UNITED STATES

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

Or

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

For the transition period from                               to                               

Commission file number 0-13368

FIRST MID BANCSHARES, INC.

(Exact name of Registrant as specified in its charter)

Delaware	37-1103704
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)

1421 Charleston Avenue
Mattoon, Illinois	61938
(Address of principal executive offices)	(Zip code)

(217) 234-7454

(Registrant's telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	FMBH	NASDAQ Global Market

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

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

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

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

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

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

As of May 11, 2021 16,736,442 common shares, $4.00 par value, were outstanding.

PART I

ITEM 1. FINANCIAL STATEMENTS

First Mid Bancshares, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)	March 31, 2021			December 31, 2020
Assets
Cash and due from banks:
Non-interest bearing	$	78,481		$	75,152
Interest bearing		329,745			340,821
Federal funds sold		1,321			1,308
Cash and cash equivalents		409,547			417,281
Certificates of deposit		2,695			2,695
Investment securities:
Available-for-sale, at fair value		1,087,948			879,240
Held-to-maturity, at amortized cost (estimated fair value of $7,125 and $5,119 at    March 31, 2021 and December 31, 2020, respectively)		7,045			5,016
Equity securities, at fair value		300			218
Loans held for sale		4,693			1,924
Loans		3,938,406			3,136,495
Less allowance for credit losses		(55,418	)		(41,910	)
Net loans		3,882,988			3,094,585
Interest receivable		20,218			19,287
Other real estate owned		13,339			2,489
Premises and equipment, net		86,654			58,206
Goodwill		113,948			104,992
Intangible assets, net		24,658			23,128
Bank owned life insurance		124,925			68,955
Right of use lease assets		17,424			17,209
Other assets		40,888			31,123
Total assets	$	5,837,270		$	4,726,348
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	1,185,181		$	936,926
Interest bearing		3,552,512			2,755,858
Total deposits		4,737,693			3,692,784
Securities sold under agreements to repurchase		212,503			206,937
Interest payable		3,214			2,345
FHLB borrowings		116,861			93,969
Junior subordinated debentures, net		19,069			19,027
Subordinated debt, net		94,289			94,253
Lease liabilities		17,578			17,351
Other liabilities		34,179			31,454
Total liabilities		5,235,386			4,158,120
Stockholders’ Equity:
Common stock, $4 par value; authorized 30,000,000 shares; issued 18,662,947 and    17,361,898 shares in 2021 and 2020, respectively		76,652			71,449
Additional paid-in capital		338,897			297,806
Retained earnings		198,408			197,726
Deferred compensation		1,597			2,980
Accumulated other comprehensive income		5,087			17,095
Less treasury stock at cost, 620,691 shares in 2021 and 2020		(18,757	)		(18,828	)
Total stockholders’ equity		601,884			568,228
Total liabilities and stockholders’ equity	$	5,837,270		$	4,726,348

See accompanying notes to unaudited condensed consolidated financial statements.

2

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Income (unaudited)

(In thousands, except per share data)

	Three months ended March 31,
(In thousands, except per share data)	2021		2020
Interest income:
Interest and fees on loans	$	35,886	$	30,027
Interest on investment securities		4,842		4,589
Interest on certificates of deposit investments		14		31
Interest on federal funds sold		—		2
Interest on deposits with other financial institutions		74		92
Total interest income		40,816		34,741
Interest expense:
Interest on deposits		2,484		3,861
Interest on securities sold under agreements to repurchase		70		194
Interest on FHLB borrowings		374		580
Interest on other borrowings		—		15
Interest on junior subordinated debentures		140		218
Interest on subordinated debentures		984		—
Total interest expense		4,052		4,868
Net interest income		36,764		29,873
Provision for loan losses		12,136		5,481
Net interest income after provision for loan losses		24,628		24,392
Other income:
Wealth management revenues		4,926		3,626
Insurance commissions		5,857		6,621
Service charges		1,364		1,778
Securities gains, net		4		531
Mortgage banking revenue, net		1,409		308
ATM / debit card revenue		2,699		1,987
Bank owned life insurance		637		431
Other		853		1,228
Total other income		17,749		16,510
Other expense:
Salaries and employee benefits		23,487		16,500
Net occupancy and equipment expense		4,970		4,242
Net other real estate owned expense		78		(46	)
FDIC insurance		452		93
Amortization of intangible assets		1,220		1,295
Stationery and supplies		316		268
Legal and professional		1,402		1,398
ATM / debit card		838		605
Marketing and donations		502		481
Other		4,335		2,895
Total other expense		37,600		27,731
Income before income taxes		4,777		13,171
Income taxes		668		3,172
Net income	$	4,109	$	9,999
Per share data:
Basic net income per common share	$	0.24	$	0.60
Diluted net income per common share		0.24		0.60
Cash dividends declared per common share		0.205		—

See accompanying notes to unaudited condensed consolidated financial statements.

3

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

	Three months ended March 31,
(in thousands)	2021			2020
Net income	$	4,109		$	9,999
Other Comprehensive Income (Loss)
Unrealized losses on available-for-sale securities, net of taxes of $4,903 and   $1,139 for three months ended March 31, 2021 and 2020, respectively		(12,005	)		(2,789	)
Amortized holding losses on held-to-maturity securities transferred from available-for- sale, net of taxes of $0 and ($5) for three months ended March 31, 2021 and 2020, respectively		—			15
Less: reclassification adjustment for realized gains included in net income, net of taxes of $1 and $154 for three months ended March 31, 2021 and 2020, respectively		(3	)		(377	)
Other comprehensive income, net of taxes		(12,008	)		(3,151	)
Comprehensive income (loss)	$	(7,899	)	$	6,848

See accompanying notes to unaudited condensed consolidated financial statements.

4

First Mid Bancshares, Inc.

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

For the three months ended March 31, 2021 and 2020

(in thousands)	Common Stock		Additional Paid-In- Capital			Retained Earnings			Deferred Compensation			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
December 31, 2020	$	71,449	$	297,806		$	197,726		$	2,980		$	17,095		$	(18,828	)	$	568,228
Net income		—		—			4,109			—			—			—			4,109
Other comprehensive income, net tax		—		—			—			—			(12,008	)		—			(12,008	)
Cash dividends on common stock (.205/share)		—		—			(3,427	)		—			—			—			(3,427	)
Issuance of 4,896 common shares pursuant to the Dividend Reinvestment Plan		17		154			—			—			—			—			171
Issuance of 18,397 common shares pursuant to Deferred Compensation Plan		3		15			—			—			—			—			18
Issuance of 27,750 restricted shares pursuant to the 2017 Stock Incentive Plan		111		832			—			—			—			—			943
Issuance of 2,375 common shares pursuant to the 2017 Stock Incentive Plan		10		75															85
Issuance of 1,262,246 common shares pursuant to acquisition of LINCO Bancshares, Inc., net proceeds		5,049		39,142															44,191
Issuance of 3,142 common shares pursuant to the Employee Stock Purchase Plan		13		62			—			—			—			—			75
Deferred Compensation		—		—			—			(71	)		—			71			—
Tax benefit related to deferred compensation distributions		—		179			—			—			—			—			179
Grant of restricted units pursuant to 2017 Stock Incentive Plan		—		1,216			—			—			—			—			1,216
Release of restricted units pursuant to 2017 Stock Incentive Plan		—		(584	)		—			—			—			—			(584	)
Vested restricted shares/units compensation expense		—		—			—			(1,312	)		—			—			(1,312	)
March 31, 2021	$	76,652	$	338,897		$	198,408		$	1,597		$	5,087		$	(18,757	)	$	601,884
December 31, 2019	$	71,152	$	295,925		$	166,667		$	2,760		$	8,360		$	(18,255	)	$	526,609
Cumulative change in accounting principal for adoption of ASU 2016-13		—		—			(717	)		—			—			—			(717	)
December 31, 2019 (as adjusted for change in accounting principal)		71,152		295,925			165,950			2,760			8,360			(18,255	)		525,892
Net income		—		—			9,999			—			—			—			9,999
Other comprehensive income, net tax		—		—			—			—			(3,151	)		—			(3,151	)
Issuance of 25,200 restricted shares pursuant to the 2017 Stock Incentive Plan		101		767			—			—			—			—			868
Issuance of 3,804 common shares pursuant to the Employee Stock Purchase Plan		15		71			—			—			—			—			86
Deferred Compensation		—		—			—			(5	)		—			5			—
Tax benefit related to deferred compensation distributions		—		22			—			—			—			—			22
Grant of restricted units pursuant to 2017 Stock Incentive Plan		—		584			—			—			—			—			584
Release of restricted units pursuant to 2017 Stock Incentive Plan				(516	)														(516	)
Vested restricted shares/units compensation expense		—		—			—			(733	)		—			—			(733	)
March 31, 2020	$	71,268	$	296,853		$	175,949		$	2,022		$	5,209		$	(18,250	)	$	533,051

See accompanying notes to unaudited condensed consolidated financial statements.

5

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Three months ended March 31,
(In thousands)	2021			2020
Cash flows from operating activities:
Net income	$	4,109		$	9,999
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		12,136			5,481
Depreciation, amortization and accretion, net		2,692			2,721
Change in cash surrender value of bank owned life insurance		(637	)		(431	)
Stock-based compensation expense		262			204
Operating lease payments		(711	)		(677	)
Gains on investment securities, net		(4	)		(531	)
Gain on sales of repossessed assets, net		(35	)		(162	)
Gain on sale of premises and equipment		—			(26	)
Gains on sale of loans held for sale, net		(1,229	)		(353	)
Decrease in accrued interest receivable		2,034			155
(Decrease) increase in accrued interest payable		262			(164	)
Origination of loans held for sale		(42,379	)		(20,039	)
Proceeds from sale of loans held for sale		40,839			20,961
Increase in other investment		(84	)		—
(Increase) decrease in other assets		454			(937	)
Decrease in other liabilities		3,844			413
Net cash provided by operating activities		21,553			16,614
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments		—			1,225
Purchases of certificates of deposit investments		—			(980	)
Proceeds from maturities of securities available-for-sale		68,541			108,666
Proceeds from maturities of securities held-to-maturity		—			45,000
Purchases of securities available-for-sale		(177,116	)		(44,830	)
Net (increase) decrease in loans		26,319			(50,059	)
Purchases of premises and equipment		(1,195	)		(786	)
Proceeds from sales of other real property owned		116			1,211
Investment in banked owned life insurance		(25,000	)		—
Net cash provided by acquisition		27,061			—
Net cash (used in) provided by investing activities		(81,274	)		59,447
Cash flows from financing activities:
Net increase (decrease) in deposits		54,499			(8,739	)
Decrease in federal funds purchased		—			(5,000	)
Increase in repurchase agreements		5,566			23,540
Proceeds from FHLB advances		—			15,000
Repayment of FHLB advances		(5,000	)		(9,000	)
Proceeds from long-term debt		—			5,000
Proceeds from issuance of common stock		179			85
Dividends paid on common stock		(3,257	)		—
Net cash provided by financing activities		51,987			20,886
Increase (decrease) in cash and cash equivalents		(7,734	)		96,947
Cash and cash equivalents at beginning of period		417,281			85,080
Cash and cash equivalents at end of period	$	409,547		$	182,027

See accompanying notes to unaudited condensed consolidated financial statements.

6

First Mid Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

	Three months ended March 31,
(In thousands)	2021		2020
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	3,183	$	5,100
Income taxes		—		—
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate		45		184
Dividends reinvested in common stock		171		—
Net tax benefit related to option and deferred compensation plans		179		22
Supplemental dislosure of purchase of capital stock of LINCO Bancshares, Inc.
Fair value of assets acquired	$	1,173,443		-
Consideration paid:
Cash paid		103,500		-
Common stock issued		44,191		-
Total consideration paid		147,691
Fair value of liabilities assumed	$	1,025,752		-

7

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 -- Basis of Accounting and Consolidation

The unaudited condensed consolidated financial statements include the accounts of First Mid Bancshares, Inc. (“Company”) formerly known as First Mid-Illinois Bancshares, Inc., and its wholly owned subsidiaries: First Mid Bank & Trust, N.A. (“First Mid Bank”), Providence Bank (“Providence Bank”), First Mid Wealth Management Company, Mid-Illinois Data Services, Inc. (“MIDS”), First Mid Insurance Group, Inc. (“First Mid Insurance”) and First Mid Captive, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. The financial information reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended March 31, 2021 and 2020, and all such adjustments are of a normal recurring nature. Certain amounts in the prior year’s consolidated financial statements may have been reclassified to conform to the March 31, 2021 presentation and there was no impact on net income or stockholders’ equity. The results of the interim period ended March 31, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021. The Company operates as a one-segment entity for financial reporting purposes. The 2020 year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and related footnote disclosures although the Company believes that the disclosures made are adequate to make the information not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on Form 10-K.

COVID-19

The COVID-19 outbreak is an unprecedented event that provides significant economic uncertainty for a broad spectrum of industries. The Company is focused on supporting its customers, communities and employees during this unique operating environment. Throughout this document, the Company describes the impact COVID-19 is having, actions taken as a result of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation.

Subordinated Debt Offering

On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”).  

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

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

8

Website

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

General Litigation

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

Loan Purchase

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

Stock Plans

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

Following the stockholders’ approval at the 2021 annual meeting of the Company, a maximum of 399,983 shares of common stock may be issued under the SI Plan. There have been no stock options awarded under any Company plan since 2008. The Company has awarded 27,750 and 25,200 shares of restricted stock during 2021 and 2020, respectively, and 16,950 and 16,200 restricted stock units during 2021 and 2020, respectively.

Employee Stock Purchase Plan

At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code.

A maximum of 600,000 shares of common stock may be issued under the ESPP. As of March 31, 2021 and 2020, 3,142 shares and 3,804 shares, respectively, were issued pursuant to the ESPP.

Captive Insurance Company

First Mid Captive, Inc. (the “Captive"), a wholly owned subsidiary of the Company which was formed and began operations in December 2019, is a Nevada-based captive insurance company. The Captive insures against certain risks unique to operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today's insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,300,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company's consolidated financial statements and its federal income return.

9

Bank Owned Life Insurance

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

Revenue Recognition

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

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

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

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

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

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

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

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

10

Accumulated Other Comprehensive Income

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

	Unrealized Gain (Loss) on Securities
March 31, 2021
Net unrealized gains on securities available-for-sale	$	7,165
Tax expense		(2,078	)
Balance at March 31, 2021	$	5,087
December 31, 2020
Net unrealized gains on securities available-for-sale	$	24,077
Tax expense		(6,982	)
Balance at December 31, 2020	$	17,095

Amounts reclassified from accumulated other comprehensive income and the affected line items in the statements of income during the three months ended March 31, 2021 and 2020, were as follows (in thousands):

	Amounts Reclassified from Other Comprehensive Income
	Three months ended March 31,
	2021			2020			Affected Line Item in the Statements of Income
Realized gains on available-for-sale securities	$	4		$	531		Securities gains, net
Tax effect		(1	)		(154	)	Income taxes
Total reclassifications out of accumulated other    comprehensive income	$	3		$	377		Net reclassified amount

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

Adoption of New Accounting Guidance

Accounting Standards Update 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). In August 2018, FASB issued ASU 2018-13. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, an entity will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. As ASU 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”). In June 2016, FASB issued ASU 2016-13. The provisions of ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for sale debt securities. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

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Management formed an internal, cross functional committee in 2017 to evaluate implementation steps and assess the impact ASU 2016-13 would have on the Company’s consolidated financial statements. The committee assigned roles and responsibilities, key tasks to complete, and established a general time-line for implementation. The Company also engaged an outside consultant to assist with the methodology review and data validation, as well as other key aspects of implementing the standard. The committee met periodically to discuss the latest developments and ensure progress was being made. In addition, the committee kept current on evolving interpretations and industry practices related to ASU 2016-13. The committee evaluated and validated data resources and different loss methodologies. Key implementation activities for 2019 included finalization of models, establishing processes and controls, development of supporting analytics and documentation, policies and disclosure, and implementing parallel processing.

The Company adopted ASU 2016-13 using the modified retrospective method for financial assets measured at amortized cost-effective January 1, 2020. Results for the periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of approximately $717,000 upon adoption of ASU 2016-13. The transition adjustment included an increase to the allowance for credit losses on loans of $1.7 million and an increase to the allowance for credit losses on off-balance sheet credit exposure of $69,000. There was no allowance for credit losses recorded for held-to- maturity debt securities. The transition adjustment included corresponding increases in deferred tax assets.

The Company adopted ASU 2016-13 using the prospective transition approach for financial assets considered purchased credit deteriorated ("PCD") that were previously classified as purchase credit impaired ("PCI") and accounted for under ASC 310-30 effective January 1, 2020. In accordance with the standard, the Company did not reassess whether the PCI assets met the criteria of PCD assets as of the adoption date. The amortized cost of the PCD assets were adjusted to reflect the addition of $833,000 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost) will be accreted into interest income at the effective interest rate over the remaining life of the assets.

The following table illustrates the impact of ASU 2016-13 adoption (in thousands):

	January 1, 2020
	As reported		Pre-ASU		Impact of ASU
	under ASU		2016-13		2016-13
	2016-13		Adoption		Adoption
Assets:
Construction & Land Development	$	1,033	$	1,146	$	(113	)
Farm		1,323		1,093		230
1-4 Family Residential Properties		2,142		1,386		756
Commercial Real Estate		11,739		11,198		541
Agricultural		1,023		1,386		(363	)
Commercial & Industrial		9,428		9,273		155
Consumer		1,895		1,429		466
Allowance for credit losses for all loans	$	28,583	$	26,911	$	1,672
Liabilities:
Allowance for credit losses on off-balance sheet exposures	$	69	$	—	$	69

The following table illustrates the impact of ASU 2013-13 adoption for PCD assets previously classified as PCI included in the table above (in thousands):

	January 1, 2020
	As reported		Pre-ASU		Impact of ASU
	under ASU		2016-13		2016-13
	2016-13		Adoption		Adoption
Construction & Land Development	$	291	$	—	$	291
1-4 Family Residential Properties		48		6		42
Commercial Real Estate		818		359		459
Commercial & Industrial		41		—		41
Allowance for credit losses for PCD loans	$	1,198	$	365	$	833

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Note 2 -- Earnings Per Share

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

The components of basic and diluted net income per common share available to common stockholders for the three months ended March 31, 2021 and 2020 were as follows:

	Three months ended March 31,
	2021		2020
Basic Net Income per Common Share
Available to Common Stockholders:
Net income	$	4,109,000	$	9,999,000
Weighted average common shares outstanding		17,299,927		16,693,183
Basic earnings per common share	$	0.24	$	0.60
Diluted Net Income per Common Share
Available to Common Stockholders:
Net income applicable to diluted earnings per share	$	4,109,000	$	9,999,000
Weighted average common shares outstanding		17,299,927		16,693,183
Dilutive potential common shares:
Restricted stock awarded		53,020		46,908
Dilutive potential common shares		53,020		46,908
Diluted weighted average common shares outstanding		17,352,947		16,740,091
Diluted earnings per common share	$	0.24	$	0.60

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There were no shares excluded when computing diluted earnings per share for the three months ended March 31, 2021 and 2020 because they were anti-dilutive.

Note 3 -- Investment Securities

The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at March 31, 2021 and December 31, 2020 were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
March 31, 2021
Available-for-sale:
U.S. Treasury securities and obligations of U.S.    government corporations & agencies	$	174,789	$	377	$	(3,636	)	$	171,530
Obligations of states and political subdivisions		249,776		9,226		(1,283	)		257,719
Mortgage-backed securities: GSE residential		620,102		7,988		(6,138	)		621,952
Other securities		36,116		699		(68	)		36,747
Total available-for-sale	$	1,080,783	$	18,290	$	(11,125	)	$	1,087,948
Held-to-maturity:
U.S. Treasury securities and obligations of    U.S. government corporations & agencies	$	5,012	$	80	$	—		$	5,092
Annuity		2,033		—		—			2,033
Total held-to-maturity	$	7,045	$	80	$	—		$	7,125
December 31, 2020
Available-for-sale:
U.S. Treasury securities and obligations of U.S.    government corporations & agencies	$	127,067	$	790	$	(788	)	$	127,069
Obligations of states and political subdivisions		237,886		11,995		(37	)		249,844
Mortgage-backed securities: GSE residential		479,470		12,038		(160	)		491,348
Other securities		10,740		252		(13	)		10,979
Total available-for-sale	$	855,163	$	25,075	$	(998	)	$	879,240
Held-to-maturity:
U.S. Treasury securities and obligations of U.S.    government corporations & agencies	$	5,016	$	103	$	—		$	5,119

The Company also had $300,000 and $218,000 of equity securities, at fair value, as of March 31, 2021 and December 31, 2020, respectively. The Company's held-to-maturity securities are government agency-backed securities for which the risk of loss is minimal. As such, as of March 31, 2021, the Company did not record an allowance for credit losses on its held-to-maturity securities.

Realized gains and losses resulting from sales of securities were as follows during the three months ended March 31, 2021 and 2020 (in thousands):

	Three months March 31,
	2021		2020
Gross gains	$	4	$	531
Gross losses		—		—

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The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity presented at amortized cost, at March 31, 2021 and the weighted average yield for each range of maturities (dollars in thousands):

	One year or less			After 1 through 5 years			After 5 through 10 years			After ten years			Total
Available-for-sale:
U.S. Treasury securities and obligations of    U.S. government corporations and agencies	$	105,823		$	54,392		$	11,315		$	—		$	171,530
Obligations of state and political subdivisions		29,540			71,481			152,466			4,232			257,719
Mortgage-backed securities: GSE residential		26,948			293,661			301,343			—			621,952
Other securities		12,042			20,070			4,635			—			36,747
Total available-for-sale investments	$	174,353		$	439,604		$	469,759		$	4,232		$	1,087,948
Weighted average yield		1.87	%		2.28	%		1.69	%		2.57	%		1.96	%
Full tax-equivalent yield		2.06	%		2.45	%		1.94	%		3.52	%		2.17	%
Held to Maturity:
U.S. Treasury securities and obligations of    U.S. government corporations and agencies	$	5,012		$	—		$	—		$	—		$	5,012
Annuity		—									2,033			2,033
Total held-to-maturity	$	5,012		$	—		$	—		$	2,033		$	7,045
Weighted average yield		2.06	%		—	%		—	%		—	%		2.06	%
Full tax-equivalent yield		2.06	%		—	%		—	%		—	%		2.06	%

The weighted average yields are calculated based on the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent yields have been calculated using a 21% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at March 31, 2021.

Investment securities carried at approximately $621 million and $531 million at March 31, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

The following table presents the aging of gross unrealized losses and fair value by investment category as of March 31, 2021 and December 31, 2020 (in thousands):

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2021
Available-for-sale:
U.S. Treasury securities and obligations of    U.S. government corporations and agencies	$	144,404	$	(3,636	)	$	—	$	—		$	144,404	$	(3,636	)
Obligations of states and political subdivisions		51,381		(1,283	)		—		—			51,381		(1,283	)
Mortgage-backed securities: GSE residential		230,029		(5,155	)		129,370		(983	)		359,399		(6,138	)
Other securities		12,679		(68	)		—		—			12,679		(68	)
Total	$	438,493	$	(10,142	)	$	129,370	$	(983	)	$	567,863	$	(11,125	)
December 31, 2020
Available-for-sale:
U.S. Treasury securities and obligations of    U.S. government corporations and agencies	$	59,211	$	(788	)	$	—	$	—		$	59,211	$	(788	)
Obligations of states and political subdivisions		5,380		(37	)		—		—			5,380		(37	)
Mortgage-backed securities: GSE residential		57,609		(160	)		2,377		—			59,986		(160	)
Other securities		3,977		(13	)		—		—			3,977		(13	)
Total	$	126,177	$	(998	)	$	2,377	$	—		$	128,554	$	(998	)

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U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At March 31, 2021 and December 31, 2020, there were no available-for sale or held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more.

Obligations of states and political subdivisions. At March 31, 2021 and December 31, 2020, there were no obligations of states and political subdivisions in a continuous loss position for twelve months or more.

Mortgage-backed Securities: GSE Residential. At March 31, 2021, there were twelve mortgage-backed securities with a fair value of $129,370,000 and unrealized losses of $(983,000) in a continuous unrealized loss position for twelve months or more. At December 31, 2020 there were two mortgage-backed securities with a fair value of $2,377,000 and unrealized losses of $0 in a continuous unrealized loss position for twelve months or more.

Other securities.  At March 31, 2021, and December 31, 2020, there were no other securities in a continuous unrealized loss position for twelve months or more.

The Company does not believe any unrealized losses as of March 31, 2021 represents other than temporary impairment ("OTTI"). However, given the uncertainty of the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced, and the resulting loss recognized in the period the other-than-temporary impairment is identified.

Note 4 – Loans and Allowance for Credit Losses

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

A summary of loans at March 31, 2021 and December 31, 2020 follows (in thousands):

	March 31, 2021			December 31, 2020
Construction and land development	$	165,780		$	122,853
Agricultural real estate		269,759			254,662
1-4 Family residential properties		411,964			325,480
Multifamily residential properties		295,467			189,265
Commercial real estate		1,401,585			1,176,290
Loans secured by real estate		2,544,555			2,068,550
Agricultural loans		121,955			137,333
Commercial and industrial loans		1,020,608			741,819
Consumer loans		90,780			78,023
All other loans		163,901			118,196
Total Gross loans		3,941,799			3,143,921
Less: Loans held for sale		4,693			1,924
		3,937,106			3,141,997
Less:
Net deferred loan fees (costs), premiums and discounts		(1,300	)		5,502
Allowance for credit losses		55,418			41,910
Net loans	$	3,882,988		$	3,094,585

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

Accrued interest on loans, which is excluded from the amortized cost of the balances above, totaled $15.6 million and $15.9 million at March 31, 2021 and December 31, 2020, respectively.

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Most of the Company’s business activities are with customers located near the Company's branch locations in Illinois, Missouri and Texas. At March 31, 2021, the Company’s loan portfolio included $390.7 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $278.2 million was concentrated in corn and other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased $1.0 million from $391.7 million at December 31, 2020 due to seasonal timing of cash flow requirements. Loans concentrated in corn and other grain farming decreased $30.0 million from $308.2 million at December 31, 2020. The Company's underwriting practices include collateralization of loans. Any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio.

In addition, the Company has $126.0 million of loans to motels and hotels. The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region. While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses. The Company also has $426.3 million of loans to lessors of non-residential buildings, $319.8 million of loans to lessors of residential buildings and dwellings, $109.8 million of loans to nursing care facilities, and $121.3 million of loans to other gambling industries.

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

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

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

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

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

17

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

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

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

Allowance for Credit Losses

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

Impaired loans

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

Non-Impaired loans

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

18

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

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

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

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

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

Agricultural Real Estate Loans. The average life of the agricultural real estate segment was determined to be thirty-six months. Historical losses in the segment remain very low. Farmland values have remained steady over an extended period of time and there are no indications that this will change in the next year. There was no adjustment to the qualitative factor for this segment.

1- 4 Family Residential Properties Loans. The average life of the 1-4 Family Residential segment was determined to be: Residential Real Estate-non-owner occupied, sixty months; Residential Real Estate-owner occupied, sixty months; Home Equity lines of credit, thirty months. COVID-19 has impacted the finances of consumers from layoffs and furloughs resulting from employers that must reduce or suspend operations. Increased risk in this segment includes consumer ability to make mortgage and rent payments. Some of this impact has been offset by governmental actions such as stimulus payments and extended unemployment benefits. First Mid Bank and Providence Bank have also offered short-term loan payment deferral to borrowers in this segment.  Overall, the historical loss rate for this segment increased slightly.

Commercial Real Estate Loans. The average life of the commercial real estate segment was determined to be thirty-six months. This segment includes the Company's majority of exposure to the hotel industry which has been significantly impacted by COVID-19 events. Other impacted industries in this segment include restaurants and retail establishments. First Mid Bank and Providence Bank have implemented deferral programs for borrowers in this segment in order to ease the impact to these borrowers. There was a slight increase in the historical loss rate for this segment.

Agricultural Loans. The average life of the agricultural segment was determined to be eighteen months. Losses in this segment are very low and it is believed that borrowers in this segment will benefit from current governmental programs such as PPP and MFP. Many farmers are holding grain from the 2019 operating season and should be able to take advantage of an increase in prices. There was no change to the qualitative factor of this segment.

19

Commercial and Industrial Loans. The average life of the commercial and industrial segment was determined to be twenty-four months. The COVID-19 impacts include forced closures and scaled-back services for many industries within this segment including retailers, restaurants, and video gaming establishments. Some of this risk is offset by government relief programs as well as, First Mid Bank and Providence Bank's payment deferral program. There was a slight decrease in the historical loss rate but the qualitative factor for this segment was not changed.

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

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

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

Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date. Accordingly, on January 1, 2020, the amortized cost basis of the PCD loans were adjusted to reflect the addition of $833,000 to the allowance for credit losses.

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

The following table presents the activity in the allowance for credit losses based on portfolio segment for the three months ended March 31, 2021 (in thousands):

	Construction & Land Development		Agricultural Real Estate		1-4 Family Residential Properties		Commercial Real Estate		Agricultural Loans			Commercial & Industrial		Consumer Loans		Total
Three months ended March 31, 2021
Beginning Balance	$	1,666	$	1,084	$	2,322	$	19,660	$	1,526		$	13,485	$	2,167	$	41,910
Initial allowance on loans purchased with credit deterioration		261		44		328		646		-			795		-		2,074
Provision for credit loss expense		359		500		617		5,902		(645	)		4,674		729		12,136
Loans charged off		—		—		182		480		—			18		288		968
Recoveries collected		—		—		8		9		—			18		231		266
Ending balance	$	2,286	$	1,628	$	3,093	$	25,737	$	881		$	18,954	$	2,839	$	55,418

20

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

	Construction & Land Development			Agricultural Real Estate			1-4 Family Residential Properties			Commercial Real Estate		Agricultural Loans			Commercial & Industrial		Consumer Loans		Total
Three months ended March 31, 2020
Beginning Balance (prior to adoption of ASC 326)	$	1,146		$	1,093		$	1,386		$	11,198	$	1,386		$	9,273	$	1,429	$	26,911
Impact of adopting ASC 326	$	(113	)	$	230		$	756		$	541	$	(363	)	$	155	$	466		1,672
Provision for credit loss expense		587			12			(77	)		1,961		41			2,815		142		5,481
Loans charged off		—			—			196			84		0			972		171		1,423
Recoveries collected		—			—			62			5		—			23		145		235
Ending balance	$	1,620		$	1,335		$	1,931		$	13,621	$	1,064		$	11,294	$	2,011	$	32,876
Twelve months ended December 31, 2020
Beginning Balance (prior to adoption of ASC 326)	$	1,146		$	1,093		$	1,386		$	11,198	$	1,386		$	9,273	$	1,429	$	26,911
Impact of adopting ASC 326		(113	)		230			756			541		(363	)		155		466		1,672
Provision for credit loss expense		646			(239	)		274			8,581		503			5,869		469		16,103
Loans charged off		13			—			393			829		—			1,991		618		3,844
Recoveries collected		—			—			299			169		—			179		421		1,068
Ending balance	$	1,666		$	1,084		$	2,322		$	19,660	$	1,526		$	13,485	$	2,167	$	41,910

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

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

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

21

The following table presents the amortized cost basis of collateral-dependent loans by class of loans that were individually evaluated to determine expected credit losses, and the related allowance for credit losses, as of March 31, 2021 (in thousands):

	Collateral								Allowance
	Real Estate		Business Assets		Other		Total		for Credit Losses
Construction and land development	$	508	$	—	$	—	$	508	$	303
Agricultural real estate		—		—		—		—		—
1-4 Family residential properties		4,436		—		—		4,436		163
Multifamily residential properties		1,914		—		—		1,914		—
Commercial real estate		12,308		—		—		12,308		1,252
Loans secured by real estate		19,166		—		—		19,166		1,718
Agricultural loans		—		—		—		—		—
Commercial and industrial loans		—		3,393		1,909		5,302		808
Consumer loans		—		—		8	8			163
Other loans		—		26		—	26			26
Total loans	$	19,166	$	3,419	$	1,917	$	24,502	$	2,715

Credit Quality

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

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

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

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

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

22

The following tables present the credit risk profile of the Company’s loan portfolio on amortized cost basis based on risk rating category and year of origination as of March 31, 2021 (in thousands):

	Term Loans by Origination Year												Revolving
Risk Rating	2021		2020		2019		2018		2017		Prior		Loans		Total
March 31, 2021
Construction & Land Development Loans
Pass	$	6,259	$	55,930	$	35,782	$	44,866	$	12,068	$	9,723	$	—	$	164,628
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		128		0		573		47		—		748
Total	$	6,259	$	55,930	$	35,910	$	44,866	$	12,641	$	9,770	$	—	$	165,376
Agricultural Real Estate Loans
Pass	$	29,531	$	101,049	$	31,082	$	39,931	$	14,717	$	38,968	$	—	$	255,278
Special Mention		825		282		4,337		422		407		6,472		—		12,745
Substandard		—		—		0		707		625		297		—		1,629
Total	$	30,356	$	101,331	$	35,419	$	41,060	$	15,749	$	45,737	$	—	$	269,652
1-4 Family Residential Property Loans
Pass	$	28,885	$	114,918	$	29,974	$	40,369	$	20,251	$	117,623	$	34,265	$	386,285
Special Mention		—		189		2,136		349		2,714		1,190		57		6,635
Substandard		376		299		868		1,814		1,929		13,327		937		19,550
Total	$	29,261	$	115,406	$	32,978	$	42,532	$	24,894	$	132,140	$	35,259	$	412,470
Commercial Real Estate Loans
Pass	$	67,044	$	480,974	$	318,800	$	223,168	$	163,413	$	377,041	$	—	$	1,630,440
Special Mention		954		2,712		1,285		3,268		11,070		24,347		—		43,636
Substandard		—		1,794		37		6,901		2,004		16,057		—		26,793
Total	$	67,998	$	485,480	$	320,122	$	233,337	$	176,487	$	417,445	$	—	$	1,700,869
Agricultural Loans
Pass	$	1,853	$	83,342	$	6,921	$	5,131	$	1,631	$	104	$	—	$	98,982
Special Mention		13,723		3,777		3,769		214		206		159		—		21,848
Substandard		53		44		118		25		—		—		—		240
Total	$	15,629	$	87,163	$	10,808	$	5,370	$	1,837	$	263	$	—	$	121,070
Commercial & Industrial Loans
Pass	$	152,091	$	477,167	$	162,411	$	98,524	$	96,059	$	145,657	$	—	$	1,131,909
Special Mention		1,556		3,248		33,491		804		473		1,895		—		41,467
Substandard		397		343		2,369		447		2,345		2,680		—		8,581
Total	$	154,044	$	480,758	$	198,271	$	99,775	$	98,877	$	150,232	$	—	$	1,181,957
Consumer Loans
Pass	$	7,723	$	35,908	$	33,307	$	11,526	$	138	$	2,681	$	—	$	91,283
Special Mention		—		—		23		21		—		—		—		44
Substandard		13		27		13		90		79		156		—		378
Total	$	7,736	$	35,935	$	33,343	$	11,637	$	217	$	2,837	$	—	$	91,705
Total Loans
Pass	$	293,386	$	1,349,288	$	618,277	$	463,515	$	308,277	$	691,797	$	34,265	$	3,758,805
Special Mention		17,058		10,208		45,041		5,078		14,870		34,063		57		126,375
Substandard		839		2,507		3,533		9,984		7,555		32,564		937		57,919
Total	$	311,283	$	1,362,003	$	666,851	$	478,577	$	330,702	$	758,424	$	35,259	$	3,943,099

23

The following tables present the credit risk profile of the Company’s loan portfolio based on risk rating category as of December 31, 2020 (in thousands):

	Term Loans by Origination Year												Revolving
Risk Rating	2020		2019		2018		2017		2016		Prior		Loans		Total
December 31, 2020
Construction & Land Development Loans
Pass	$	41,842	$	40,989	$	31,500	$	2,760	$	871	$	3,822	$	—	$	121,784
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		128		—		517		—		50		—		695
Total	$	41,842	$	41,117	$	31,500	$	3,277	$	871	$	3,872	$	—	$	122,479
Agricultural Real Estate Loans
Pass	$	73,630	$	34,412	$	37,839	$	16,138	$	13,559	$	58,291	$	—	$	233,869
Special Mention		1,845		3,970		533		469		1,106		11,232		—		19,155
Substandard		—		—		800		208		64		245		—		1,317
Total	$	75,475	$	38,382	$	39,172	$	16,815	$	14,729	$	69,768	$	—	$	254,341
1-4 Family Residential Property Loans
Pass	$	81,366	$	29,695	$	38,163	$	23,086	$	26,676	$	62,942	$	40,363	$	302,291
Special Mention		192		2,142		523		2,720		247		1,578		293		7,695
Substandard		296		695		1,915		1,859		1,996		7,516		1,499		15,776
Total	$	81,854	$	32,532	$	40,601	$	27,665	$	28,919	$	72,036	$	42,155	$	325,762
Commercial Real Estate Loans
Pass	$	368,750	$	237,119	$	171,591	$	148,283	$	143,400	$	215,616	$	—	$	1,284,759
Special Mention		2,469		1,300		6,108		11,262		6,741		16,947		—		44,827
Substandard		1,863		40		7,081		2,022		4,905		18,435		—		34,346
Total	$	373,082	$	238,459	$	184,780	$	161,567	$	155,046	$	250,998	$	—	$	1,363,932
Agricultural Loans
Pass	$	83,377	$	15,680	$	5,978	$	1,838	$	635	$	2,856	$	—	$	110,364
Special Mention		21,070		4,483		694		224		148		38		—		26,657
Substandard		68		238		25		—		—		—		—		331
Total	$	104,515	$	20,401	$	6,697	$	2,062	$	783	$	2,894	$	—	$	137,352
Commercial & Industrial Loans
Pass	$	371,683	$	132,148	$	70,497	$	78,890	$	42,439	$	114,904	$	—	$	810,561
Special Mention		4,116		32,130		849		489		1,101		730		—		39,415
Substandard		889		2,360		532		1,689		136		969		—		6,575
Total	$	376,688	$	166,638	$	71,878	$	81,068	$	43,676	$	116,603	$	—	$	856,551
Consumer Loans
Pass	$	31,609	$	21,384	$	12,084	$	8,279	$	3,150	$	1,022	$	—	$	77,528
Special Mention		—		24		24		1		1		—		—		50
Substandard		15		16		111		95		67		120		—		424
Total	$	31,624	$	21,424	$	12,219	$	8,375	$	3,218	$	1,142	$	—	$	78,002
Total Loans
Pass	$	1,052,257	$	511,427	$	367,652	$	279,274	$	230,730	$	459,453	$	40,363	$	2,941,156
Special Mention		29,692		44,049		8,731		15,165		9,344		30,525		293		137,799
Substandard		3,131		3,477		10,464		6,390		7,168		27,335		1,499		59,464
Total	$	1,085,080	$	558,953	$	386,847	$	300,829	$	247,242	$	517,313	$	42,155	$	3,138,419

24

The following table presents the Company’s loan portfolio aging analysis at March 31, 2021 and December 31, 2020 (in thousands):

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
March 31, 2021
Construction and land development	$	227	$	—	$	128	$	355	$	165,021	$	165,376	$	—
Agricultural real estate		0		—		34		34		269,618		269,652		—
1-4 Family residential properties		1,212		2,400		1,546		5,158		407,312		412,470		—
Multifamily residential properties		39		1,098		—		1,137		296,847		297,984		—
Commercial real estate		846		1,166		1,961		3,973		1,398,912		1,402,885		—
Loans secured by real estate		2,324		4,664		3,669		10,657		2,537,710		2,548,367		—
Agricultural loans		2,153		125		22		2,300		118,770		121,070		—
Commercial and industrial loans		535		257		1,320		2,112		1,015,288		1,017,400		—
Consumer loans		122		50		136		308		91,397		91,705		—
All other loans		59		—		—		59		164,498		164,557		—
Total loans	$	5,193	$	5,096	$	5,147	$	15,436	$	3,927,663	$	3,943,099	$	—
December 31, 2020
Construction and land development	$	—	$	—	$	128	$	128	$	122,351	$	122,479	$	—
Agricultural real estate		1,198		34		0		1,232		253,109		254,341		—
1-4 Family residential properties		1,121		1,105		2,033		4,259		321,503		325,762		—
Multifamily residential properties		—		—		—		—		189,632		189,632		—
Commercial real estate		2,618		341		794		3,753		1,170,547		1,174,300		—
Loans secured by real estate		4,937		1,480		2,955		9,372		2,057,142		2,066,514		—
Agricultural loans		43		—		236		279		137,073		137,352		—
Commercial and industrial loans		2,426		8		1,420		3,854		734,459		738,313		—
Consumer loans		145		50		149		344		77,658		78,002		—
All other loans		—		—		—		0		118,238		118,238		—
Total loans	$	7,551	$	1,538	$	4,760	$	13,849	$	3,124,570	$	3,138,419	$	—

Impaired Loans

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

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

25

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

	March 31, 2021						December 31, 2020
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans with a specific allowance:
Construction and land development	$	573	$	573	$	303	$	516	$	516	$	246
Agricultural real estate		—		—		—		—		—		—
1-4 Family residential properties		5,817		5,990		163		4,005		4,157		158
Multifamily residential properties		1,914		1,914		—		1,914		1,914		0
Commercial real estate		12,317		13,062		1,252		11,528		11,794		863
Loans secured by real estate		20,621		21,539		1,718		17,963		18,381		1,267
Agricultural loans		—		228		—		0		228		0
Commercial and industrial loans		5,430		6,996		808		3,523		4,878		664
Consumer loans		182		126		163		112		114		0
Other loans		26		26		26		—		—		—
Total loans	$	26,259	$	28,915	$	2,715	$	21,598	$	23,601	$	1,931
Loans without a specific allowance:
Construction and land development	$	160	$	173	$	—	$	162	$	175	$	—
Agricultural real estate		374		374		—		359		359		—
1-4 Family residential properties		3,971		4,692		—		4,262		4,715		—
Multifamily residential properties		258		259		—		267		267		—
Commercial real estate		450		752		—		552		581		—
Loans secured by real estate		5,213		6,250		—		5,602		6,097		—
Agricultural loans		262		34		—		659		431		—
Commercial and industrial loans		973		3,026		—		907		1,331		—
Consumer loans		229		729		—		218		313		—
Total loans	$	6,677	$	10,039	$	—	$	7,386	$	8,172	$	—
Total loans:
Construction and land development	$	733	$	746	$	303	$	678	$	691	$	246
Agricultural real estate		374		374		—		359		359		—
1-4 Family residential properties		9,788		10,682		163		8,267		8,872		158
Multifamily residential properties		2,172		2,173		—		2,181		2,181		0
Commercial real estate		12,767		13,814		1,252		12,080		12,375		863
Loans secured by real estate		25,834		27,789		1,718		23,565		24,478		1,267
Agricultural loans		262		262		—		659		659		0
Commercial and industrial loans		6,403		10,022		808		4,430		6,209		664
Consumer loans		411		855		163		330		427		0
Other loans		26		26		26		—		—		—
Total loans	$	32,936	$	38,954	$	2,715	$	28,984	$	31,773	$	1,931

26

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

	For the three months ended
	March 31, 2021				March 31, 2020
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Construction and land development	$	754	$	5	$	600	$	8
Agricultural real estate		957		—		1,202		—
1-4 Family residential properties		9,857		13		8,997		18
Multifamily residential properties		2,294		—		3,323		1
Commercial real estate		13,156		38		8,266		42
Loans secured by real estate		27,018		56		22,388		69
Agricultural loans		262		6		960		—
Commercial and industrial loans		6,455		1		7,402		2
Consumer loans		438		—		544		—
All other loans		26		—		—		—
Total loans	$	34,199	$	63	$	31,294	$	71

The amount of interest income recognized by the Company within the periods stated above was due to loans modified in troubled debt restructurings that remain on accrual status. The average balances of these loans included in impaired loans at March 31, 2021 and 2020, were $4.1 million and $4.4 million, respectively.

Non-Accrual Loans

The following table presents the amortized cost basis of loans on nonaccrual status and of nonaccrual loans individually evaluated for which no allowance was recorded as of March 31, 2021 and December 31, 2020 (in thousands). There were no loans past due over eighty-nine days that were still accruing.

	March 31, 2021				December 31, 2020
	Nonaccrual with no Allowance for			Total	Nonaccrual with no Allowance for			Total
	Credit Loss		Nonaccrual		Credit Loss		Nonaccrual
Construction and land development	$	160	$	225	$	162	$	162
Agricultural real estate		374		374		359		359
1-4 Family residential properties		7,116		8,771		6,747		6,930
Multifamily residential properties		2,173		2,173		2,181		2,181
Commercial real estate		3,780		9,516		7,345		8,760
Loans secured by real estate		13,603		21,059		16,794		18,392
Agricultural loans		262		262		659		659
Commercial and industrial loans		3,641		6,137		3,677		4,372
Consumer loans		295		394		327		327
All other loans		0		25
Total loans	$	17,801	$	27,877	$	21,457	$	23,750

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

27

Subsequent to adoption of ASU 2016-13 on January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.

Troubled Debt Restructuring

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

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

Troubled debt restructurings:	March 31, 2021		December 31, 2020
1-4 Family residential properties	$	1,381	$	1,603
Commercial real estate		4,594		5,170
Loans secured by real estate		5,975		6,773
Agricultural loans		228		228
Commercial and industrial loans		2,362		2,389
Consumer loans		124		112
Total	$	8,689	$	9,502
Performing troubled debt restructurings:
1-4 Family residential properties	$	1,004	$	1,268
Commercial real estate		3,027		3,045
Loans secured by real estate		4,031		4,313
Commercial and industrial loans		55		58
Consumer loans		17		2
Total	$	4,103	$	4,373

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The following table presents loans modified as TDRs during the three months ended March 31, 2021, as a result of various modified loan factors (in thousands). The change in the recorded investment from pre-modification to post- modification was not material.

	March 31, 2021					March 31, 2020
	Number of		Recorded		Type of	Number of		Recorded		Type of
	Modifications		Investment		Modifications	Modifications		Investment		Modifications
Commercial real estate		—	$	—			1	$	305	(b)(c)(d)
Loans secured by real estate		—		—			1		305
Commercial and industrial loans		—		—			1		7	(b)(c)(d)
Consumer Loans		2		16	(b)		1		11	(c)
Total		2	$	16			3	$	323

Type of modifications:

(a) Reduction of stated interest rate of loan

(b) Change in payment terms

(c) Extension of maturity date

(d) Permanent reduction of the recorded investment

A loan is considered to be in payment default once it is 90 days past due under the modified terms. There were no loans modified as troubled debt restructurings during the prior twelve months that experienced defaults for three months ended March 31, 2021. There were no loans modified as troubled debt restructuring during the prior twelve months that experienced defaults as of December 31, 2020.

The balance of real estate owned includes $13,339,000 and $2,489,000 of foreclosed real estate properties recorded as a result of obtaining physical possession of the property at March 31, 2021 and December 31, 2020, respectively. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure procedures are in process was $634,000 and $713,000 at March 31, 2021 and December 31, 2020, respectively.

Purchased Credit Deteriorated (PCD) Loans

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

	LINCO    Acquisition
Purchase price of loans at acquisition	$	64,647
Allowance for credit losses at acquisition		(2,074	)
Non-credit discount/(premium) at acquisition		(187	)
Fair value of acquired loans at acquisition	$	62,386

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Note 5 -- Goodwill and Intangible Assets

The Company has goodwill from business combinations, intangible assets from branch acquisitions, identifiable intangible assets assigned to core deposit relationships and customer lists of First Mid Wealth Management Company and First Mid Insurance. The following table presents gross carrying value and accumulated amortization by major intangible asset class as of March 31, 2021 and December 31, 2020 (in thousands):

	March 31, 2021				December 31, 2020
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Goodwill not subject to amortization (effective 1/1/02)	$	117,708	$	3,760	$	108,752	$	3,760
Intangibles from branch acquisition		3,015		3,015		3,015		3,015
Core deposit intangibles		34,503		21,620		32,355		20,910
Other intangibles		16,779		5,555		16,389		5,222
	$	172,005	$	33,950	$	160,511	$	32,907

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

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

Unallocated purchase price				$	14,992
Less purchase accounting adjustments:
Fair value of securities	$	264
Fair value of loans, net		(2,818	)
Fair value of other real estate owned		915
Fair value of premises and equipment		6,360
Fair value of time deposits		(2,081	)
Fair value of FHLB advances		(975	)
Core deposit intangible		2,025
Other assets		2,530
Other liabilities		(184	)
					6,036
				$	8,956

The Company has mortgage servicing rights acquired in previous acquisitions. The following table summarizes the activity pertaining to mortgage servicing rights included in intangible assets as of March 31, 2021, March 31, 2020 and December 31, 2020 (in thousands):

	March 31, 2021			March 31, 2020			December 31, 2020
Beginning Balance	$	516		$	1,444		$	1,444
Valuation reserve		210			(18	)		(273	)
Mortgage servicing rights amortized		(177	)		(126	)		(593	)
Interest only Strip		2			(4	)		(62	)
Ending Balance	$	551		$	1,296		$	516

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

	Three months ended March 31,
	2021		2020
Core deposit intangibles	$	710	$	843
Customer list intangibles		333		326
Mortgage servicing rights		177		126
	$	1,220	$	1,295

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

30

Aggregate amortization expense:
For period 01/01/21-3/31/21	$	1,220
Estimated amortization expense:
For period 04/01/21-12/31/21		3,888
For year ended 12/31/22		3,885
For year ended 12/31/23		3,534
For year ended 12/31/24		3,234
For year ended 12/31/25		2,891
For year ended 12/31/26		2,215

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” codified within ASC 350, the Company performed testing of goodwill for impairment as of September 30, 2020 and determined that, as of that date, goodwill was not impaired. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets.

Note 6 -- Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase were $212.5 million at March 31, 2021, an increase of $5.6 million from $206.9 million at December 31, 2020. The increase during the first three months of 2021 was primarily due to changes in business cash flow needs. All the transactions have overnight maturities with a weighted average rate of 0.15%.

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

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

	March 31, 2021		December 31, 2020
US Treasury securities and obligations of U.S. government corporations & agencies	$	55,619	$	37,423
Mortgage-backed securities: GSE: residential		156,884		168,480
Miscellaneous		—		1,034
Total	$	212,503	$	206,937

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

Advance		Term (in years)		Interest Rate	Maturity Date
$	5,000,000		5.0	1.85%	April 12, 2021
	4,000,000		1.0	2.00%	May 3, 2021
	5,000,000		7.0	2.55%	October 1, 2021
	5,000,000		5.0	2.71%	March 21, 2022
	5,000,000		8.0	2.40%	January 9, 2023
	5,000,000		3.0	2.41%	May 31, 2022
	5,000,000		3.0	2.12%	June 7, 2022
	5,000,000		3.0	2.12%	June 7, 2022
	5,000,000		4.0	2.44%	May 30, 2023
	5,000,000		3.5	1.51%	July 31, 2023
	5,000,000		3.5	0.77%	September 11, 2023
	10,000,000		5.0	1.45%	December 31, 2024
	5,000,000		5.0	0.91%	March 10, 2025
	6,940,511		10.0	2.64%	December 23, 2025
	5,000,000		10.0	1.14%	October 3, 2029
	5,000,000		10.0	1.15%	October 3, 2029
	5,000,000		10.0	1.12%	October 3, 2029
	10,000,000		10.0	1.39%	December 31, 2029
	15,000,000		10.0	1.41%	December 31, 2029

Note 7 -- Fair Value of Assets and Liabilities

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

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

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

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

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

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

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

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

32

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of March 31, 2021 and December 31, 2020 (in thousands):

	Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2021
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government    corporations and agencies	$	171,530	$	—	$	171,530	$	—
Obligations of states and political subdivisions		257,719		—		257,105		614
Mortgage-backed securities		621,952		—		621,952		—
Other securities		36,747		—		36,747		—
Total available-for-sale securities		1,087,948		—		1,087,334		614
Equity securities		300		300		—		—
Derivative assets: interest rate swaps		262		—		262		—
Total assets	$	1,088,510	$	300	$	1,087,596	$	614
Derivative liabilities: interest rate swaps	$	1,013	$	—	$	1,013	$	—
December 31, 2020
Available-for-sale securities:
U.S. Treasury securities and Obligations of U.S. government    corporations and agencies	$	127,069	$	—	$	127,069	$	—
Obligations of states and political subdivisions		249,844		—		249,050		794
Mortgage-backed securities		491,348		—		491,348		—
Other securities		10,979		—		10,979		—
Total available-for-sale securities		879,240		—		878,446		794
Equity securities		218		218		193		—
Derivative assets: interest rate swaps		1,399		-		1,399		—
Total assets	$	880,857	$	218	$	880,038	$	794
Derivative liabilities: interest rate swaps	$	2,892	$	—	$	2,892	$	—

The change in fair value of assets measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2021 and 2020 is summarized as follows (in thousands):

	Obligation of State and Political Subdivisions
	Three months ended
	March 31, 2021			March 30, 2020
Beginning balance	$	794		$	973
Transfers into Level 3		—			—
Transfers out of Level 3		—			—
Total gains or losses:
Included in net income		1			1
Included in other comprehensive income (loss)		—			—
Purchases, issuances, sales and settlements:
Purchases		—			—
Issuances		—			—
Sales		(181	)		(184	)
Settlements		—			—
Ending balance	$	614		$	790
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	—		$	—

33

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

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

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

Management establishes a specific allowance for impaired loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a change in specific allowance has occurred as of March 31, 2021 was $15,429,000 and a fair value of $2,696,000 resulting in specific loss exposures of $12,733,000.

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

Foreclosed Assets Held For Sale. Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned, or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real estate owned as of March 31, 2021 was $13,339,000. Other real estate owned included in the total carrying amount and measured at fair value on a nonrecurring basis during the period amounted to $11,292,000.

Mortgage Servicing Rights. As of March 31, 2021, mortgage servicing rights had a carrying value of $920,000 and a fair value of $551,000 resulting in a valuation reserve of $369,000. The fair value used to determine the valuation reserve for mortgage servicing rights was estimated using the discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the fair value hierarchy.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2021 and December 31, 2020 (in thousands):

March 31, 2021	Fair Value		Valuation Technique	Unobservable Inputs	Range	Weighted Average
Impaired loans (collateral dependent)	$	12,733	Third party valuations	Discount to reflect realizable value	0% - 40%	20%
Foreclosed assets held for sale		11,292	Third party valuations	Discount to reflect realizable value less estimated selling costs	0% - 40%	35%
Mortgage servicing rights		551	Third party valuations	PSA standard prepayment model rate	242 - 438		304

December 31, 2020	Fair Value		Valuation Technique	Unobservable Inputs	Range	Weighted Average
Impaired loans (collateral dependent)	$	14,876	Third party valuations	Discount to reflect realizable value	0% - 40%	20%
Foreclosed assets held for sale		290	Third party valuations	Discount to reflect realizable value less estimated selling costs	0% - 40%	35%
Mortgage servicing rights		517	Third party valuations	PSA standard prepayment model rate	242 - 441		384

34

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

	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2021
Financial Assets
Cash and due from banks	$	408,226	$	408,226	$	408,226	$	—	$	—
Federal funds sold		1,321		1,321		1,321		—		—
Certificates of deposit investments		2,695		2,695		—		2,695		—
Available-for-sale securities		1,087,948		1,087,948		—		1,087,334		614
Held-to-maturity securities		7,045		7,125		—		7,125		—
Equity securities		300		300		300		—		—
Loans held for sale		4,693		4,693		—		4,693		—
Loans net of allowance for credit losses		3,882,988		3,839,827		—		—		3,839,827
Interest receivable		20,218		20,218		—		20,218		—
Federal Reserve Bank stock		9,401		9,401		—		9,401		—
Federal Home Loan Bank stock		5,450		5,450		—		5,450		—
Financial Liabilities
Deposits	$	4,737,693	$	4,740,802	$	—	$	3,926,107	$	814,695
Securities sold under agreements to repurchase		212,503		212,514		—		212,514		—
Interest payable		3,214		3,214		—		3,214		—
Federal Home Loan Bank borrowings		116,861		117,670		—		117,670		—
Subordinated debt, net		94,289		94,289				94,289
Junior subordinated debentures, net		19,069		14,495		—		14,495		—
December 31, 2020
Financial Assets
Cash and due from banks	$	415,973	$	415,973	$	415,973	$	—	$	—
Federal funds sold		1,308		1,308		1,308		—		—
Certificates of deposit investments		2,695		2,695		—		2,695		—
Available-for-sale securities		879,240		879,240		—		878,446		794
Held-to-maturity securities		5,016		5,119		—		5,119		—
Equity securities		218		218		218		—		—
Loans held for sale		1,924		1,924		—		1,924		—
Loans net of allowance for credit losses		3,094,585		3,056,344		—		—		3,056,344
Interest receivable		19,287		19,287		—		19,287		—
Federal Reserve Bank stock		9,401		9,401		—		9,401		—
Federal Home Loan Bank stock		5,450		5,450		—		5,450		—
Financial Liabilities
Deposits	$	3,692,784	$	3,697,105	$	—	$	3,215,715	$	481,390
Securities sold under agreements to repurchase		206,937		206,945		—		206,945		—
Interest payable		2,345		2,345		—		2,345		—
Federal Home Loan Bank borrowings		93,969		96,669		—		96,669		—
Subordinated debt, net		94,253		94,253		—		94,253		—
Junior subordinated debentures, net		19,027		14,604		—		14,604		—

35

Note 8 – Business Combinations

On September 25, 2020, the Company and Eval Sub Inc., a newly formed Illinois corporation and wholly-owned subsidiary of the Company ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with LINCO Bancshares, Inc., a Missouri corporation ("LINCO"), and the sellers as defined therein, pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of LINCO pursuant to a business combination whereby Merger Sub will merge with and into LINCO, whereupon the separate corporate existence of Merger Sub will cease and LINCO will continue as the surviving company and a wholly-owned subsidiary of the Company (the "Merger").

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

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business
Combinations ("ASC 805"),” and accordingly the assets and liabilities were recorded at their estimated fair values as of the
date of acquisition. Fair values are subject to refinement for up to one year after the closing date of February 22, 2021 as
additional information regarding the closing date fair values become available. The total consideration paid was used to
determine the amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets
acquired, goodwill of $8.9 million was recorded for the acquisition. Goodwill recorded in the transaction, which reflects the
synergies and economies of scale expected from combining operations and the enhanced revenue opportunities from the
Company’s service capabilities, is not tax deductible, and was all assigned to the banking segment of the Company.

	Acquired			Fair Value			As Recorded by
	Book Value			Adjustments			Providence Bank
Assets
Cash and due from banks	$	130,561		$	-		$	130,561
Investment Securities		119,234			264			119,498
Loans		838,377			(9,401	)		828,976
Allowance for credit losses		(8,656	)		6,583			(2,073	)
Other real estate owned		8,435			2,456			10,891
Premises and equipment		23,440			4,819			28,259
Goodwill		-			8,956			8,956
Core deposit intangible		123			2,025			2,148
Right of use asset		-			794			794
Other assets		43,697			1,736			45,433
Total assets acquired	$	1,155,211		$	18,232		$	1,173,443
Liabilities
Deposits	$	988,329		$	2,081		$	990,410
Securities sold under agreements to repurchase		-			-			-
FHLB advances		26,941			975			27,916
Other borrowings		-			-			-
Lease liability		-			794			794
Other liabilities		7,242			(610	)		6,632
Total liabilities assumed		1,022,512			3,240			1,025,752
Net assets acquired	$	132,699		$	14,992		$	147,691
Consideration Paid
Cash							$	103,500
Common stock								44,191
							$	147,691

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The Company has recognized approximately $3.1 million, pre-tax, of acquisition costs for the LINCO acquisition. Of this amount, $2.6 million was recognized during the first quarter of 2021. These costs are included in salaries and benefits, legal and professional and other expense. Of the $9.4 million adjustment to loans, $11.1 million is being accreted to interest income over the remaining term of the loans. The remaining $1.7 million was the elimination of deferred fees and unearned discounts previously recorded by Providence Bank. The Company also recorded approximately $2 million directly to the allowance for credit losses for loans identified as PCD. Of the $838 million of loans acquired, approximately $64.6 million was identified as PCD.

The differences between fair value and acquired value of the assumed time deposits of $2.1 million and the assumed FHLB advances of $975,000, are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible assets, with a fair value of $2 million, will be amortized on an accelerated basis over its estimated life of 10 years.

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

	Three months ended                                     March 31, 2021		Three months ended                                     March 31, 2020
Net interest income	$	38,237	$	40,626
Provision for loan losses		12,136		5,492
Non-interest income		17,749		17,651
Non-interest expense		37,659		32,060
Income before taxes		6,191		20,725
Income tax expense (benefit)		1,078		5,277
Net income (loss)	$	5,113	$	15,448
Earnings per share
Basic	$	0.30	$	0.86
Diluted		0.29		0.86
Basic weighted average shares o/s		17,299,927		17,955,429
Diluted weighted average shares o/s		17,352,947		18,002,337

Note 9 -- Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of March 31, 2021, substantially all the Company's leases are operating leases for real estate property for bank branches, ATM locations, and office space.

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

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

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

3. An entity need not reassess initial direct costs for any existing leases.

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

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For leases in effect at January 1, 2019 and for leases commencing thereafter, the Company recognizes a lease liability and a right-of-use asset, based on the present value of lease payments over the lease term. The discount rate used in determining present value was the Company's incremental borrowing rate which is the FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the commencement date for leases subsequently entered into. The following table contains supplemental balance sheet information related to leases (dollars in thousands):

	March 31, 2021			March 31, 2020			December 31, 2020
Operating lease right-of-use assets	$	17,424		$	16,542		$	17,209
Operating lease liabilities		17,578			16,568			17,351
Weighted-average remaining lease term (in years)		6.8			7.1			7.3
Weighted-average discount rate		2.63	%		3.08	%		2.85	%

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

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

Year ending December 31,
	2021	$	2,226
	2022		2,703
	2023		2,364
	2024		1,942
	2025		1,629
Thereafter			9,150
Total lease payments			20,014
Less imputed interest			(2,436	)
Total lease liability		$	17,578

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

	Three months ended March 31,
	2021			2020
Operating lease cost	$	708		$	642
Short-term lease cost		35			46
Variable lease cost		137			169
Total lease cost		880			857
Income from subleases		(153	)		(193	)
Net lease cost	$	727		$	664

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

	March 31, 2021		March 31, 2020
Operating cash flows from operating leases	$	711	$	677

Note 10 – Derivatives

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

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Derivatives Designated as Hedging Instruments

The following table provides the outstanding notional balances and fair values of outstanding derivatives designated as hedging instruments as of March 31, 2021 and December 31, 2020 (in thousands):

	Balance Sheet Location	Weighted Average Remaining Maturity (Years)	Notional Amount		Estimated Value
March 31, 2021
Fair Value Hedges:
Interest rate swap agreements	Other liabilities	8.1 years	$	14,276	$	(1,013	)
December 31, 2020
Fair Value Hedges:
Interest rate swap agreements	Other liabilities	8.3 years	$	14,334	$	(2,892	)

The effects of the fair value hedges on the Company's income statement during the three months ended March 31, 2021 and 2020 were as follows (in thousands):

		Three months ended March 31,
Derivative	Location of Gain (Loss) on Derivatives	2021			2020
Interest rate swap agreements	Interest income on loans	$	(743	)	$	(1,384	)

		Three months ended March 31,
Derivative	Location of Gain (Loss) on Hedged Items	2021		2020
Interest rate swap agreements	Interest income on loans	$	743	$	1,384

As of March 31, 2021, the following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustment for fair value hedges (in thousands):

Line Item in the Balance Sheet in Which the Hedge Item is Included	Carrying Amount of the Hedged Asset		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset
Loans	$	13,525	$	751

Derivatives Not Designated as Hedging Instruments

The following amounts represent the notional amounts and gross fair value of derivative contracts not designated as hedging instruments outstanding during the three months ended March 31, 2021 and 2020  (in thousands):

September 30, 2020	Balance Sheet Location	Weighted Average Remaining Maturity (Years)	Notional Amount		Estimated Value
Interest rate swap agreements	Other assets	6.8	$	42,223	$	262
Interest rate swap agreements	Other liabilities	6.8		42,223		(262	)

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

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

Forward-Looking Statements

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

COVID-19 Impact

The COVID-19 outbreak is an unprecedented event that provides significant economic uncertainty for a broad spectrum of industries. The spread of this outbreak has caused significant disruptions in the U.S. economy and some of these impacts will be long lasting. As it continues to evolve it is not clear when or how the pandemic-driven contraction will recover. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Many of the CARES Act provisions, as well as other recent legislative and regulatory efforts, are expected to have a material impact on financial institutions. The Company's strong track record and revenue diversification provide a solid foundation for earnings and capital. The Company is focused on supporting its customers, communities, and employees during this unique operating environment. Following is a description of the impact COVID-19 is having, actions taken because of COVID-19, and certain risks to the Company that COVID-19 creates or exacerbates, as well as management's outlook on the current COVID-19 situation.

Lending operations and accommodations to customers. Beginning in March 2020, First Mid Bank offered a 90-day commercial deferral program, primarily to hotel and restaurant borrowers. Subsequently, additional deferrals were offered on an individual case basis and a broader program was offered to residential and consumer customers. As of March 31, 2021, a total of $50.6 million was deferred through these programs. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.

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Beginning April 3, 2020, with the passage of the initial Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company actively participated in assisting existing and new customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. The Company believes that most of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of March 31, 2021, the Company has outstanding 2,732 PPP loans totaling $259.7 million with the SBA. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government and as such do not represent a credit risk.

Employees. The Company has a business continuity plan in place that was executed in March 2020. Approximately half of the Company's workforce has the ability to work remotely with secure connections. In addition, various preventative and personal hygiene measures, in accordance with CDC guidelines have been implemented. To protect and ensure the safety of employees, as well as customers, all branch locations were transitioned to drive-thru use only. Most branch lobbies were re-opened in mid-June and the Company continues to monitor each location. The Company increased the number of available sick days to every employee impacted in anyway by COVID-19 and offered financial assistance for any employee with need.

Asset impairment. The Company does not believe that any impairment exists due to COVID-19 to goodwill and other intangible assets, long-lived assets, mortgage servicing rights ("MSRs"), right of use assets, or available-for-sale investment securities at this time. While certain valuation assumptions and judgements will change to account for COVID-19 related circumstances, the Company does not expect significant changes in methodology used to determine the fair value of assets in accordance with GAAP. It is uncertain whether prolonged effects of COVID-19 will result in future impairment charges related to any of these assets.

Capital and liquidity. The Company's and First Mid Bank's capital levels are higher today than during the Great Recession of 2008. The Company’s current allowance for credit losses could absorb net charge offs greater than the total of all net charge offs over the last 20 years. The Company’s aggregate net charge offs over the last 20 years through March 31, 2021, were $33.2 million. Current capital levels also support the Company's recent loan stress testing of the most vulnerable industry sectors impacted by COVID-19.

The Company maintains access to multiple sources of liquidity. Currently, the Company's total liquidity sources could provide $2.3 billion of total available capacity as of March 31, 2021.

Management's outlook. The Company's current financial position is strong and the fundamental earning capabilities of its currently existing operations is solid. Due to the uncertain economic outlook related to the COVID-19 crisis and the potential for loan losses and other asset impairments, it is anticipated that reserve levels will remain elevated compared to recent historical trends. All processes, procedures and internal controls are expected to continue as outlined in existing applicable policies despite remote working status of many employees. While the Company does not currently anticipate any material changes or deficiencies to its capital or liquidity sources, uncertainties about duration and overall effects on the economy could result in more adverse effects than expected.

Overview

This overview of management’s discussion and analysis highlights selected information in this document and may not contain all the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates which have an impact on the Company’s financial condition and results of operations you should carefully read this entire document.

Net income was $4,109,000 and $9,999,000 for the three months ended March 31, 2021 and 2020, respectively. Diluted net income per common share was $0.24 and $0.60 for the three months ended March 31, 2021 and 2020.

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

	Three months ended						Year ended
	March 31, 2021			March 31, 2020			December 31, 2020
Return on average assets		0.32	%		1.05	%		1.05	%
Return on average common equity		2.78	%		7.48	%		8.24	%
Average equity to average assets		11.41	%		13.97	%		12.76	%

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Total assets were $5.8 billion at March 31, 2021, compared to $4.7 billion as of December 31, 2020. From December 31, 2020 to March 31, 2021, cash and interest-bearing deposits decreased $7.7 million, net loan balances increased $788.4 million and investment securities increased $210.8 million. Net loan balances were $3.88 billion at March 31, 2021 compared to $3.09 billion at December 31, 2020. The increases were primarily due to the acquisition of Providence Bank during the first quarter of 2021.

Net interest margin, on a tax equivalent basis, defined as net interest income divided by average interest-earning assets, was 3.16% for the three months ended March 31, 2021, down from 3.51% for the same period in 2020. This decrease was primarily due to lower yields on loans and investments. Net interest income before the provision for loan losses was $36.8 million compared to net interest income of $29.9 million for the same period in 2020. The increase in net interest income was primarily due to the acquisition of Providence Bank during the first quarter of 2021.

Total non-interest income of $17.7 million increased $1.2 million or 7.5% from $16.5 million for the same period last year. The increase in non-interest income resulted primarily from an increase in wealth management revenues, and income from Providence Bank.

Total non-interest expense of $37.6 million increased $9.9 million or 35.6% from $27.7 million for the same period last year. The increase was primarily due to costs related to the acquisition of LINCO during the first quarter of 2021, and expenses from Providence Bank.

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

	Change in Net Income
	2021 versus 2020
		Three months ended March 31, 2021
Net interest income		$	6,891
Provision for loan losses			(6,655	)
Other income, including securities transactions			1,239
Other expenses			(9,869	)
Income taxes			2,504
Decrease in net income		$	(5,890	)

Credit quality is an area of importance to the Company. Total nonperforming loans were $32.0 million at March 31, 2021, compared to $24.5 million at March 31, 2020 and $28.1 million at December 31, 2020. See the discussion under the heading “Loan Quality and Allowance for Loan Losses” for a detailed explanation of these balances. Repossessed asset balances totaled $13.3 million at March 31, 2021 compared to $2.8 million at March 31, 2020 and $2.5 million at December 31, 2020. The increases in nonperforming loans and repossessed assets were due to the acquisition of Providence Bank.

The Company’s provision for loan losses for the three months ended March 31, 2021 and 2020 was $12,136,000 and $5,481,000, respectively. This increase was due to recording initial provision for credit losses for Providence Bank loans of $11.5 million, offset by lower provision expense for First Mid Bank during the first quarter of 2021 compared to 2020 when ASC 2016-13 was adopted. Total loans past due 30 days or more were 0.39% of loans at March 31, 2021 compared to 1.43% at March 31, 2020, and 0.44% of loans at December 31, 2020. The decline in this ratio was primarily due to the increase in loan balances. Loans secured by both commercial and residential real estate comprised approximately 64.6% of the loan portfolio as of March 31, 2021 and 65.8% as of December 31, 2020

The Company’s capital position remains strong and the Company has consistently maintained regulatory capital ratios above the “well-capitalized” standards. The Company’s Tier 1 capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at March 31, 2021 and 2020 and December 31, 2020 was 10.74%, 15.05% and 14.63%, respectively. The Company’s total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at March 31, 2021 and 2020, and December 31, 2020 was 13.75%, 16.13% and 18.82%, respectively. The decrease in these ratios from December 31, 2020 was primarily due to the acquisition of LINCO offset by net income added to retained earnings.

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On March 27, 2020, the federal banking regulatory agencies, issued an interim final rule which provided an option to delay the estimated impact on regulatory capital of ASU 2016-13, which was effective January 1, 2020. The initial impact of adoption of ASU 2016-13 as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 ("CECL adjustments") will be delayed for two years. After two years, the cumulative amount of these adjustments will be phased out of the regulatory capital calculation over a three-year period, with 75% of the adjustments included in year three, 50% of the adjustments included in year four and 25% of the adjustments included in year five. After five years, the temporary delay of ASU 2016-13 adoption will be fully reversed. The Company has elected this option.

The Company’s liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company maintains various sources of liquidity to fund its cash needs. See the discussion under the heading “Liquidity” for a full listing of sources and anticipated significant contractual obligations.

The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. The total outstanding commitments at March 31, 2021 and 2020, were $850 million and $596 million, respectively.

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

On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent. Because the reserve ratio exceeded 1.35 percent, two deposit insurance assessment changes occurred under the FDIC regulations:

• Surcharges on large banks (total consolidated assets of less than $10 billion) ended; the last surcharge on large banks was collected on December 28, 2018.

• Small banks (total consolidated assets of less than $10 billion) were awarded assessment credits for the portion of their assets that contributed to the growth in the reserve ratio from 1.15 percent to 1.35 percent, to be applied when the reserve ratio is at least 1.38 percent.

On August 20, 2019, the FDIC Board approved a Notice of Proposed Rulemaking which amended the Small Bank Credits regulation to permit credit usage when the reserve ratio is at least 1.35 percent (rather than 1.38%). Additionally, after eight quarters of credit usage, the FDIC would remit the remaining full nominal value to each bank. Eligible banks were notified in January 24, 2019 with preliminary estimate of their share of small bank assessment credits. First Mid Bank's Small Bank Credit was $931,853. A portion of the credit was applied to the second and third quarter assessments paid in 2019 and the fourth quarter assessment paid in 2020. The remaining credit of approximately $163,700 was applied to the Company's assessment for the first quarter of 2020.

The Company expensed $452,045 and $93,000 for the assessment during the first three months of 2021 and 2020, respectively. The increase in 2021 expense was due to a remaining small bank credit utilized during the first quarter of 2020.

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

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

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

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

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

Critical Accounting Policies and Use of Significant Estimates

The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Company’s consolidated financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements included in the Company’s 2019 Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

Investment in Debt and Equity Securities. The Company classifies its investments in debt and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which was codified into ASC 320. Securities classified as held-to-maturity are recorded at amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of the Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income (loss).

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

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

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

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

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

Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense.

Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.

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

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

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

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

Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the Company’s consolidated balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment as of September 30, 2020 as part of the goodwill impairment test and no impairment was identified.

As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the consolidated balance sheets. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually.

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Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.

SFAS No. 157, “Fair Value Measurements”, which was codified into ASC 820, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date.

The three levels are defined as follows:

• Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 — inputs that are unobservable and significant to the fair value measurement.

At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 7 – Fair Value of Assets and Liabilities.

Results of Consolidated Operations

Net Interest Income

The largest source of revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds.

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is presented on a full tax equivalent ("TE") basis in the table that follows. The federal statutory rate in effect of 21% for 2020 and 2019 was used. The TE analysis portrays the income tax benefits associated with the tax-exempt assets. The year-to-date net yield on interest-earning assets excluding the TE adjustments of $595,000 and $520,000 for 2021 and 2020, respectively were 3.11% and 3.45% at March 31, 2021 and March 31, 2020.

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The Company’s average balances, fully tax equivalent interest income and interest expense, and rates earned or paid for major balance sheet categories are set forth for the three months ended March 31, 2021 and 2020 in the following table (dollars in thousands):

	Three months ended March 31, 2021								Three months ended March 31, 2020
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
Assets
Interest-bearing deposits with other financial    institutions	$	278,295		$	74		0.11	%	$	23,824		$	91		1.54	%
Federal funds sold		1,316			—		0.03	%		926			2		0.87	%
Certificates of deposit		2,695			14		2.14	%		5,064			31		2.46	%
Investment securities:
Taxable		761,727			3,249		1.71	%		543,799			3,339		2.46	%
Tax-exempt (1)		248,188			2,016		3.25	%		174,459			1,582		3.63	%
Loans net of unearned income (TE) (2)		3,477,754			36,058		4.20	%		2,703,051			30,215		4.50	%
Total earning assets		4,769,975			41,411		3.52	%		3,451,123			35,260		4.11	%
Cash and due from banks		84,392								93,283
Premises and equipment		68,282								59,476
Other assets		296,284								251,359
Allowance for loan losses		(46,735	)							(29,990	)
Total assets	$	5,172,198							$	3,825,251
Liabilities and Stockholders' Equity
Interest-bearing deposits
Demand deposits	$	1,876,378		$	886		0.19	%	$	1,264,489		$	1,092		0.35	%
Savings deposits		579,632			136		0.10	%		435,480			119		0.11	%
Time deposits		623,852			1,462		0.95	%		570,132			2,650		1.87	%
Total Interest-bearing deposits		3,079,862			2,484		0.33	%		2,270,101			3,861		0.68	%
Securities sold under agreements to repurchase		198,670			70		0.14	%		202,693			194		0.38	%
FHLB advances		102,081			374		1.49	%		120,146			580		1.94	%
Federal funds purchased		—			—		0.00	%		2,110			10		1.91	%
Subordinated debt		94,266			984		4.23	%		—			—		0.00	%
Junior subordinated debentures		19,041			140		2.98	%		18,873			218		4.65	%
Other debt		—			—		0.00	%		769			4		2
Total borrowings		414,058			1,568		1.54	%		344,591			1,006		1.17	%
Total interest-bearing liabilities		3,493,920			4,052		0.47	%		2,614,692			4,867		0.75	%
Non interest-bearing demand deposits		1,033,741					0.36	%		628,588					0.60	%
Other liabilities		54,346								47,539
Stockholders' equity		590,191								534,432
Total liabilities & equity	$	5,172,198							$	3,825,251
Net interest income				$	37,359							$	30,393
Net interest spread							3.05	%							3.36	%
Impact of non interest-bearing funds							0.11	%							0.15	%
TE Net yield on interest-earning assets							3.16	%							3.51	%

1. The tax-exempt income is shown on a tax equivalent basis.

2. Nonaccrual loans and loans held for sale are included in the average balances. Balances are net of unaccreted discount related to loans acquired.

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Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for the three months ended March 31, 2021, compared to the same period in 2020 (in thousands):

	Three months ended March 31, 2021 compared to 2020 Increase / (Decrease)
	Total
	Change			Volume (1)			Rate (1)
Earning Assets:
Interest-bearing deposits	$	(17	)	$	612		$	(629	)
Federal funds sold		(2	)		4			(6	)
Certificates of deposit investments		(17	)		(13	)		(4	)
Investment securities:
Taxable		(90	)		4,581			(4,671	)
Tax-exempt (2)		434			613			(179	)
Loans (2) (3)		5,843			17,898			(12,055	)
Total interest income	$	6,151		$	23,695		$	(17,544	)
Interest-Bearing Liabilities:
Interest-bearing deposits
Demand deposits	$	(206	)	$	1,975		$	(2,181	)
Savings deposits		17			82			(65	)
Time deposits		(1,188	)		1,496			(2,684	)
Securities sold under agreements to repurchase		(124	)		(4	)		(120	)
FHLB advances		(206	)		(81	)		(125	)
Federal Funds Purchased		(10	)		(5	)		(5	)
Subordinated debt		984			931			53
Junior subordinated debentures		(78	)		14			(92	)
Other debt		(4	)		(2	)		(2	)
Total interest expense		(815	)		4,406			(5,221	)
Net interest income	$	6,966		$	19,289		$	(12,323	)

1. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate.

2. The tax-exempt income is shown on a tax-equivalent basis.

3. Nonaccrual loans have been included in the average balances.

Tax equivalent net interest income increased $7.0 million, or 22.9%, to $37.4 million for the three months ended March 31, 2021, from $30.4 million for the same period in 2019. Net interest income increased primarily due to the acquisition of Providence Bank during the first quarter of 2021. The net interest margin decreased primarily due to a lower interest rates on loans and investments.

For the three months ended March 31, 2021, average earning assets increased $1.3 billion, or 38.2%, and average interest-bearing liabilities increased $879.2 million or 33.6% compared with average balances for the same period in 2020.

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

• Average interest-bearing deposits with other financial institutions increased $254.5 million or 1068.1%.

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

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

• Average loans increased by $774.7 million or 28.7%.

• Average securities increased by $291.7 million or 40.6%.

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

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

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

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

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Provision for Loan Losses

The provision for loan losses for the three months ended March 31, 2021 and 2020 was $12.1 million and $5.5 million, respectively. This increase was due to recording initial provision for credit losses for Providence Bank loans of $11.5 million, offset by lower provision expense for First Mid Bank during the first quarter of 2021 compared to 2020 when ASC 2016-13 was adopted. Net charge-offs were $702,000 for the three months ended March 31, 2021, compared to net charge offs of $1.2 million for March 31, 2020. Nonperforming loans were $32.0 million and $24.5 million as of March 31, 2021 and 2020, respectively. For information on loan loss experience and nonperforming loans, see discussion under the “Nonperforming Loans” and “Loan Quality and Allowance for Loan Losses” sections below.

Other Income

An important source of the Company’s revenue is other income. The following table sets forth the major components of other income for the three months ended March 31, 2021 and 2020 (in thousands):

	Three months March 31, 2021
	2021		2020		$ Change			% Change
Wealth management revenues	$	4,926	$	3,626	$	1,300			35.9	%
Insurance commissions		5,857		6,621		(764	)		-11.5	%
Service charges		1,364		1,778		(414	)		-23.3	%
Security gains, net		4		531		(527	)		-99.2	%
Mortgage banking revenue, net		1,409		308		1,101			357.5	%
ATM / debit card revenue		2,699		1,987		712			35.8	%
Bank Owned Life Insurance		637		431		206			47.8	%
Other		853		1,228		(375	)		-30.5	%
Total other income	$	17,749	$	16,510	$	1,239			7.5	%

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

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

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

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

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

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

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

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

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

• Revenue from ATMs and debit cards increased due to an increase in activity during the quarter.

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

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

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Other Expense

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

	Three months March 31, 2021
	2021		2020			$ Change			% Change
Salaries and employee benefits	$	23,487	$	16,500		$	6,987			42.3	%
Net occupancy and equipment expense		4,970		4,242			728			17.2	%
Net other real estate owned expense		78		(46	)		124			269.6	%
FDIC insurance		452		93			359			386.0	%
Amortization of intangible assets		1,220		1,295			(75	)		-5.8	%
Stationery and supplies		316		268			48			17.9	%
Legal and professional		1,402		1,398			4			0.3	%
Marketing and donations		502		481			21			4.4	%
ATM/debit card expense		838		605			233			38.5	%
Other operating expenses		4,335		2,895			1,440			49.7	%
Total other expense	$	37,600	$	27,731		$	9,869			35.6	%

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

• The increase in salaries and employee benefits, the largest component of other expense, is primarily due to an increase in incentive compensation and commissions, group insurance expense, share-based compensation expense, increases for merit raises and applicable payroll taxes, and the addition of Providence Bank for part of the first quarter of 2021. There were 983 and 835 full-time equivalent employees at March 31, 2021 and 2020, respectively.

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

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

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

• The increase in other operating expenses was primarily due to an increase in costs to acquire LINCO and additional expenses from the operation of Providence Bank.

• On a net basis, all other categories of operating expenses increased slightly during the period compared to last year primarily due to the operation of Providence Bank.

Income Taxes

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

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

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Analysis of Consolidated Balance Sheets

Securities

The Company’s overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance. The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions. The following table sets forth the amortized cost of the available-for-sale and held-to-maturity securities as of March 31, 2021 and December 31, 2020 (dollars in thousands)

	March 31, 2021					December 31, 2020
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
U.S. Treasury securities and obligations of U.S. government    corporations and agencies	$	179,801		1.20	%	$	132,083		1.25	%
Obligations of states and political subdivisions		249,776		2.65	%		237,886		2.72	%
Mortgage-backed securities: GSE residential		620,102		1.76	%		479,470		1.92	%
Other securities		38,148		4.39	%		10,740		5.22	%
Total securities	$	1,087,827		1.95	%	$	860,179		2.08	%

At March 31, 2021, the Company’s investment portfolio increased by $227.6 million from December 31, 2020 primarily due to securities added with the acquisition of Providence Bank. When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed.  The table below presents the credit ratings as of March 31, 2021 for certain investment securities (in thousands):

					Average Credit Rating of Fair Value at March 31, 2021 (1)
	Amortized Cost		Estimated Fair Value		AAA		AA +/-		A +/-		BBB +/-		< BBB -		Not rated
Available-for-sale:
U.S. Treasury securities and    obligations of U.S. government    corporations and agencies	$	174,789	$	171,530	$	29,261	$	131,290	$	—	$	—	$	—	$	10,980
Obligations of state and political    subdivisions		249,776		257,719		20,117		173,117		63,244		—		—		1,241
Mortgage-backed securities (2)		620,102		621,952		1,073		—		—		—		—		620,879
Other securities		36,116		36,747		—		—		—		—		—		36,747
Total available-for-sale	$	1,080,783	$	1,087,948	$	50,451	$	304,407	$	63,244	$	—	$	—	$	669,847
Held-to-maturity:
U.S. Treasury securities and    obligations of U.S. government    corporations and agencies	$	5,012	$	5,092	$	—	$	5,092	$	—	$	—	$	—	$	—
Annuity		2,033		2,033												2,033
Total held-to-maturity	$	7,045	$	7,125	$	—	$	5,092	$	—	$	—	$	—	$	2,033
Equity securities:
Federal Agricultural Mtg Corp	$	84	$	300	$	—	$	—	$	—	$	—	$	—	$	300

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

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

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Loans

The loan portfolio is the largest category of the Company’s earning assets. The following table summarizes the composition of the loan portfolio at amortized cost, including loans held for sale, as of March 31, 2021 and December 31, 2020 (in thousands):

	March 31, 2021					December 31, 2020
	Amortized Cost		% Outstanding Loans			Amortized Cost		% Outstanding Loans
Construction and land development	$	165,376		4.2	%	$	122,479		3.9	%
Agricultural real estate		269,652		6.8	%		254,341		8.1	%
1-4 Family residential properties		412,470		10.5	%		325,762		10.4	%
Multifamily residential properties		297,984		7.6	%		189,632		6.0	%
Commercial real estate		1,402,885		35.6	%		1,174,300		37.4	%
Loans secured by real estate		2,548,367		64.6	%		2,066,514		65.8	%
Agricultural loans		121,070		3.1	%		137,352		4.4	%
Commercial and industrial loans		1,017,400		25.8	%		738,313		23.5	%
Consumer loans		91,705		2.3	%		78,002		2.5	%
All other loans		164,557		4.2	%		118,238		3.8	%
Total loans	$	3,943,099		100.0	%	$	3,138,419		100.0	%

Loan balances increased $804.7 million, or 25.6% of which approximately $838 million were loans acquired with Providence Bank and $259.7 million were PPP loans. The balance of real estate loans held for sale, included in the balances shown above, amounted to $4.7 million and $1.9 million as of March 31, 2021 and December 31, 2020, respectively.

Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. The Company does not have any sub-prime mortgages or credit card loans outstanding which are also generally considered to be higher credit risk.

Loans are geographically dispersed in central and southern Illinois, the St. Louis Metro area and central Missouri, and Texas. While these regions have experienced some economic stress during 2021 and 2020, the Company does not consider these locations high risk areas since these regions have not experienced the significant declines in real estate values seen in some other areas in the United States.

The Company does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage of total risk-based capital for the periods shown above. At March 31, 2021 and December 31, 2020, the Company did have industry loan concentrations that exceeded 25% of total risk-based capital in the following industries (dollars in thousands):

	March 31, 2021					December 31, 2020
	Principal balance		% Outstanding Loans			Principal balance		% Outstanding Loans
Other grain farming	$	278,186		7.06	%	$	308,202		9.82	%
Lessors of non-residential buildings		426,294		10.81	%		420,175		13.39	%
Lessors of residential buildings & dwellings		319,777		8.11	%		313,268		9.98	%
Other gambling industries		121,283		3.08	%		119,549		3.81	%
Hotels and motels		126,016		3.20	%		124,755		3.98	%
Nursing care facilities (skilled nursing)		109,839		2.79	%		114,937		3.66	%

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

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The following table presents the balance of loans outstanding as of March 31, 2021, by contractual maturities (in thousands):

	Maturity (1)
	One year or less(2)		Over 1 through 5 years		Over 5 years		Total
Construction and land development	$	31,740	$	84,287	$	49,349	$	165,376
Agricultural real estate		29,201		99,640		140,811		269,652
1-4 Family residential properties		29,086		75,631		307,753		412,470
Multifamily residential properties		29,627		164,465		103,892		297,984
Commercial real estate		168,171		569,110		665,604		1,402,885
Loans secured by real estate		287,825		993,133		1,267,409		2,548,367
Agricultural loans		71,515		46,750		2,805		121,070
Commercial and industrial loans		250,797		582,829		183,774		1,017,400
Consumer loans		4,968		68,502		18,235		91,705
All other loans		73,130		24,041		67,386		164,557
Total loans	$	688,235	$	1,715,255	$	1,539,609	$	3,943,099

1. Based upon remaining contractual maturity.

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

As of March 31, 2021, loans with maturities over one year consisted of approximately $2.5 billion in fixed rate loans and approximately $719 million in variable rate loans. The loan maturities noted above are based on the contractual provisions of the individual loans. The Company has no general policy regarding renewals and borrower requests, which are handled on a case-by-case basis.

Nonperforming Loans and Nonperforming Other Assets

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

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

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

The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets at March 31, 2021 and December 31, 2020 (in thousands):

	March 31, 2021			December 31, 2020
Nonaccrual loans	$	27,877		$	23,750
Restructured loans which are performing in accordance with revised terms		4,104			4,373
Total nonperforming loans		31,981			28,123
Repossessed assets		13,339			2,493
Total nonperforming loans and repossessed assets	$	45,320		$	30,616
Nonperforming loans to loans, before allowance for loan losses		0.81	%		0.90	%
Nonperforming loans and repossessed assets to loans, before allowance for loan losses		1.15	%		0.98	%

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

	March 31, 2021					December 31, 2020
	Balance		% of Total			Balance		% of Total
Construction and land development	$	225		0.8	%	$	162		0.7	%
Agricultural real estate		374		1.3	%		359		1.5	%
1-4 Family residential properties		8,771		31.5	%		6,930		29.2	%
Multifamily Residential properties		2,173		7.8	%		2,181		9.2	%
Commercial real estate		9,516		34.2	%		8,760		36.9	%
Loans secured by real estate		21,059		75.6	%		18,392		77.4	%
Agricultural loans		262		0.9	%		659		2.8	%
Commercial and industrial loans		6,137		22.0	%		4,372		18.4	%
Consumer loans		394		1.4	%		327		1.4	%
Other loans		25		0.1	%		—		0.0	%
Total loans	$	27,877		100.0	%	$	23,750		100.0	%

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

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

	March 31, 2021					December 31, 2020
	Balance		% of Total			Balance		% of Total
Construction and land development	$	4,839		36.3	%	$	1,436		57.6	%
1-4 family residential properties		6,778		50.8	%		71		2.8	%
Commercial real estate		1,722		12.9	%		982		39.4	%
Total real estate		13,339		100.0	%		2,489		99.8	%
Consumer loans		—		0.0	%		4		0.2	%
Total repossessed collateral	$	13,339		100.0	%	$	2,493		100.0	%

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

Loan Quality and Allowance for Credit Losses

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

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

Management recognizes there are risk factors that are inherent in the Company’s loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company’s operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company’s success. At March 31, 2021, the Company’s loan portfolio included $390.7 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $278.2 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture decreased $1.0 million from $391.7 million at December 31, 2020 while loans concentrated in other grain farming decreased $30.0 million from $308.2 million at December 31, 2020. While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio. In addition, the Company has $126.0 million of loans to motels and hotels. The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region. While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses. The Company also has $426.3 million of loans to lessors of non-residential buildings, $319.8 million of loans to lessors of residential buildings and dwellings, and $121.3 million of loans to other gambling industries.

The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the Board of Directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed. Most of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments.

The Company minimizes credit risk by adhering to sound underwriting and credit review policies. Management and the board of directors of the Company review these policies at least annually. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. The board of directors and management review the status of problem loans each month and formally determine a best estimate of the allowance for loan losses on a quarterly basis. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses.

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

	Three months ended March 31,
	2021			2020
Average loans outstanding, net of unearned income	$	3,477,754		$	2,703,051
Allowance-prior year end of period		41,910			26,911
Adjustment for adoption of ASU 2013-16		—			1,672
Allowance - beginning of period		41,910			28,583
Initial allowance on loans purchased with credit deterioration		2,074			—
Charge-offs:
Construction & Land Development		—			—
1-4 Family residential		182			196
Commercial Real Estate		480			84
Agricultural		—			—
Commercial & Industrial		18			972
Consumer		288			171
Total charge-offs		968			1,423
Recoveries:
1-4 Family Residential		8			62
Commercial Real Estate		9			5
Commercial & Industrial		18			23
Consumer		231			145
Total recoveries		266			235
Net charge-offs (recoveries)		702			1,188
Provision for loan losses		12,136			5,481
Allowance-end of period	$	55,418		$	32,876
Ratio of annualized net charge-offs to average loans		0.08	%		0.18	%
Ratio of allowance for credit losses to loans outstanding (at amortized cost)		1.41	%		1.20	%
Ratio of allowance for credit losses to nonperforming loans		173	%		134	%

Excluding the fully guaranteed PPP loans, the ratio of allowance for credit losses to loans outstanding was 1.50% as of March 31, 2021. The increase in the allowance for credit losses to nonperforming loans ratio is primarily due to the increase in the allowance for credit losses and a decline in nonperforming loans at March 31, 2021 compared to March 31, 2020. The increase in allowance for credit losses is primarily due to the day one provision required to be recorded in the acquisition of loans with Providence Bank.

During the first three months of 2021, the Company had net charge-offs of $702,000 compared to net charge-offs of $1,188,000 in 2020. During the first three months of 2021, there was a significant charge-off of one commercial real estate loans of one borrower totaling $480,000. During the first three months of 2020, there was one significant charge off on one loan to a commercial borrower of $836,200.

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Deposits

Funding of the Company’s earning assets is substantially provided by a combination of consumer, commercial and public fund deposits. The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates for the three months ended March 31, 2021 and 2020 and for the year ended December 31, 2020 (dollars in thousands):

	Three months ended March 31, 2021					Three months ended March 31, 2020					Year ended December 31, 2020
	Average Balance		Weighted Average Rate			Average Balance		Weighted Average Rate			Average Balance		Weighted Average Rate
Demand deposits:
Non-interest-bearing	$	1,033,741	—%			$	628,588	—%			$	777,435	—%
Interest-bearing		1,876,378		0.19	%		1,264,489		0.35	%		1,557,264		0.24	%
Savings		579,632		0.10	%		435,480		0.11	%		469,276		0.09	%
Time deposits		623,852		0.95	%		570,132		1.86	%		531,834		1.61	%
Total average deposits	$	4,113,603		0.25	%	$	2,898,689		0.54	%	$	3,335,809		0.38	%

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

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

	Three months ended                      March 31, 2021		Three months ended                      March 31, 2020		Year ended December 31, 2020
High month-end balances of total deposits	$	4,737,693	$	2,932,973	$	3,692,784
Low month-end balances of total deposits		3,725,741		2,873,260		2,873,260

Balances of time deposits of $100,000 or more include time deposits maintained for public fund entities and consumer time deposits. The following table sets forth the maturity of time deposits of $100,000 or more at March 31, 2021 and December 31, 2020 (in thousands):

	March 31, 2021		December 31, 2020
3 months or less	$	126,122	$	72,945
Over 3 through 6 months		127,404		49,710
Over 6 through 12 months		334,529		88,682
Over 12 months		79,133		72,070
Total	$	667,188	$	283,407

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Repurchase Agreements and Other Borrowings

Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. These obligations are collateralized with certain government securities that are direct obligations of the United States or one of its agencies. These retail repurchase agreements are offered as a cash management service to its corporate customers. Other borrowings consist of Federal Home Loan Bank (“FHLB”) advances, federal funds purchased, loans (short-term or long-term debt) that the Company has outstanding and junior subordinated debentures. Information relating to securities sold under agreements to repurchase and other borrowings as of March 31, 2021 and December 31, 2020 is presented below (dollars in thousands):

	March 31, 2021			December 31, 2020
Securities sold under agreements to repurchase	$	212,503		$	206,937
Federal Home Loan Bank advances:
Fixed term – due in one year or less		18,984			18,984
Fixed term – due after one year		97,877			74,985
Other borrowings:
Fed funds		—			—
Subordinated debt		94,289			94,253
Junior subordinated debentures		19,069			19,027
Total	$	442,722		$	414,186
Average interest rate at end of period		1.39	%		0.81	%
Maximum outstanding at any month-end:
Securities sold under agreements to repurchase	$	212,503		$	350,288
Federal Home Loan Bank advances:
FHLB-Overnight		—			—
Fixed term – due in one year or less		18,984			66,000
Fixed term – due after one year		97,877			74,895
Other borrowings:
Federal funds purchased		—			8,000
Debt due in one year or less		—			5,000
Debt due after one year		—			—
Subordinated debt		94,289			94,256
Junior subordinated debentures		19,069			19,027
Averages for the period (YTD):
Securities sold under agreements to repurchase	$	198,670		$	219,298
Federal Home Loan Bank advances:
FHLB-overnight		—			1,831
Fixed term – due in one year or less		17,406			24,858
Fixed term – due after one year		84,675			79,999
Other borrowings:
Federal funds purchased		—			525
Loans due in one year or less		—			656
Loans due after one year		—			—
Subordinated debt		94,266			22,403
Junior subordinated debentures		19,041			18,936
Total	$	414,058		$	370,338
Average interest rate during the period		1.52	%		1.07	%

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

Advance		Term (in years)		Interest Rate	Maturity Date
$	5,000,000		5.0	1.85%	April 12, 2021
	4,000,000		1.0	2.00%	May 3, 2021
	5,000,000		7.0	2.55%	October 1, 2021
	5,000,000		5.0	2.71%	March 21, 2022
	5,000,000		8.0	2.40%	January 9, 2023
	5,000,000		3.0	2.41%	May 31, 2022
	5,000,000		3.0	2.12%	June 7, 2022
	5,000,000		3.0	2.12%	June 7, 2022
	5,000,000		4.0	2.44%	May 30, 2023
	5,000,000		3.5	1.51%	July 31, 2023
	5,000,000		3.5	0.77%	September 11, 2023
	10,000,000		5.0	1.45%	December 31, 2024
	5,000,000		5.0	0.91%	March 10, 2025
	6,940,511		10.0	2.64%	December 23, 2025
	5,000,000		10.0	1.14%	October 3, 2029
	5,000,000		10.0	1.15%	October 3, 2029
	5,000,000		10.0	1.12%	October 3, 2029
	10,000,000		10.0	1.39%	December 31, 2029
	15,000,000		10.0	1.41%	December 31, 2029

The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $15 million. There was no balance on this line of credit as of March 31, 2021. This loan was renewed on April 9, 2021 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by the stock of First Mid Bank. The Company and First Mid Bank were in compliance with the existing covenants at March 31, 2021 and 2020, and December 31, 2020.

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

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

On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through First Mid-Illinois Statutory Trust II (“Trust II”), a statutory business trust and wholly owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II for the purpose of issuing the trust preferred securities. The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common equity of Trust II, a total of $10,310 000, was invested in junior subordinated debentures of the Company. The underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points, 1.78% and 1.82% at March 31, 2021 and December 31, 2020, respectively).

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On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First Clover Financial. The $4,000,000 of trust preferred securities and an additional $124,000 additional investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (2.03% and 2.07% at March 31, 2021 and December 31, 2020, respectively) and resets quarterly.

On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First BancTrust Corporation. The $6,000,000 of trust preferred securities and an additional $186,000 additional investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I. The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (1.88% and 2.44% at March 31, 2021 and December 31, 2020, respectively) and resets quarterly.

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

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

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

Interest Rate Sensitivity

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

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In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as “static GAP” analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet. The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at March 31, 2021 (dollars in thousands):

	Rate Sensitive Within
	1 years			1-2 years			2-3 years			3-4 years			4-5 years			Thereafter			Total		Fair Value
Interest-earning assets:
Federal funds sold and other    interest-bearing deposits	$	331,066		$	—		$	—		$	—		$	—		$	—		$	331,066	$	331,066
Certificates of deposit investments		980			1,715			—		—				—		—				2,695		2,695
Taxable investment securities		130,978			127,482			114,465			110,812			43,819			315,174			842,730		842,730
Nontaxable investment securities		37,250			13,785			13,750			17,927			16,016			153,835			252,563		252,643
Loans		1,341,946			639,970			461,940			597,510			448,676			453,057			3,943,099		3,899,938
Total	$	1,842,220		$	782,952		$	590,155		$	726,249		$	508,511		$	922,066		$	5,372,153	$	5,329,072
Interest-bearing liabilities:
Savings and NOW accounts	$	496,434		$	171,251		$	171,251		$	171,251		$	171,251		$	755,542		$	1,936,980	$	1,936,980
Money market accounts		527,665			33,838			33,838			33,838			33,838			140,929			803,946		803,946
Other time deposits		669,953			87,194			23,041			19,888			11,439			71			811,586		814,695
Short-term borrowings/debt		212,503			—			—		—				—			—			212,503		212,514
Long-term borrowings/debt		38,053			20,326			15,206			15,000			101,634			40,000			230,219		226,454
Total	$	1,944,608		$	312,609		$	243,336		$	239,977		$	318,162		$	936,542		$	3,995,234	$	3,994,589
Rate sensitive assets – rate    sensitive liabilities	$	(102,388	)	$	470,343		$	346,819		$	486,272		$	190,349		$	(14,476	)	$	1,376,919
Cumulative GAP		(102,388	)		367,955			714,774			1,201,046			1,391,395			1,376,919
Cumulative amounts as % of    total Rate sensitive assets		-1.9	%		8.8	%		6.5	%		9.1	%		3.5	%		-0.3	%
Cumulative Ratio		-1.9	%		6.8	%		13.3	%		22.4	%		25.9	%		25.6	%

The static GAP analysis shows that at March 31, 2021, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon. This indicates that future increases in interest rates could have an adverse effect on net interest income. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis. The Company’s ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank’s historical experience and with known industry trends. ALCO meets at least monthly to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities. The Company is currently experiencing downward pressure on asset yields resulting from the extended period of historically low interest rates and heightened competition for loans. A continuation of this environment could result in a decline in interest income and the net interest margin.

Capital Resources

At March 31, 2021, the Company’s stockholders' equity increased $33.7 million, or 5.9%, to $602 million from $568 million as of December 31, 2020. During the first three months of 2021, net income contributed $4.1 million to equity before the payment of dividends to stockholders. The change in market value of available-for-sale investment securities decreased stockholders' equity by $12.0 million, net of tax. Dividends of $3.4 million were paid during the first quarter of 2021. The acquisition of LINCO also increase stockholders’ equity $44.2 million.

The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Bank holding companies follow minimum regulatory requirements established by the Board of Governors of the Federal Reserve System (“Federal Reserve System”), and First Mid Bank and Providence Bank follow similar minimum regulatory requirements established for banks by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation, as applicable. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and its subsidiary banks to maintain a minimum capital amounts and ratios (set forth in the table below). Management believes that, as of March 31, 2021 and December 31, 2020, the Company, First Mid Bank and Providence Bank met all capital adequacy requirements.

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

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

	Actual					Required Minimum For Capital Adequacy Purposes			To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio	Amount		Ratio
March 31, 2021
Total Capital (to risk-weighted    assets)
Company	$	636,910		13.75	%	$	486,239	> 10.50%	N/A		N/A
First Mid Bank		453,194		14.56			326,900	> 10.50	$	311,334	> 10.00%
Providence Bank		139,480		17.12			85,564	> 10.50	$	81,490	> 10.00%
Tier 1 Capital (to risk-weighted    assets)
Company		497,506		10.74			393,622	> 8.50	N/A		N/A
First Mid Bank		415,986		13.36			264,633	> 8.50		249,067	> 8.00
Providence Bank		131,573		16.15			69,266	> 8.50		65,192	> 8.00
Common Equity Tier 1 Capital    (to risk-weighted assets)
Company		478,437		10.33			324,160	> 7.00	N/A		N/A
First Mid Bank		415,986		13.36			217,933	> 7.00		202,367	> 6.50
Providence Bank		131,573		16.15			57,043	> 7.00		52,968	> 6.50
Tier 1 Capital (to average    assets)
Company		497,506		10.74			202,161	> 4.00	N/A		N/A
First Mid Bank		415,986		13.36			183,401	> 4.00		229,252	> 5.00
Providence Bank		131,573		16.15			42,143	> 4.00		52,678	> 5.00
December 31, 2020
Total Capital (to risk-weighted    assets)
Company	$	589,352		18.82	%	$	328,865	> 10.50%	N/A		N/A
First Mid Bank		446,308		14.30			327,685	> 10.50	$	312,081	> 10.00%
Tier 1 Capital (to risk-weighted    assets)
Company		458,325		14.63			266,224	> 8.50	N/A		N/A
First Mid Bank		409,534		13.12			265,269	> 8.50		249,665	> 8.00
Common Equity Tier 1 Capital    (to risk-weighted assets)
Company		439,299		14.03			219,243	> 7.00	N/A		N/A
First Mid Bank		409,534		13.12			218,457	> 7.00		202,853	> 6.50
Tier 1 Capital (to average    assets)
Company		458,325		10.22			179,302	> 4.00	N/A		N/A
First Mid Bank		409,534		9.18			178,497	> 4.00		223,121	> 5.00

The Company's risk-weighted assets, capital, and capital ratios for March 31, 2021 are computed in accordance with Basel III capital rules which were effective January 1, 2015. See heading "Basel III" in the Overview section of this report for a more detailed description of the Basel III rules. As of March 31, 2021, the Company, First Mid Bank and Providence Bank had capital ratios above the required minimums for regulatory capital adequacy, and First Mid Bank and Providence Bank had capital ratios that qualified it for treatment as well-capitalized under the regulatory framework for prompt corrective action with respect to banks.

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Stock Plans

Participants may purchase Company stock under the following four plans of the Company: The Deferred Compensation Plan, the First Retirement and Savings Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan. For more detailed information on these plans, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

Following the stockholders’ approval at the 2021 annual meeting of the Company, a maximum of 399,983 shares of common stock may be issued under the SI Plan. The Company awarded 27,750 and 25,200 restricted stock awards during 2020 and 2019, respectively and 35,400 and 16,950 as stock unit awards during 2020 and 2019, respectively.

Employee Stock Purchase Plan

At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 5% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 600,000 shares of common stock may be issued under the ESPP. During the three months ended March 31, 2021 and 2020, 3,142 shares and 3,804 shares, respectively, were issued pursuant to the ESPP.

Stock Repurchase Program

Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock. During the quarter, the Company repurchased no shares. The Company has approximately $4.7 million in remaining capacity under its existing repurchase program.

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

Liquidity

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

Details of the Company's liquidity sources include:

• First Mid Bank has $100 million available in overnight federal fund lines, including $30 million from First Horizon Bank, N.A., $20 million from U.S. Bank, N.A., $10 million from Wells Fargo Bank, N.A., $15 million from The Northern Trust Company and $25 million from Zions Bank. Availability of the funds is subject to First Mid Bank meeting minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total average assets. As of March 31, 2021, First Mid Bank met these regulatory requirements.

• First Mid Bank and Providence Bank can borrow from the Federal Home Loan Bank as a source of liquidity. Availability of the funds is subject to the pledging of collateral to the Federal Home Loan Bank. Collateral that can be pledged includes one-to-four family residential real estate loans and securities. At March 31, 2021, the excess collateral at the FHLB would support approximately $812 million of additional advances for First Mid Bank and Providence Bank.

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

• In addition, as of March 31, 2021, the Company had a revolving credit agreement in the amount of $15 million with The Northern Trust Company with an outstanding balance of $0 million and $15 million in available funds. This loan was renewed on April 9, 2021 for one year as a revolving credit agreement. The interest rate is floating at 2.25% over the federal funds rate. The loan is secured by the stock of First Mid Bank, including requirements for operating and capital ratios. The Company and its subsidiary bank were in compliance with the existing covenants at March 31, 2021 and 2020 and December 31, 2020.

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

• lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions;

• deposit activities, including seasonal demand of private and public funds;

• investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Treasury and government agency securities; and

• operating activities, including scheduled debt repayments and dividends to stockholders.

The following table summarizes significant contractual obligations and other commitments at March 31, 2021 (in thousands):

			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
Time deposits	$	811,586	$	669,953	$	110,235	$	31,327	$	71
Debt		113,358		—		—		—		113,358
Other borrowing		329,364		231,487		35,326		15,206		47,345
Operating leases		20,009		2,908		4,901		3,428		8,772
Supplemental retirement		419		50		100		100		169
	$	1,274,736	$	904,398	$	150,562	$	50,061	$	169,715

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

Off-Balance Sheet Arrangements

First Mid Bank and Providence Bank enter into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments. The off-balance sheet financial instruments whose contract amounts represent credit risk at March 31, 2021 and December 31, 2020 were as follows (in thousands):

	March 31, 2021		December 31, 2020
Unused commitments and lines of credit:
Commercial real estate	$	98,463	$	56,309
Commercial operating		419,682		396,345
Home equity		54,927		40,464
Other		263,538		112,327
Total	$	836,610	$	605,445
Standby letters of credit	$	13,183	$	10,048

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Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded within ninety days. Lines of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long as there is no violation of any condition established in the loan agreement. Both commitments to originate credit and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the lines and some commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties. Standby letters of credit are primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers. The maximum amount of credit that would be extended under letters of credit is equal to the total off-balance sheet contract amount of such instrument. The Company's deferred revenue under standby letters of credit was nominal.

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the market risk faced by the Company since December 31, 2020. For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 4. CONTROLS AND PROCEDURES

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

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PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Various risks and uncertainties, some of which are difficult to predict and beyond the Company’s control, could negatively impact the Company. As a financial institution, the Company is exposed to interest rate risk, liquidity risk, credit risk, operational risk, risks from economic or market conditions, and general business risks among others. Adverse experience with these or other risks could have a material impact on the Company’s financial condition and results of operations, as well as the value of its common stock. See the risk factors and “Supervision and Regulation” described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

.

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

ISSUER PURCHASES OF EQUITY SECURITIES
Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Total		0	$	0.00		0	$	4,660,000

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

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

Exhibit Number	Exhibit Index to Quarterly Report on Form 10-Q Description and Filing or Incorporation Reference
2.1	First Amendment to Agreement and Plan of Merger, dated as of February 21, 2021, by and among First Mid Bancshares, Inc., Eval Sub Inc., a Missouri corporation, Eval Sub Inc., a Delaware corporation, LINCO Bancshares, Inc., and the sellers named therein (incorporated by reference to Exhibit 2.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 22, 2021).
10.1	Second Amendment to Sixth Amended and Restated Credit Agreement by and between First Mid Bancshares, Inc. and The Northern Trust Company, dated as of January 26, 2021 (incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on January 27, 2021).
10.2	Registration Rights Agreement, dated as of February 22, 2021, by and between First Mid Bancshares, Inc. and the stockholder named therein (incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on February 22, 2021).
10.3	Third Amendment to Sixth Amended and Restate Credit Agreement by and between First Mid Bancshares, Inc. and The Northern Trust Company, dated as of April 9, 2021 (incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.'s Current Report on Form 8-K filed with the SEC on April 12, 2021.
10.4	2017 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to First Mid Bancshares, Inc.’s Current Report on Form 8-K filed with the SEC on April 30, 2021).
31.1	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101.INS	Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
104	The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (formatted as Inline XBRL and contained in Exhibits 101)

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SIGNATURES

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

FIRST MID BANCSHARES, INC.

(Registrant)

Date: May 10, 2021

/s/ Joseph R. Dively

Joseph R. Dively

President and Chief Executive Officer

/s/ Matthew K. Smith

Matthew K. Smith

Chief Financial Officer

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