composition of repossessed assets (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","","December 31, 2021"],["","","Balance","","","% of Total","","","Balance","","","% of Total"],["Construction and land development","","$","2,763","","","","63.2","%","","$","3,004","","","","59.9","%"],["1-4 family residential properties","","","108","","","","2.5","%","","","12","","","","0.2","%"],["Commercial real estate","","","1,390","","","","31.8","%","","","1,968","","","","39.2","%"],["Total real estate","","","4,261","","","","97.5","%","","","4,984","","","","99.3","%"],["Consumer loans","","","108","","","","2.5","%","","","35","","","","0.7","%"],["Total repossessed collateral","","$","4,369","","","","100.0","%","","$","5,019","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Repossessed assets sold during 2022 resulted in net gains of $36,000 related to real estate asset sales and $2,000 of net losses related to other assets sales. The Company also recognized $61,000 of deferred gains and recorded $236,000 of write downs on three real estate properties owned.

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 credit losses is the charge against current earnings that is determined by management 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, 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. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for credit losses. Management considers collateral values and guarantees in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net loan losses, 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 consumers’ ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. Management considers the allowance for credit 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 December 31, 2022, the Company’s loan portfolio included $577.2 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $445.2 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $146.4 million from $430.8 million at December 31, 2021 while loans concentrated in other grain farming increased $147.8 million from $297.4 million at December 31, 2021. 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 $209.8 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 $956.1 million of loans to lessors of non-residential buildings and $453.2 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.

28

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. On a quarterly basis, the Board of Directors and management review the status of problem loans and determine a best estimate of the allowance. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for credit losses.

Analysis of the allowance for credit losses for the past five years and of changes in the allowance for these periods is summarized as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2022","","","2021","","","2020","","","2019","","","2018"],["Average loans outstanding, net of unearned income","","$","4,518,566","","","$","3,778,142","","","$","3,003,488","","","$","2,598,718","","","$","2,276,500"],["Adjustment for adoption of ASU 2016-13","","","\u2014","","","","\u2014","","","","1,672","","","","\u2014","","","","\u2014"],["Allowance-beginning of period","","","54,655","","","","41,910","","","","28,583","","","","26,189","","","","19,977"],["Initial allowance on loans purchased with credit deterioration","","","863","","","","2,074","","","","\u2014","","","","\u2014","","","","\u2014"],["Charge-offs:"],["Construction and land development","","","2","","","","205","","","","13","","","","\u2014","","","","10"],["Agricultural real estate","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["1-4 family residential properties","","","191","","","","371","","","","393","","","","1,477","","","","1,111"],["Commercial real estate","","","414","","","","535","","","","830","","","","1,743","","","","170"],["Agricultural loans","","","93","","","","\u2014","","","","\u2014","","","","24","","","","93"],["Commercial and industrial loans","","","870","","","","3,118","","","","1,991","","","","1,828","","","","832"],["Consumer loans","","","1,380","","","","1,405","","","","617","","","","1,254","","","","777"],["Total charge-offs","","","2,950","","","","5,634","","","","3,844","","","","6,326","","","","2,993"],["Recoveries:"],["Construction and land development","","","100","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Agricultural real estate","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["1-4 family residential properties","","","359","","","","211","","","","299","","","","91","","","","102"],["Commercial real estate","","","385","","","","60","","","","169","","","","12","","","","\u2014"],["Agricultural loans","","","54","","","","1","","","","\u2014","","","","\u2014","","","","\u2014"],["Commercial and industrial loans","","","208","","","","139","","","","179","","","","155","","","","145"],["Consumer loans","","","613","","","","743","","","","421","","","","357","","","","291"],["Total recoveries","","","1,719","","","","1,154","","","","1,068","","","","615","","","","538"],["Net charge-offs","","","1,231","","","","4,480","","","","2,776","","","","5,711","","","","2,455"],["Provision for loan losses","","","4,806","","","","15,151","","","","16,103","","","","6,433","","","","8,667"],["Allowance-end of period","","$","59,093","","","$","54,655","","","$","41,910","","","$","26,911","","","$","26,189"],["Ratio of annualized net charge-offs to average loans","","","0.03","%","","","0.12","%","","","0.09","%","","","0.22","%","","","0.11","%"],["Ratio of allowance for credit losses to loans outstanding (less unearned interest at end of period)","","","1.22","%","","","1.37","%","","","1.34","%","","","1.00","%","","","0.99","%"],["Ratio of allowance for credit losses to nonperforming loans","","","308.3","%","","","248.0","%","","","149.0","%","","","96.7","%","","","88.0","%"]]
[[/GREPCENT_TABLE]]

The ratio of the allowance for credit losses to nonperforming loans was 308.3% as of December 31, 2022 compared to 248.0% as of December 31, 2021. The increase in this ratio is primarily due to a decline in nonperforming loans. Management believes that the overall estimate of the allowance for credit losses appropriately accounts for probable losses attributable to current exposures.

During 2022, the Company had net charge-offs of $1,231,000 compared to $4,480,000 in 2021. During 2022, there were significant charge-offs of two commercial real estate loans to one borrower of $271,000 and significant charge-offs of two commercial operating loans to two borrowers of $739,000. During 2021, there were significant charge-offs of two commercial real estate loans to two borrowers of $661,000 and significant charge-offs of five commercial operating loans to three borrowers of $2.9 million.

At December 31, 2022, the allowance for credit losses amounted to $59.1 million or 1.22% of total loans. At December 31, 2021, the allowance for credit losses amounted to $54.7 million or 1.37% of total loans. The allowance is allocated to the individual loan categories by a specific allocation for all classified loans plus a percentage of loans not classified based on historical losses and other factors.

29

The allowance for credit losses, in management's judgment, was allocated as follows to cover probable loan losses (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","","December 31, 2021","","","December 31, 2020"],["","","","","","% of loans to","","","","","","% of loans to","","","","","","% of loans to"],["","","Allowance for credit losses","","","total loans","","","Allowance for credit losses","","","total loans","","","Allowance for credit losses","","","total loans"],["Construction and land development","","$","2,250","","","","3.0","%","","$","1,743","","","","3.6","%","","$","1,666","","","","3.9","%"],["Agriculture real estate","","","1,433","","","","8.5","%","","","1,257","","","","7.0","%","","","1,084","","","","8.1","%"],["1-4 family residential","","","3,742","","","","9.1","%","","","2,330","","","","10.0","%","","","2,322","","","","10.4","%"],["Commercial real estate","","","28,157","","","","48.2","%","","","26,246","","","","49.2","%","","","19,660","","","","43.4","%"],["Agricultural loans","","","585","","","","3.5","%","","","983","","","","3.8","%","","","1,526","","","","4.4","%"],["Commercial and industrial","","","20,808","","","","25.7","%","","","19,241","","","","24.4","%","","","13,485","","","","27.3","%"],["Consumer","","","2,118","","","","2.0","%","","","2,855","","","","2.0","%","","","2,167","","","","2.5","%"],["Total allocated","","","59,093","","","","100.0","%","","","54,655","","","","100.0","%","","","41,910","","","","100.0","%"],["Unallocated","","","\u2014","","","NA","","","","\u2014","","","NA","","","","\u2014","","","NA"],["Allowance at end of year","","$","59,093","","","","100.0","%","","$","54,655","","","","100.0","%","","$","41,910","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","December 31, 2019","","","December 31, 2018"],["","","","","","% of loans to","","","","","","% of loans to"],["","","Allowance for credit losses","","","total loans","","","Allowance for credit losses","","","total loans"],["Construction and land development","","$","1,146","","","","3.5","%","","$","561","","","","1.9","%"],["Agriculture real estate","","","1,093","","","","8.9","%","","","1,246","","","","8.8","%"],["1-4 family residential","","","1,386","","","","12.5","%","","","1,504","","","","14.1","%"],["Commercial real estate","","","11,198","","","","42.6","%","","","11,102","","","","41.3","%"],["Agricultural loans","","","1,386","","","","5.1","%","","","951","","","","5.1","%"],["Commercial and industrial","","","9,273","","","","24.3","%","","","9,893","","","","25.3","%"],["Consumer","","","1,429","","","","3.1","%","","","932","","","","3.5","%"],["Total allocated","","","26,911","","","","100.0","%","","","26,189","","","","100.0","%"],["Unallocated","","","\u2014","","","NA","","","","\u2014","","","NA"],["Allowance at end of year","","$","26,911","","","","100.0","%","","$","26,189","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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 years ended December 31, 2022, 2021, and 2020 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2022","","","2021","","","2020"],["","","Average Balance","","","Weighted Average Rate","","","Average Balance","","","Weighted Average Rate","","","Average Balance","","","Weighted Average Rate"],["Demand deposits:"],["Non-interest-bearing","","$","1,356,912","","","","\u2014","%","","$","1,164,877","","","","\u2014","%","","$","777,435","","","","\u2014","%"],["Interest-bearing","","","2,598,480","","","","0.53","%","","","2,217,281","","","","0.19","%","","","1,557,264","","","","0.24","%"],["Savings","","","666,334","","","","0.09","%","","","611,379","","","","0.08","%","","","469,276","","","","0.09","%"],["Time deposits","","","655,240","","","","0.69","%","","","671,056","","","","0.64","%","","","531,834","","","","1.61","%"],["Total average deposits","","$","5,276,966","","","","0.36","%","","$","4,664,593","","","","0.19","%","","$","3,335,809","","","","0.38","%"]]
[[/GREPCENT_TABLE]]

The following table sets forth the high and low month-end balances for the years ended December 31, 2022, 2021, and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","2022","","","2021","","","2020"],["High month-end balances of total deposits","","$","5,487,305","","","$","5,000,084","","","$","3,692,784"],["Low month-end balances of total deposits","","","4,904,973","","","","3,725,741","","","","2,873,260"]]
[[/GREPCENT_TABLE]]

In 2022, the average balance of deposits increased by $612.4 million from 2021. The increase in 2022 was primarily due to deposits added in the acquisition of Jefferson Bank offset by maturing time deposits. Also from 2021 and 2022, average non-interest bearing deposits increased by $192.0 million, interest-bearing deposits increased by $381.2 million, savings accounts increased by $55.0 million, and time deposits decreased by $15.8 million. In 2021, the average balance of deposits increased by $1,328.8 million from 2020. The increase in 2021 was primarily due to approximately $990 million of deposits acquired from Providence Bank and $219 million of deposits acquired in association with loans purchased from Stifel Bank. Also from 2020 to 2021, average non-interest bearing deposits increased by $387.4 million, interest-bearing deposits increased by $660.0 million, savings accounts increased by $142.1 million, and time deposits increased by $139.2 million.

30

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 (in thousands):

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2022","","","2021","","","2020"],["3 months or less","","$","80,856","","","$","86,790","","","$","72,945"],["Over 3 through 6 months","","","31,771","","","","57,777","","","","49,710"],["Over 6 through 12 months","","","127,405","","","","82,644","","","","88,682"],["Over 12 months","","","183,597","","","","75,568","","","","72,070"],["Total","","$","423,629","","","$","302,779","","","$","283,407"]]
[[/GREPCENT_TABLE]]

The balance of time deposits of $100,000 or more increased $120.9 million from December 31, 2021 to December 31, 2022. The increase was primarily due to time deposits acquired from Jefferson Bank. The balance of time deposits of $100,000 or more increased $19.4 million from December 31, 2020 to December 31, 2021. The increase in 2021 was primarily due to time deposits acquired from Providence Bank.

In 2022 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of $319.4 million and $291.4 million in various checking accounts and time deposits as of December 31, 2022 and 2021, respectively. These balances are subject to change depending upon the cash flow needs of the public entity.

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 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, subordinated debt and junior subordinated debentures.

31

Information relating to securities sold under agreements to repurchase and other borrowings as December 31, 2022, 2021, and 2020 is presented below (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","2022","","","2021","","","2020"],["Securities sold under agreements to repurchase","","$","221,414","","","$","146,268","","","$","206,937"],["Federal Home Loan Bank advances:"],["FHLB-overnite","","","65,000","","","","\u2014","","","","\u2014"],["Fixed term \u2013 due in one year or less","","","110,040","","","","25,113","","","","18,984"],["Fixed term \u2013 due after one year","","","290,031","","","","61,333","","","","74,985"],["Subordinated debt","","","94,553","","","","94,400","","","","94,253"],["Junior subordinated debentures","","","19,364","","","","19,195","","","","19,027"],["Total","","$","800,402","","","$","346,309","","","$","414,186"],["Average interest rate at end of period","","","2.52","%","","","1.78","%","","","0.81","%"],["Maximum outstanding at any month-end:"],["Securities sold under agreements to repurchase","","$","257,061","","","$","212,503","","","$","350,288"],["Federal funds purchased","","","10,000","","","","\u2014","","","","8,000"],["Federal Home Loan Bank advances:"],["FHLB-overnite","","","310,000","","","","\u2014","","","","\u2014"],["Fixed term \u2013 due in one year or less","","","160,048","","","","30,180","","","","34,969"],["Fixed term \u2013 due after one year","","","290,031","","","","97,877","","","","104,974"],["Subordinated debt","","","94,553","","","","94,400","","","","94,256"],["Junior subordinated debentures","","","19,364","","","","19,195","","","","19,027"],["Debt:"],["Debt due in one year or less","","","\u2014","","","","\u2014","","","","5,000"],["Averages for the period (YTD):"],["Securities sold under agreements to repurchase","","$","202,242","","","$","173,762","","","$","219,298"],["Federal funds purchased","","","481","","","","\u2014","","","","525"],["Federal Home Loan Bank advances:"],["FHLB-overnite","","","100,084","","","","\u2014","","","","1,831"],["Fixed term \u2013 due in one year or less","","","94,247","","","","22,751","","","","24,858"],["Fixed term \u2013 due after one year","","","82,070","","","","84,766","","","","79,999"],["Subordinated debt","","","94,471","","","","94,321","","","","22,403"],["Junior subordinated debentures","","","19,275","","","","19,105","","","","18,936"],["Debt:"],["Loans due in one year or less","","","14","","","","\u2014","","","","656"],["Total","","$","592,884","","","$","394,705","","","$","370,338"],["Average interest rate during the period","","","2.16","%","","","1.58","%","","","1.07","%"]]
[[/GREPCENT_TABLE]]

Securities sold under agreements to repurchase increased $75.1 million during 2022 primarily due to balances acquired from Jefferson Bank, the seasonal demands in balances and change in cash flow needs of various customers. FHLB advances represent borrowings by the First Mid Bank to economically fund loan demand. At December 31, 2022 FHLB advances totaled $465 million with a weighted-average interest rate of 3.48% and maturities from January 2023 to December 2032. At December 31, 2021 FHLB advances totaled $86 million with a weighted-average interest rate of 1.66% and maturities from March 2022 to December 2029.

The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $15 million. The balance on this line of credit was $0 as of December 31, 2022. This loan was renewed on April 8, 2022 for one year as a revolving credit agreement with a maximum available balance of $15 million. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of First Mid Bank. The Company and its subsidiary banks were in compliance with the existing covenants at December 31, 2022 and 2021.

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. At December 31, 2022, the recorded balance of the subordinated notes was $94,553,000.

32

On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through First Mid-Illinois Statutory Trust II (“Trust II”), a statutory business trust and wholly owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common equity of Trust II, a total of $10,310,000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points) after June 15, 2011 (6.37% and 1.80% at December 31, 2022 and 2021, respectively). The net proceeds to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield Bancorp, Inc. in 2006.

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 (6.47% and 2.05% at December 31, 2022 and 2021, 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 (6.62% and 1.90% at December 31, 2022 and 2021, 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. 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 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.” On December 10, 2013, the federal banking agencies issued final rules to implement the prohibitions required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry regarding the adverse impact the final rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies approved a final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities. Under the final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets 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. Although the Volcker Rule impacts many large banking entities, 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.

Interest Rate Sensitivity

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

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

33

The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at December 31, 2022 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","Rate Sensitive Within"],["","","1 year","","","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","","$","14,021","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","14,021","","","$","14,021"],["Certificates of deposit investments","","","980","","","","490","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","1,470","","","","1,470"],["Taxable investment securities","","","4,609","","","","98,736","","","","96,837","","","","81,678","","","","104,070","","","","552,361","","","","938,291","","","","938,291"],["Nontaxable investment securities","","","(53,820",")","","","5,277","","","","(658",")","","","7,362","","","","11,291","","","","314,507","","","","283,959","","","","283,959"],["Loans","","","1,637,284","","","","696,937","","","","655,235","","","","727,657","","","","738,360","","","","370,739","","","","4,826,212","","","","4,460,999"],["Total","","$","1,603,074","","","$","801,440","","","$","751,414","","","$","816,697","","","$","853,721","","","$","1,237,607","","","$","6,063,953","","","$","5,698,740"],["Interest-bearing liabilities:"],["Savings and NOW accounts","","$","513,747","","","$","176,242","","","$","176,242","","","$","176,242","","","$","176,242","","","$","807,267","","","$","2,025,982","","","$","2,025,982"],["Money market accounts","","","787,564","","","","71,231","","","","71,231","","","","71,231","","","","71,231","","","","195,238","","","","1,267,726","","","","1,267,726"],["Other time deposits","","","409,987","","","","200,771","","","","32,568","","","","15,970","","","","47,126","","","","357","","","","706,779","","","","707,526"],["Short-term borrowings/debt","","","221,414","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","221,414","","","","286,262"],["Long-term borrowings/debt","","","194,404","","","","60,029","","","","104,555","","","","\u2014","","","","150,000","","","","70,000","","","","578,988","","","","499,466"],["Total","","$","2,127,116","","","$","508,273","","","$","384,596","","","$","263,443","","","$","444,599","","","$","1,072,862","","","$","4,800,889","","","$","4,786,962"],["Rate sensitive assets \u2013 rate sensitive liabilities","","$","(524,042",")","","$","293,167","","","$","366,818","","","$","553,254","","","$","409,122","","","$","164,745","","","$","1,263,064"],["Cumulative GAP","","$","(524,042",")","","$","(230,875",")","","$","135,943","","","$","689,197","","","$","1,098,319","","","$","1,263,064"],["Cumulative amounts as % of total rate sensitive assets","","","(8.6",")%","","","4.8","%","","","6.0","%","","","9.1","%","","","6.7","%","","","2.7","%"],["Cumulative ratio","","","(8.6",")%","","","(3.8",")%","","","2.2","%","","","11.4","%","","","18.1","%","","","20.8","%"]]
[[/GREPCENT_TABLE]]

The static GAP analysis shows that at December 31, 2022, 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 December 31, 2022, the Company’s stockholders' equity had decreased approximately $0.7 million, or 0.1%, to $633.2 million from $633.9 million as of December 31, 2021. During 2022, net income contributed $73.0 million to equity before the payment of dividends to stockholders of $17.8 million. The change in market value of available-for-sale investment securities decreased stockholders' equity by $150.7 million, net of tax.

Stock Plans

Deferred Compensation Plan. The Company follows the provisions of the Emerging Issues Task Force Issue No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested” (“EITF 97-14”), which was codified into ASC 710-10, for purposes of the First Mid Bancshares, Inc. Amended and Restated Deferred Compensation Plan (“DCP”). At December 31, 2022, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $4,799,000 as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $4,799,000 as an equity instrument (deferred compensation).

The DCP was effective as of June 1984. The purpose of the DCP is to enable directors, advisory directors, and key employees the opportunity to defer a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. The Company invests all participants’ deferrals in shares of common stock. Dividends paid on the shares are credited to participants’ DCP accounts and invested in additional shares. The Company issued, pursuant to DCP:

•
8,378 common shares during 2022

•
9,513 common shares during 2021, and

•
12,921 common shares during 2020

First Retirement and Savings Plan. The First Retirement Savings Plan ("401(k) plan") was effective beginning in 1985. Employees are eligible to participate in the 401(k) plan after three months of service with the Company. The Company offers common stock as an investment option for participants of the 401(k) plan. Beginning in 2016, shares for the 401(k) plan were purchased in the open market instead of being issued by the Company.

Dividend Reinvestment Plan. The Dividend Reinvestment Plan (“DRIP”) was effective as of October 1994. The purpose of the DRIP is to provide participating stockholders with a simple and convenient method of investing cash dividends paid by the Company on its common and preferred shares into newly issued common shares of the Company. All holders of record of the Company’s common or preferred stock are eligible to voluntarily participate in the DRIP. The DRIP is administered by Computershare Investor Services, LLC and offers a way to increase one’s investment in the Company. Of the $17,830,000 in common stock dividends paid during 2022, $0 or 0.0% was reinvested into shares of common stock of the Company through the DRIP. Approximately $0, $333,000 and $680,000 of common stock was issued through reinvestment of dividends during 2022, 2021, and 2020, respectively. Beginning in mid-2021, shares for dividend reinvestment were purchased in the open market instead of being issued by the Company.

34

Stock Incentive Plan. 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.

A maximum of 149,983 shares of common stock may be issued under the SI Plan. During 2022, 2021, and 2020, the Company awarded 63,150 and 48,575, and 25,950 shares as stock and stock unit awards, respectively. This SI Plan is more fully described in Note 13 - Stock Incentive Plan.

Stock Repurchase Program. Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock.

During 2022, the Company repurchased 10,647 shares (0.05% of common shares) at a total price of approximately $341,000. During 2021, the Company repurchased 7,752 (0.05% of common shares) at a total price of approximately $326,000. All of these shares were a result of shares withheld for taxes on vested employee stock incentives. As of December 31, 2022, approximately $4.1 million remains available for purchase under the repurchase programs. Treasury stock is further affected by activity in the DCP.

Employee Stock Purchase Plan. At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP provides eligible employees with the opportunity to purchase shares of common stock of the Company at a 15% discount through payroll deductions. The ESPP is 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 December 31, 2022, 2021, and 2020, 23,055, 11,748, and 11,037 shares, respectively were issued pursuant to ESPP.

Capital Ratios

For 2022, the minimum regulatory ratios required for minimum capital adequacy purposes plus the capital buffer are 10.5% for the Total Risk-based capital ratio, 8.5% for the Tier 1 Risk-based capital ratio, 7.0% for the Common Equity Tier 1 capital ratio, and 4.0% for the Tier 1 Leverage ratio. The Company and First Mid Bank have capital ratios above the minimum regulatory capital requirements and, as of December 31, 2022, the Company and First Mid Bank had capital ratios above the levels required for categorization as well-capitalized under the capital adequacy guidelines established by the bank regulatory agencies. A tabulation of the Company and First Mid Bank's capital ratios as of December 31, 2022 follows:

[[GREPCENT_TABLE]]
[["","","Total Risk- based Capital Ratio","","","Tier One Risk-based Capital Ratio","","","Common Equity Tier 1 Capital Ratio","","","Tier One Leverage Ratio (Capital to Average Assets)"],["First Mid Bancshares, Inc. (Consolidated)","","","15.20","%","","","12.40","%","","","12.03","%","","","9.68","%"],["First Mid Bank","","","14.18","%","","","13.17","%","","","13.17","%","","","10.22","%"]]
[[/GREPCENT_TABLE]]

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, 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 for these sources include:

•
First Mid Bank has $100 million available in overnight federal fund lines, including $30 million from First Horizon Bank, $20 million from U.S. Bank, N.A., $10 million from Wells Fargo Bank, N.A., $15 million from The Northern Trust Company and $25 million from Zions Bank. Availability of the funds is subject to First Mid Bank meeting minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total average assets. As of December 31, 2022, 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. At December 31, 2022, the excess collateral at the FHLB would support approximately $582.1 million of additional advances for First Mid Bank.

•
First Mid Bank is a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged.

•
In addition, as of December 31, 2022, 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 8, 2022 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by all of the stock of First Mid Bank and includes requirements for operating and capital ratios. The Company and its subsidiary banks were in compliance with the existing covenants at December 31, 2022 and 2021.

35

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 December 31, 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","","Total","","","Less than 1 year","","","1-3 years","","","3-5 years","","","More than 5 years"],["Time deposits","","$","706,779","","","$","409,987","","","$","233,339","","","$","63,096","","","$","357"],["Debt","","","113,917","","","","\u2014","","","","\u2014","","","","3,922","","","","109,995"],["Other borrowings","","","686,485","","","","396,454","","","","70,031","","","","150,000","","","","70,000"],["Operating leases","","","17,969","","","","2,945","","","","4,817","","","","3,917","","","","6,290"],["Supplemental retirement","","","1,798","","","","50","","","","100","","","","150","","","","1,498"],["","","$","1,526,948","","","$","809,436","","","$","308,287","","","$","221,085","","","$","188,140"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2022, net cash of $65.8 million was provided from operating activities, $178.7 million was used in investing activities, and $96.7 million was provided by financing activities. In total cash and cash equivalents decreased by $16.2 million from year-end 2021.

For the year ended December 31, 2021, net cash of $69.6 million was provided from operating activities, $482.5 million was used in investing activities, and $164.2 million was provided by financing activities. In total cash and cash equivalents decreased by $248.7 million from year-end 2020.

For the year ended December 31, 2020, net cash of $63.5 million was provided from operating activities, $562.4 million was used in investing activities, and $831.1 million was provided by financing activities. In total cash and cash equivalents increased by $332.2 million from year-end 2019.

For the years ended December 31, 2022 and 2021, the Company also had $10 million of floating rate trust preferred securities outstanding through Trust II, and in September 2016, the Company acquired $4 million of floating rate trust preferred securities from First Clover Leaf under Clover Leaf Statutory Trust I and on May 1, 2018, the Company acquired $6 million of floating rate trust preferred securities from First BancTrust Corporation. See Note 9 – “Borrowings” for a more detailed description.

Effects of Inflation

Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are affected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company’s assets and liabilities that are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects.

36