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 respectable earnings performance in recent years, especially during this challenging interest rate environment, which has been reinforced by its diverse revenue mix, including fee income that has typically averaged 30% of operating revenue. These revenues are largely derived from its wealth management and insurance divisions that reflect meaningful scale among community banks ($6.3 billion of AUM as of 2Q24), though also include other durable line items, such as service charges and ATM/debit card revenue. FMBH’s favorable noninterest 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. Strong fee income combined with NIM expansion following the Blackhawk Bancorp, Inc. acquisition in 3Q23, which is expected to persist the rest of the year, has facilitated solid profitability during 2024 (core ROA of ~1.1% for 1H24). KBRA also recognizes the company’s favorable funding base, which is largely core deposit funded and has reflected a below average beta through the cycle and has helped produce a healthy NIM despite below average loan yields due to its higher concentration in fixed rate loans. Moreover, in our view, the core deposit base is comprised of stable and granular relationships. First Mid has also generally upheld a conservative liquidity position, with the loan-to-core deposit ratio tracking at 100% or below, and maintained ample borrowing capacity. KBRA also acknowledges FMBH’s healthy risk-based capital position, which has consistently tracked in line with or above peer levels (CET1 ratio of 12.2% as of 2Q24). Management continues to target a TCE ratio between 8%-9% over the longer-term (7.7% as of 2Q24), which we believe is suitable for the overall risk profile of the institution, and provides flexibility for future M&A or potential loan growth. Capital should move closer to that target in the near term given First Mid's strong earnings capacity, which, combined with slower balance sheet growth, a reasonable dividend payout ratio (<30%), and minimal appetite for share buybacks, allows for relatively quick internal capital accretion - evidenced by the 100 bps growth in the CET1 ratio since the close of the merger in 3Q23. We also positively view the sound credit performance over a long period of time, with an NCO ratio that has averaged just below 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. Corn and soybean prices remain above pre-pandemic levels, though have experienced headwinds in recent years, which could present challenges for more leveraged borrowers. With that said, management does not foresee any material issues this year, and if any unforeseen problems arise, a majority of crop operations are cross-collateralized with farmland that reflects very low LTVs. Given this, there have been been minimal credit losses historically (~$1.6 million of NCOs between 1999 and 2023). The company also has a manageable exposure to the troubled office sector at 6% of loans, half of which is concentrated in medical tenants that are generally more resilient. 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, below average exposure to investor CRE, and management's knowledge and expertise, we believe FMBH is well positioned to endure the potential credit issues facing the industry.

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