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.

The ratings are supported by First Mid’s diverse revenue mix, with fee income averaging nearly 30% of total revenues the last five years (33% for 1H23), that has persisted over the years despite an active M&A strategy, which demonstrates the management team’s commitment to maintaining a higher level of noninterest income and the ability to achieve revenue synergies post-merger, specifically within its wealth management and insurance divisions. Additionally, the company’s noninterest income is derived from durable business lines, with wealth management and insurance services accounting for 60% of total revenue for 1H23, and the remainder consisting of relatively stable line items, including service charges and ATM/debit card revenue. Given the growing fee income levels, First Mid has been able to maintain a strong level of profitability (core ROA of approximately 1.10% for 1H23) despite NIM headwinds from rising interest rates. Moving forward, the recent acquisition of Blackhawk Bancorp, Inc. ("Blackhawk") in 3Q23 presents meaningful cost-savings opportunities, as well as NIM benefits from the target bank’s higher margin and de-leveraging opportunities as Blackhawk reflected an excess liquidity position (67% loan-to-core deposit ratio as of 2Q23). As such, the company will have the option to sell a portion of the target bank's securities portfolio, which has been marked-to-market, to reduce borrowings and other higher cost funding sources. Given this, there is the potential for improving earnings capacity prospectively. KBRA also recognizes the company’s favorable funding base, which is largely core deposit funded and reflects below average costs. Additionally, FMBH maintains a granular deposit base, which results in a comparatively low level of uninsured deposits. First Mid has also generally upheld a conservative liquidity position, with the loan-to-core deposit ratio tracking at 100% or below, and access to ample borrowing sources. Moreover, the acquisition of Blackhawk is expected to enhance funding and liquidity metrics. KBRA also acknowledges FMBH’s healthy capital position, which has consistently tracked above peer levels. Capital ratios are expected to decrease following the close of the Blackhawk acquisition in 3Q23, though remain strong overall, with a projected pro forma Tier 1 ratio of 12.1%. We also positively view the sound credit performance over a long period of time, with an NCO ratio that has averaged just 15 bps the last 20 years. KBRA is mindful of the concentration in agricultural lending (11% of total loans), which was a challenging segment prior to the pandemic. While commodity prices have certainly increased over the year in conjunction with rising inflation, there have been some headwinds on corn and soybean prices over the past year, which, along with difficult weather conditions in footprint, presents some challenges. With that said, management does not foresee any issues this year, and if any unforeseen problems arise, a majority of crop operations are cross-collateralized with farmland that reflect very low LTVs. Given this, there have been been minimal credit losses historically (~$1 million of NCOs since 1995). The company also has a manageable exposure to the troubled office sector at 5% of loans, half of which is concentrated in medical that is generally more resilient. Given First Mid's diverse loan portfolio, below average exposure to investor CRE, and management's knowledge and expertise, we believe FMBH is well positioned to endure potentially weakening economic conditions.

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