First Mid Bancshares (FMBH): A Community Banking Powerhouse Forging Growth and Shareholder Value - FMBH Stock Research Report

## Executive Summary / Key Takeaways * Resilient Performance and Margin Expansion: First Mid Bancshares demonstrated robust financial health in the first half of 2025, with net interest income growing 10.0% and net interest margin expanding by 36 basis points to 3.66%, driven by effective interest rate management. * Diversified Revenue Streams: Strategic acquisitions, notably Mid Rivers Insurance Group, fueled a 3.3% increase in non-interest income, with insurance commissions and wealth management revenues showing strong growth, diversifying the company's earnings profile. * Solid Loan Growth and Prudent Credit Quality: The loan portfolio expanded by 1.7% to $5.77 billion, primarily in construction, multifamily, and agricultural segments, while nonperforming loans decreased by 26.6% from year-end 2024, reflecting sound underwriting and risk management. * Strong Capital and Liquidity Position: FMBH maintains capital ratios well above regulatory "well-capitalized" thresholds and boasts diverse liquidity sources, including $1.6 billion in additional FHLB advances and a $401 million contingent liquidity from the Federal Reserve's Borrower-in-Custody program. * Commitment to Shareholder Returns: With a new stock repurchase program authorizing up to 1.2 million shares and a competitive dividend yield of 2.40%, FMBH signals confidence in its future earnings and dedication to enhancing shareholder value. ## The Enduring Strength of Community Banking in a Dynamic Market First Mid Bancshares, Inc. (NASDAQ:FMBH), founded in Mattoon, Illinois, in 1865, stands as a testament to the enduring power of community banking. With over a century and a half of history, FMBH has cultivated a deep-rooted presence across Illinois, Missouri, Texas, and Wisconsin, serving commercial, retail, and agricultural clients. Its overarching strategy centers on a community-centric model, offering a comprehensive suite of banking, wealth management, and insurance services designed to foster strong local relationships and provide tailored financial solutions. This foundational strength allows FMBH to carve out a distinct position in an industry increasingly dominated by larger, more impersonal institutions. The banking industry today is characterized by evolving interest rate environments, increasing digital adoption, and persistent demand for specialized financial services. FMBH operates within this landscape, leveraging its local expertise and diversified offerings to generate stable revenue. While the company reports as a single segment, its operational segments—traditional banking, wealth management, and insurance—each contribute significantly to its financial narrative and competitive differentiation. ## Strategic Pillars: Niche Lending, Fee-Based Growth, and Operational Technology FMBH's strategic approach is multifaceted, focusing on high-touch customer relationships, targeted lending, and expanding fee-based income. The company's loan portfolio, totaling $5.77 billion as of June 30, 2025, reflects a deliberate emphasis on key sectors. Construction and land development, multifamily residential properties, and agricultural operating loans have been primary drivers of recent growth, increasing by $94.5 million, or 1.7%, since December 31, 2024. This focus on specific, often localized, lending segments allows FMBH to build expertise and strong borrower relationships, distinguishing it from broader-market competitors. Beyond traditional lending, FMBH has strategically diversified its revenue streams through its wealth management and insurance arms. Wealth management revenues increased by 4.5% to $11.21 million for the first six months of 2025, driven by growth in brokerage fees and agricultural services. The acquisition of Mid Rivers Insurance Group in the third quarter of 2024 significantly bolstered its insurance segment, contributing to a 12.8% increase in insurance commissions, reaching $17.77 million for the first half of 2025. This expansion into fee-based services provides a crucial buffer against interest rate fluctuations and enhances overall profitability. \ Technology plays a critical, albeit enabling, role in FMBH's operational strategy. While FMBH does not disclose proprietary technological products, its investment in "nonrecurring technology project expenses" and the management of "ATM/debit card revenue/expense" indicate an ongoing commitment to modernizing its infrastructure. For a regional bank, technological differentiation primarily translates into enhanced operational efficiency, improved customer experience, and robust risk management capabilities. These investments aim to streamline processes, offer competitive digital banking services, and strengthen data security, allowing FMBH to maintain service quality and compete effectively against larger banks with more extensive digital platforms. The strategic intent is to ensure FMBH's services remain accessible and efficient, supporting its community-focused model without necessarily leading with groundbreaking tech products. ## Financial Resilience and Performance Highlights First Mid Bancshares delivered a strong financial performance in the first half of 2025, demonstrating resilience and strategic execution. Net income for the six months ended June 30, 2025, rose to $45.61 million, a notable 13.3% increase from $40.25 million in the same period of 2024. Diluted net income per common share followed suit, climbing 13.1% to $1.90 from $1.68 year-over-year. The core driver of this performance was a significant expansion in net interest income and margin. Tax-equivalent net interest income increased by 10.0% to $124.80 million for the first six months of 2025, up from $113.40 million in the prior year. This was largely due to a 36-basis-point improvement in the tax-equivalent net interest margin, which reached 3.66% for the period, reflecting effective management of earning asset yields and a decrease in deposit and borrowing rates. Average earning assets saw a modest increase of 0.3%, while average interest-bearing liabilities decreased by 1.2%, further contributing to margin expansion.

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\ Non-interest income also provided a healthy boost, increasing by 3.3% to $48.46 million. This growth was primarily fueled by the aforementioned increases in insurance commissions and wealth management revenues, alongside a 25.1% surge in Bank Owned Life Insurance (BOLI) income to $2.89 million, largely due to a death claim gain. On the expense side, total non-interest expense increased by 4.3% to $109.23 million, mainly due to routine salary increases, higher incentive compensation accruals reflecting overperformance, and nonrecurring technology project expenses. However, these were partially offset by reduced integration costs from the Blackhawk Bank acquisition. Credit quality remains a focus, with nonperforming loans decreasing by 26.6% to $21.90 million at June 30, 2025, compared to $29.84 million at December 31, 2024. The allowance for credit losses to total loans stood at a consistent 1.23%. The provision for credit losses, however, increased to $4.22 million for the first six months of 2025, up from $0.73 million in the prior year, reflecting a more conservative stance in a dynamic economic environment. ## Capital Strength and Liquidity Management FMBH maintains a robust capital position, consistently exceeding regulatory "well-capitalized" standards. As of June 30, 2025, the company's Common Equity Tier 1 (CET1) capital ratio was 12.92%, its Tier 1 capital ratio was 13.31%, and its Total Capital ratio stood at 15.76%. These figures underscore the company's financial stability and capacity for future growth. Liquidity is also a significant strength, with diverse sources available to meet financial obligations. FMBH has access to $130 million in overnight federal fund lines, approximately $1.6 billion in additional Federal Home Loan Bank (FHLB) advances backed by excess collateral, and enhanced contingent liquidity of approximately $401 million through the Federal Reserve Bank's Borrower-in-Custody program. This multi-pronged approach to liquidity management ensures operational flexibility and resilience.

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\ In a move demonstrating confidence in its valuation and commitment to shareholder returns, the Board of Directors approved a new stock repurchase program on June 24, 2025, effective July 1, 2025. This program authorizes the repurchase of up to 1.2 million shares, representing approximately 5% of outstanding common stock, until December 31, 2026. This initiative, coupled with a competitive dividend yield of 2.40%, highlights FMBH's balanced approach to capital allocation. ## Competitive Standing in the Regional Banking Arena FMBH operates in a competitive landscape alongside regional peers such as Old National Bancorp (TICKER:ONB), Wintrust Financial Corporation (TICKER:WTFC), Heartland Financial USA, Inc. (TICKER:HTLF), and Commerce Bancshares, Inc. (TICKER:CBSH). While FMBH's market capitalization of approximately $970 million positions it as a smaller player compared to some of these larger regional banks, its community-focused strategy and diversified service offerings provide distinct advantages. In terms of profitability, FMBH's latest trailing twelve-month (TTM) net profit margin of 19.57% is competitive, surpassing ONB (18%) and WTFC (18%), though trailing CBSH (25%). Its TTM operating profit margin of 25.32% also demonstrates solid operational efficiency, comparable to ONB (23%), WTFC (24%), and HTLF (24%), but again, CBSH leads with 32%. This suggests FMBH is effectively managing its cost base relative to its revenue generation within its operational scale.

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\ FMBH's debt-to-equity ratio of 0.61 is relatively conservative compared to ONB (0.85) and CBSH (0.88), indicating a more balanced capital structure. This financial prudence provides flexibility and reduces risk, a key consideration for investors in the banking sector. From a valuation perspective, FMBH's TTM P/E ratio of 11.46 is attractive, sitting below ONB (12.46), HTLF (22.39), and CBSH (15.91), and on par with WTFC (11.43). Similarly, its TTM P/B ratio of 1.08 is also competitive, suggesting a reasonable valuation relative to its book value. FMBH's competitive edge lies in its deep local market penetration and specialized lending expertise, particularly in agriculture and municipal projects, which may not be as intensely pursued by larger, more geographically dispersed competitors. While larger rivals like CBSH may boast more advanced digital infrastructure, FMBH's ongoing technology investments aim to enhance its service delivery and operational efficiency, ensuring it remains competitive in customer experience. The company's diversified non-interest income streams, particularly from insurance and wealth management, also provide a more stable revenue base compared to banks heavily reliant solely on traditional lending. ## Outlook and Investment Thesis The outlook for First Mid Bancshares appears positive, underpinned by its strong performance in the first half of 2025 and strategic initiatives. Analysts project solid earnings growth for the current fiscal year, with the Zacks Consensus Estimate for 2025 EPS at $3.73, representing a year-over-year growth rate of 7.18%. This forecast is supported by the company's ability to expand its net interest margin in a dynamic rate environment and the continued growth in its diversified fee-based businesses. Management's focus on maintaining robust capital and liquidity, coupled with strategic investments in technology, positions FMBH for sustained, albeit measured, growth. While the company acknowledges risks such as prolonged low commodity prices affecting agricultural loans or reduced travel impacting hospitality loans, its disciplined underwriting and credit review policies are designed to mitigate these exposures. The new stock repurchase program further signals management's confidence in the company's intrinsic value and commitment to returning capital to shareholders. ## Conclusion First Mid Bancshares presents a compelling investment thesis rooted in its long-standing community banking model, strategic diversification, and sound financial management. The company's ability to expand its net interest margin, grow non-interest income through targeted acquisitions and service expansion, and maintain a strong capital position demonstrates its resilience and adaptability. FMBH's competitive standing is reinforced by its niche lending expertise and conservative financial profile, offering a differentiated value proposition in the regional banking sector. For discerning investors, FMBH represents a stable, income-generating opportunity with a clear path for continued growth. Its commitment to operational efficiency, prudent risk management, and shareholder returns, as evidenced by its robust financial performance and capital allocation strategies, makes it a noteworthy consideration in the regional banking landscape. The company's blend of traditional community values with a forward-looking approach to service diversification and technological enhancement positions it well to capitalize on future opportunities and deliver consistent value.