Executive Summary / Key Takeaways

• First Mid Bancshares, a community-focused financial holding company, demonstrated solid performance in Q1 2025, with net income increasing 8.1% year-over-year, driven primarily by an expanding net interest margin and growth in non-interest income segments like insurance and wealth management.
• The company's strategic emphasis on diversified service offerings, including banking, wealth management, and insurance, provides a more resilient revenue profile compared to traditional banks heavily reliant solely on interest income.
• Recent acquisitions, such as Mid Rivers Insurance Group, Inc., are contributing directly to non-interest income growth, while ongoing technology investments aim to address competitive gaps and improve operational efficiency.
• While facing competitive pressures from larger regional banks and fintech, FMBH leverages its strong community presence and specialized lending expertise, particularly in agriculture, to maintain customer loyalty and differentiate its offerings.
• Investors should monitor the company's ability to manage credit quality in concentrated loan segments, execute on technology initiatives to enhance efficiency, and navigate the interest rate environment which currently presents a liability-sensitive position in the near term.

Setting the Scene: A Community Bank's Evolving Story

First Mid Bancshares, Inc. (NASDAQ: FMBH) traces its roots back to 1865, establishing a deep history within the communities it serves. Headquartered in Mattoon, Illinois, the company has grown from a local institution into a regional financial holding company with a presence primarily across Illinois, Missouri, Texas, and Wisconsin. This expansion has been fueled not only by organic growth but also through strategic acquisitions, notably the recent integration of Blackhawk Bancorp, Inc. in 2023 and Mid Rivers Insurance Group, Inc. in 2024.

FMBH operates a diversified business model centered around community banking. It provides a full suite of traditional banking products and services to commercial, retail, and agricultural customers, including various deposit products and a broad range of loan types. Beyond core banking, a key component of FMBH's strategy is its integrated financial services offering, encompassing wealth management (including estate planning, investment services, and farm management) and insurance products (property & casualty, senior insurance, group medical, and personal lines). This multi-faceted approach aims to capture a larger share of customers' financial needs and build more robust, sticky relationships.

Within the competitive landscape of regional banking, FMBH positions itself as a community-focused alternative to larger, more impersonal institutions. Its strategy emphasizes local decision-making and tailored service. However, it competes directly with other regional banks like Midland States Bancorp (MSBI), Heartland Financial USA, Inc. (HTLF), and Wintrust Financial Corporation (WTFC), as well as facing pressure from national banks and increasingly agile fintech companies offering digital-first solutions. While FMBH benefits from barriers to entry in regional banking, such as regulatory requirements and the need for established trust, it must continuously adapt to maintain its relevance and competitive edge.

One area where FMBH, like many regional banks, faces challenges is in matching the technological pace of larger or purely digital competitors. The company's recent financial statements noted "nonrecurring technology project expenses," indicating ongoing investment in this critical area. While the company appears to lack specific proprietary technological differentiators, the strategic intent behind these investments is clear: to enhance operational efficiency, improve customer experience, and potentially narrow the gap with peers like HTLF, which are noted for faster digital processing speeds. FMBH's ability to effectively implement and leverage technology will be crucial in supporting its community-focused model and competing for digitally-savvy customers.

Financial Performance: A Quarter of Expanding Margins and Diversified Income

First Mid Bancshares delivered a strong start to 2025, reporting net income of $22.17 million for the three months ended March 31, 2025, an increase from $20.50 million in the same period of 2024. This translated to diluted net income per common share of $0.93, up from $0.86 year-over-year. The improvement in profitability was reflected in the annualized performance ratios, with Return on Average Assets increasing to 1.19% in Q1 2025 from 1.07% in Q1 2024. Return on Average Common Equity remained relatively stable at 10.35% compared to 10.37%.

The primary driver of the increased net income was a significant expansion in net interest income. For the first quarter of 2025, net interest income stood at $59.41 million, up from $55.47 million in Q1 2024. This 7.1% increase was largely attributable to a widening net interest margin, which rose to 3.60% in Q1 2025 from 3.25% in the prior year period. Management attributed this improvement to an increase in earning asset yields coupled with a decrease in rates paid on interest-bearing deposits and borrowings. Average earning assets saw a slight decrease of 1.7%, while average interest-bearing liabilities decreased by a more significant 4.1%, contributing positively to the margin expansion.

Beyond traditional interest income, FMBH's diversified business model contributed meaningfully to the top line. Total non-interest income for Q1 2025 was $24.86 million, a modest 1.6% increase from $24.48 million in Q1 2024. This growth was propelled by strong performance in key non-banking segments. Insurance commissions increased by 7.7% to $9.93 million, primarily benefiting from the acquisition of Mid Rivers Insurance Group in the latter half of 2024. Wealth management revenues grew by 9.0% to $5.80 million, driven by increases in brokerage, trust, and agricultural services fee income. Bank owned life insurance income saw a substantial 50.5% increase to $1.69 million, boosted by a gain recognized on a death claim. These gains were partially offset by decreases in ATM/debit card revenue (-10.1%) due to lower activity and a significant drop in other miscellaneous income (-66.1%), which included a loss on the repayment of subordinated debentures in the current period.

Total non-interest expense increased by 2.1% year-over-year, totaling $54.47 million in Q1 2025 compared to $53.36 million in Q1 2024. The largest component, salaries and employee benefits, rose by 4.3%, reflecting routine annual raises. Net occupancy and equipment expense, along with legal and professional fees, saw notable increases (12.2% and 25.6%, respectively), primarily attributed to nonrecurring technology project expenses. ATM/debit card expense also increased significantly (53.7%), partly due to a credit received from a vendor in the prior year period. These increases were partially mitigated by a decrease in other operating expenses, largely due to lower integration costs related to the Blackhawk Bank merger compared to Q1 2024.

The effective income tax rate decreased to 21.2% in Q1 2025 from 23.9% in Q1 2024. This reduction was primarily linked to a decrease in interest expense disallowance, as the company began utilizing an investment subsidiary in Q2 2024, and a decrease in nondeductible expenses.

Balance Sheet Dynamics and Asset Quality

As of March 31, 2025, total assets stood at $7.57 billion, a slight increase from $7.52 billion at December 31, 2024. This growth was primarily driven by a significant increase in cash and cash equivalents ($201.47 million vs. $121.22 million), and a modest increase in net loan balances ($5.63 billion vs. $5.60 billion), partially offset by a decrease in investment securities ($1.04 billion vs. $1.06 billion).

The loan portfolio, the largest earning asset category, saw a net increase of $29.5 million. The composition of the portfolio remained largely consistent, with real estate loans (commercial, residential, multifamily, construction, and agricultural real estate) comprising 68.3% of the total at March 31, 2025. Growth was noted in construction and land development and multifamily residential properties, as well as a seasonal increase in agricultural operating loans. The portfolio maintains geographic concentration within the company's branch footprint and industry concentrations in agriculture (specifically corn and grain farming), hotels/motels, and lessors of non-residential and residential buildings.

Credit quality remains a key focus. Total nonperforming loans decreased to $26.60 million at March 31, 2025, from $29.84 million at December 31, 2024, but were higher than the $20.10 million reported at March 31, 2024. The decrease from year-end 2024 was a result of loans becoming current, paid off, or charged off, partially offset by new loans moving to nonaccrual status. Repossessed assets totaled $2.11 million, down slightly from $2.20 million at year-end.

The allowance for credit losses stood at $70.05 million at March 31, 2025, a minor decrease from $70.18 million at December 31, 2024. The provision for credit losses for Q1 2025 was $1.65 million, significantly higher than the $0.36 million in Q1 2024. Net charge-offs also increased to $1.78 million in Q1 2025 compared to $0.38 million in Q1 2024, driven by specific charge-offs in commercial real estate, agricultural, and commercial operating loans. Management's assessment of the allowance considers various factors, including historical losses, nonperforming loan trends, and qualitative factors related to economic conditions and specific loan segments. Notably, qualitative factors for agricultural loans were increased significantly due to an increase in past dues, while factors for commercial real estate owner-occupied and commercial and industrial loans were moderately or minorly reduced, respectively, reflecting portfolio stability and subsiding concerns over higher rate repricing.

The investment securities portfolio decreased by $23.5 million. The portfolio consists primarily of U.S. Treasury, municipal, and mortgage-backed securities. The portfolio held unrealized losses, totaling $186.33 million on available-for-sale securities at March 31, 2025, due to changes in interest rates and market conditions. Management stated that they do not consider these to be credit losses and do not intend to sell these investments before recovery of the amortized cost basis.

Total deposits increased by $73.3 million to $6.13 billion, primarily due to seasonal demands in balances for securities sold under agreements to repurchase, which increased by $15.7 million. FHLB advances decreased by $47.5 million to $195.0 million. The company also repurchased $3 million of Blackhawk Subordinated Debt I Notes and $7 million of Blackhawk Subordinated Debt II Notes in February 2025, reducing outstanding subordinated debt.

Liquidity, Capital, and Shareholder Programs

FMBH maintains a solid liquidity position, supported by diverse funding sources. These include access to overnight federal fund lines ($130 million available), significant borrowing capacity at the Federal Home Loan Bank (approximately $1.6 billion of additional advances supported by excess collateral), borrowing ability at the Federal Reserve Bank, and a $15 million unsecured revolving credit agreement with The Northern Trust Company (NTRS), which was renewed in April 2025. Management actively monitors liquidity requirements, considering loan commitments, deposit flows, and investment portfolio dynamics.

The company's capital position remains strong, consistently exceeding regulatory minimums for well-capitalized institutions. As of March 31, 2025, the company's Tier 1 Capital to Risk-Weighted Assets ratio was 13.13%, and its Total Capital to Risk-Weighted Assets ratio was 15.59%, both comfortably above the required minimums. The increase in these ratios from December 31, 2024, was driven by the accumulation of net income less dividends and a balance sheet reallocation towards lower risk-weighted assets like cash, partially offset by loan growth.

FMBH also engages in shareholder-friendly activities. The company has a Stock Incentive Plan and an Employee Stock Purchase Plan designed to align employee interests with shareholder value. Additionally, the Board has authorized a stock repurchase program, with approximately $2.9 million remaining capacity as of March 31, 2025, providing flexibility for future capital management.

Competitive Dynamics and Strategic Responses

FMBH operates in a competitive environment characterized by a mix of larger regional players and smaller community banks, alongside increasing pressure from digital-first financial service providers. Compared to peers like HTLF and WTFC, FMBH is smaller in scale, which can translate to higher operating costs per unit due to fewer economies of scale. For instance, WTFC's larger size allows for lower costs per loan. FMBH also appears to lag some peers in digital efficiency, as suggested by the need for technology project investments and comparisons to HTLF's faster digital processing.

However, FMBH possesses distinct competitive advantages rooted in its community banking model and diversified offerings. Its strong community network fosters higher customer loyalty and retention, particularly in its core geographic markets. The integrated service model, combining banking, wealth management, and insurance, allows for greater cross-selling opportunities and deeper customer relationships, potentially leading to higher revenue per customer compared to banks focused solely on lending or deposits. FMBH's specialized expertise in agricultural lending provides a significant niche advantage in its predominantly rural markets, a segment where larger, less specialized institutions may struggle to compete effectively.

Strategically, FMBH is responding to competitive pressures by focusing on leveraging its strengths. The investments in technology are aimed at enhancing the efficiency and capabilities of its existing service lines, rather than necessarily developing groundbreaking proprietary technology. Acquisitions like Mid Rivers Insurance Group directly bolster its non-interest income segments, diversifying revenue and reducing reliance on interest income sensitivity. The company's continued focus on credit quality management, particularly in potentially vulnerable segments like agriculture and hotels, is crucial for maintaining financial stability in a dynamic economic environment.

While FMBH's growth rate (4-6% annually) has trailed some faster-growing peers like HTLF (9%) and WTFC (11%), its financial health is supported by solid cash flow generation and lower debt levels compared to some competitors. The company's strategic positioning emphasizes stability and integrated service delivery within its established community footprint, aiming for sustainable, profitable growth rather than aggressive, high-risk expansion.

Outlook and Key Risks

While the first quarter results are not necessarily indicative of the full year, the performance suggests positive momentum driven by net interest margin expansion and contributions from diversified business lines. Analyst consensus estimates for 2025 earnings per share range around $3.61 to $3.69, implying expected earnings growth for the fiscal year. The outlook is supported by the continued benefits from the Mid Rivers acquisition and ongoing efforts to manage expenses, although technology investments represent a near-term cost.

Several risks could impact FMBH's performance. Interest rate risk remains pertinent; the static GAP analysis indicates a liability-sensitive position in the near term, meaning rising interest rates could negatively impact net interest income, although recent trends have been favorable. Credit risk, particularly within the concentrated agricultural, hotel/motel, and lessor portfolios, could increase if economic conditions deteriorate in these sectors. While management employs disciplined underwriting and monitoring, prolonged low commodity prices or reduced travel could lead to increased nonperforming loans and charge-offs, as highlighted by the increased qualitative factor for agricultural loans due to rising past dues. Operational risks, including the successful implementation of new technology and management of cybersecurity threats, are also important considerations. Furthermore, the competitive landscape, including the potential for more aggressive digital offerings from rivals or further consolidation in the industry, could pressure margins and market share. Regulatory changes, although the Volcker Rule is not expected to have a material impact, always pose a potential risk to financial institutions.

Conclusion

First Mid Bancshares' Q1 2025 results underscore the resilience of its community-focused model and the benefits of its diversified financial services strategy. The expansion of net interest margin, coupled with solid contributions from wealth management and insurance, demonstrates the company's ability to generate earnings in the current environment. While facing competitive challenges, particularly in technological adoption speed compared to some larger peers, FMBH leverages its deep community ties and specialized expertise to maintain a differentiated position.

The investment thesis for FMBH centers on its stable, relationship-driven banking franchise, enhanced by growing non-interest income streams and prudent capital management. Key factors for investors to watch include the company's execution on its technology strategy to improve efficiency, its ability to navigate potential credit quality fluctuations in concentrated loan segments, and the ongoing impact of the interest rate environment on its net interest margin. FMBH's steady performance and strategic initiatives suggest a company focused on sustainable growth within its established markets, offering a compelling opportunity for investors seeking exposure to a well-managed regional bank with diversified revenue sources.