KBRA Affirms Ratings for First Mid Bancshares, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Mattoon, Illinois-based First Mid Bancshares, Inc. (NASDAQ: FMBH) ("First Mid" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its main subsidiary, First Mid Bank & Trust, N.A. The Outlook for all long-term ratings is Stable.

First Mid’s ratings reflect its strong returns, diversified revenue streams, solid credit history, comfortable liquidity position, favorable core deposit base, and conservative capital management, counterbalanced by a more concentrated operating footprint compared to larger similarly rated peers. Profitability has remained healthy in recent years (ROA of 1.2% in 1H25), supported by meaningful NIM expansion despite a challenging interest rate environment. This performance reflects a shift in the asset mix toward higher loan balances (loan-to-earning asset ratio increased to 81% as of 2Q25 vs. 77% at YE23) and the maintenance of a low-cost deposit base (average total cost of 1.64% in 2Q25). In addition, noninterest income, which represents just under 30% of total revenue, has grown steadily, particularly in wealth management and insurance services. These segments represent a majority of noninterest income and reflect meaningful scale among community banks ($6.3 billion of AUM as of 2Q25), though it also includes other durable line items, such as deposit service charges and interchange revenue. FMBH’s favorable fee income levels have been sustained over the years despite numerous whole bank acquisitions that were often times initially dilutive, which demonstrates management’s ability to discover revenue synergies post-merger, though also illustrates the effective integration of its non-bank transactions, with another small deal recently closed in 3Q25. Looking ahead, earnings are expected to remain in the top-quartile of the rating group, even with potential Fed cuts, given the company’s relatively neutral interest rate risk positioning.

Asset quality metrics remain favorable, with NPAs, NCOs, and criticized loan ratios all tracking below peer averages in 2025. First Mid has consistently reported pristine credit performance, highlighted by an NCO ratio averaging under 15 bps over the past 20 years. The company is also well positioned against broader industry risks, with manageable exposure to investor CRE (249% of total risk-based capital as of 2Q25) and a somewhat higher, but historically well-managed, concentration in agricultural lending (12% of total loans). Corn and soybean prices been volatile following the implementation of tariffs and trade wars with other countries, which could present challenges for more leveraged borrowers. With that said, management does not foresee any material issues this year given the solid crop yields, and if any unforeseen problems arise, a majority of crop operations are cross-collateralized with farmland that reflects very low LTVs (45%). Given this, there have been been minimal credit losses historically (~$4.0 million of NCOs between 2000 and 2024). The company also has a manageable exposure to the troubled office sector at 4% of loans (excluding medical properties). The portfolio continues to reflect sound metrics, including a high-level of occupancy and comfortable LTVs and DSCRs. Moreover, the exposure to central business districts is minimal, with most properties being owned and operated in suburban markets. Given First Mid's diverse loan portfolio, manageable concentration to investor CRE, and management's knowledge and expertise, we believe FMBH is well positioned to endure the potential credit issues facing the industry.

Liquidity management remains adequate, supported by a prudent loan-to-deposit ratio, in which management typically targets the low-to-mid 90s (93% as of 2Q25). While the securities portfolio is comparatively underwater and carries below-average yields, portfolio cash flows and core deposit inflows have been sufficient to mitigate this drag. Given this, the reliance on wholesale funding is minimal, with customer deposits accounting for over 90% of total funding.

FMBH’s core capital position remains enviable (CET1 ratio of 12.9% as of 2Q25), supported by measured balance sheet growth, in part, due to its fairly steady operating markets, a manageable dividend payout (typically below 30%; 25% in 1H25), and limited share repurchase activity. Looking forward, management intends to maintain the TCE ratio in the 8%–9% range, which was 8.7% as of 2Q25. We view this as appropriate given the company’s risk profile and ratings positioning. While management is likely to deploy some excess capital toward M&A as it approaches the $10 billion asset threshold, we expect any temporary dilution in capital ratios to be quickly offset by a quick rebuild via earnings retention, consistent with the company’s historical performance, notably following the Blackhawk Bancorp, Inc. acquisition in 2023.

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