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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-07 · 191 added, 138 removed, 680 unchanged (33% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries as of, and for the three months ended March 31, 2024 and 2023.

This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report.

Forward-Looking Statements

This document may contain certain forward-looking statements about First Mid, such as discussions of First Mid’s pricing and fee

trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules.

This document may contain certain forward-looking statements about First Mid, such as discussions of First Mid’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules.

First Mid intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates which have an impact on the Company’s financial condition and results of operations you should carefully read this entire document.

Net income was $20.5 million and $19.2 million for the three months ended March 31, 2024 and 2023, respectively.

Diluted net income per common share was $0.86 and $0.93 for the three months ended March 31, 2024 and 2023, respectively.

The following table shows the Company’s annualized performance ratios for three months ended March 31, 2024 and 2023, compared to the performance ratios for the year ended December 31, 2023:

Three months ended

March 31, 2024

March 31, 2023

Net income was $40.2 million and $35.7 million for the six months ended June 30, 2024 and 2023, respectively.

Diluted net income per common share was $1.68 and $1.74 for the six months ended June 30, 2024 and 2023, respectively.

The following table shows the Company’s annualized performance ratios for six months ended June 30, 2024 and 2023, compared to

the performance ratios for the year ended December 31, 2023:

Six months ended

June 30, 2024

June 30, 2023

December 31, 2023

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Average equity to average assets

Total assets were $7.7 billion at March 31, 2024, compared to $7.6 billion as of December 31, 2023.

From December 31, 2023 to March 31, 2024, cash and cash equivalents increased $212.6 million, net loan balances decreased $80.4 million and investment securities decreased $31.9 million.

Net loan balances were $5.43 billion at March 31, 2024 compared to $5.51 billion at December 31, 2023.

Net interest margin, on a tax equivalent basis, defined as net interest income divided by average interest-earning assets, was 3.25% for the three months ended March 31, 2024, up from 2.94% for the same period in 2023.

Total assets were $7.6 billion at June 30, 2024, compared to $7.6 billion as of December 31, 2023.

From December 31, 2023 to June 30, 2024, cash and cash equivalents increased $92.4 million, net loan balances decreased $22.4 million and investment securities decreased $60.7 million.

Net loan balances were $5.48 billion at June 30, 2024 compared to $5.51 billion at December 31, 2023.

Net interest margin, on a tax equivalent basis, defined as net interest income divided by average interest-earning assets, was 3.30% for the six months ended June 30, 2024, up from 2.89% for the same period in 2023.

This increase was primarily due to an increase in earning asset yields partially offset by increased rates on interest-bearing deposits and borrowings.

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Total non-interest income of $46.9 million increased $4.9 million or 11.8% from $42.0 million for the same period last year.

The increase in non-interest income resulted primarily from an increase in insurance commissions and income from Blackhawk Bank partially offset by a decrease in wealth management revenues and bank owned life insurance income.

The increase in non-interest income resulted primarily from an increase in insurance commissions and income generated from former Blackhawk Bank customers partially offset by a decrease in wealth management revenues, bank owned life insurance income, and miscellaneous income.

Total non-interest expense of $104.8 million increase $23.2 million or 28.4% from $81.6 million for the same period last year.

The increase was primarily due to the acquisition of Blackhawk Bank and the related amortization of intangibles and increased size of the bank.

The increase was primarily due to the acquisition of Blackhawk Bank during the third quarter of 2023 and the related amortization of intangibles and increased size of the bank causing increased expenses.

Following is a summary of the factors that contributed to the changes in net income (in thousands):

1 unchanged sentence

Three months ended

March 31, 2024

Six months ended

June 30, 2024

Net interest income

2 unchanged sentences

Other expenses

Increase (decrease) in net income

Increase in net income

Credit quality is an area of importance to the Company.

Total nonperforming loans were $20.1 million at March 31, 2024, compared to $15.2 million at March 31, 2023 and $20.1 million at December 31, 2023.

Total nonperforming loans were $19.1 million at June 30, 2024, compared to $18.6 million at June 30, 2023 and $20.1 million at December 31, 2023.

See the discussion under the heading “Loan Quality and Allowance for Loan Losses” for a detailed explanation of these balances.

Repossessed asset balances totaled $1.4 million at March 31, 2024 compared to $4.1 million at March 31, 2023 and $1.2 million at December 31, 2023.

The Company’s provision for credit losses for the three months ended March 31, 2024 and 2023 was ($357,000) and ($817,000), respectively.

Total loans past due 30 days or more were 0.32% of loans at March 31, 2024 compared to 0.21% at March 31, 2023, and 0.26% of loans at December 31, 2023.

Loans secured by both commercial and residential real estate comprised approximately 69.3% of the loan portfolio as of March 31, 2024 and 68.9% as of December 31, 2023.

Repossessed asset balances totaled $1.5 million at June 30, 2024 compared to $4.0 million at June 30, 2023 and $1.2 million at December 31, 2023.

The Company’s provision for credit losses for the six months ended June 30, 2024 and 2023 was $726,000 and ($359,000), respectively.

Total loans past due 30 days or more were 0.42% of loans at June 30, 2024 compared to 0.22% at June 30, 2023, and 0.26% of loans at December 31, 2023.

Loans secured by both commercial and residential real estate comprised approximately 69.0% of the loan portfolio as of June 30, 2024 and 68.9% as of December 31, 2023.

The Company’s capital position remains strong, and the Company has consistently maintained regulatory capital ratios above the “well-capitalized” standards.

The Company’s Tier 1 capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at March 31, 2024 and 2023 and December 31, 2023 was 12.46%, 12.88% and 12.02%, respectively.

The Company’s total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at March 31, 2024 and 2023, and December 31, 2023 was 15.35%, 15.74% and 14.84%, respectively.

The increase in Tier 1 capital and total to risk weighted assets ratio from December 31, 2023 was primarily due to net income for the period increasing equity and a decrease in risk weighted assets related to loans and other assets.

The Company’s Tier 1 capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at June 30, 2024 and 2023 and December 31, 2023 was 12.65%, 12.82% and 12.02%, respectively.

The Company’s total capital to risk weighted assets ratio calculated under the regulatory risk-based capital requirements at June 30, 2024 and 2023, and December 31, 2023 was 15.46%, 15.67% and 14.84%, respectively.

The increase in Tier 1 capital and total to risk weighted assets ratio from December 31, 2023 was primarily due to net income less dividends declared for the period increasing equity and a decrease in risk weighted assets related to a reallocation of the Company's balance sheet resulting in lower risk weighted assets such as cash on hand significantly increasing.

On March 27, 2020, the federal banking regulatory agencies, issued an interim final rule which provided an option to delay the estimated impact on regulatory capital of ASU 2016-13, which was effective January 1, 2020.

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These financial instruments include lines of credit, letters of credit and other commitments to extend credit.

The total outstanding commitments at March 31, 2024 and 2023, were $1.3 billion and $1.2 billion, respectively.

The total outstanding commitments at June 30, 2024 and 2023, were $1.3 billion and $1.2 billion, respectively.

Federal Deposit Insurance Corporation Insurance Coverage.

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Several requirements with respect to the FDIC insurance system have affected results, including insurance assessment rates.

The Company expensed $869,000 and $463,000 for the assessment during the first three months of 2024 and 2023, respectively.

The Company expensed $1,771,000 and $1,539,000 for the assessment during the first six months of 2024 and 2023, respectively.

Critical Accounting Policies and Use of Significant Estimates

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management considers such accounting policies to be critical accounting policies.

judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.

The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.

Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

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An estimate of potential losses inherent in the loan portfolio are determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows and estimated collateral values.

In assessing these factors, the Company uses relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

In assessing these factors, the Company uses

relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

To determine the allowance, the loan portfolio is segmented based on similar risk characteristics.

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These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years.

Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable.

Core deposit intangible assets, with finite

lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable.

Core deposit intangible assets were tested for impairment as of May 31, 2023 as part of the goodwill impairment test and no impairment was identified.

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The TE analysis portrays the income tax benefits associated with the tax-exempt assets.

The year-to-date net yield on interest-earning assets excluding the TE adjustments of $616,000 and $755,000 for 2024 and 2023, respectively were 3.20% and 2.89% at March 31, 2024 and 2023, respectively.

The Company’s average balances, fully tax equivalent interest income and interest expense, and rates earned or paid for major balance sheet categories are set forth for the three months ended March 31, 2024 and 2023 in the following table (dollars in thousands):

Three months ended March 31, 2024

Three months ended March 31, 2023

The year-to-date net yield on interest-earning assets excluding the TE adjustments of $1,211,000 and $1,500,000 for 2024 and 2023, respectively were 3.25% and 2.84% at June 30, 2024 and 2023, respectively.

The Company’s average balances, fully tax equivalent interest income and interest expense, and rates earned or paid for major balance sheet categories are set forth for the three and six months ended June 30, 2024 and 2023 in the following table (dollars in thousands):

Three months ended June 30, 2024

Three months ended June 30, 2023

Interest-bearing deposits with other financial institutions

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Subordinated Debt

Junior subordinated debt

Total borrowings

Total interest-bearing liabilities

Non interest-bearing demand deposits

Other liabilities

Stockholders' equity

Total liabilities and equity

Net interest income

Net interest spread

Impact of non interest-bearing funds

TE net yield on interest-bearing assets

Six months ended June 30, 2024

Six months ended June 30, 2023

Interest-bearing deposits with other financial institutions

Federal funds sold

Certificates of deposit

Investment securities:

Tax-exempt (1)

Loans net of unearned income (TE) (2)

Total earning assets

Cash and due from banks

Premises and equipment

Allowance for credit losses

Liabilities and stockholders' equity

Interest-bearing deposits

Demand deposits

Savings deposits

Time deposits

Total interest-bearing deposits

Securities sold under agreements to repurchase

FHLB advances

Federal funds purchased

Subordinated debt

Junior subordinated debentures

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Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense.

The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for the three months ended March 31, 2024, compared to the same period in 2023 (in thousands):

Three months ended March 31, 2024

The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for the three and six months ended June 30, 2024, compared to the same period in 2023 (in thousands):

Three months ended June 30, 2024

compared to 2023 Increase/(Decrease)

Six months ended June 30, 2024

compared to 2023 Increase/(Decrease)

Earning assets:

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Nonaccrual loans have been included in the average balances.

Tax equivalent net interest income increased $12.1 million, or 27.6%, to $56.1 million for the three months ended March 31, 2024, from $43.9 million for the same period in 2023.

Tax equivalent net interest income increased $26.4 million, or 30.3%, to $113.4 million for the six months ended June 30, 2024, from $87.1 million for the same period in 2023.

Net interest income and net interest margin increased primarily due to an increase in earning asset yields partially offset by the increase in deposit and borrowing rates.

For the three months ended March 31, 2024, average earning assets increased $832.6 million, or 13.8%, and average interest-bearing liabilities increased $697.1 million or 14.7% compared with average balances for the same period in 2023.

For the six months ended June 30, 2024, average earning assets increased $799.5 million, or 13.2%, and average interest-bearing liabilities increased $610.1 million or 12.9% compared with average balances for the same period in 2023.

The changes in average balances for these periods are shown below:

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• Average federal funds sold decreased $7.3 million or 92.9%.

• Average certificates of deposits investments decreased $244,000 or 13.6%.

• Average certificates of deposits investments increased $893,000 or 51.0%.

• Average loans increased by $743.9 million or 15.6%.

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• Average borrowings and other debt decreased by $243.4 million or 38.8%.

• Net interest margin increased to 3.25% for the first three months of 2024 from 2.94% for the first three months of 2023.

• Net interest margin increased to 3.30% for the first six months of 2024 from 2.89% for the first six months of 2023.

Provision for Loan Losses

The provision for credit losses for the three months ended March 31, 2024 and 2023 was ($357,000) and ($817,000), respectively.

Net charge offs were $382,000 for the three months ended March 31, 2024, compared to net charge offs of $53,000 for March 31, 2023.

Nonperforming loans were $20.1 million and $15.2 million as of March 31, 2024 and 2023, respectively.

The provision for credit losses for the six months ended June 30, 2024 and 2023 was $726,000 and ($359,000), respectively.

Net charge offs were $1,089,000 for the six months ended June 30, 2024, compared to net charge offs of $15,000 for June 30, 2023.

Nonperforming loans were $19.1 million and $18.6 million as of June 30, 2024 and 2023, respectively.

For information on loan loss experience and nonperforming loans, see discussion under the “Nonperforming Loans” and “Loan Quality and Allowance for Loan Losses” sections below.

An important source of the Company’s revenue is other income.

The following table sets forth the major components of other income for the three months ended March 31, 2024 and 2023 (in thousands):

Three months ended March 31,

The following table sets forth the major components of other income for the three and six months ended June 30, 2024 and 2023 (in thousands):

Three months ended June 30,

Six months ended June 30,

Wealth management revenues

6 unchanged sentences

Total other income

Following are explanations of the changes in these other income categories for the three months ended March 31, 2024 compared to the same period in 2023:

• Wealth management revenues decreased for the three month period due to less agricultural service fees partially offset by increased brokerage and trust fees.

• Insurance commissions increased primarily due to an increase in commission income partially offset by a decrease in contingency income during 2024 compared to the same period last year.

• Fees from service charges increased during the first three months of 2024 primarily due to the acquisition of Blackhawk Bank.

Following are explanations of the changes in these other income categories for the three and six months ended June 30, 2024 compared to the same period in 2023:

• Wealth management revenues decreased for the six month period due to less agricultural service fees mostly offset by increased brokerage and trust fees.

• Insurance commissions increased primarily due to an increase in commission income, including the acquisition of PGIB, partially offset by a decrease in contingency income during 2024 compared to the same period last year.

• Fees from service charges increased during the first six months of 2024 primarily due to the acquisition of Blackhawk Bank.

• Net losses from the sale of securities during 2024 were $156,000 and net losses in 2023 were $52,000.

The Company did not sell any securities during the quarter ended March 31, 2024.

The Company sold 17 securities during the quarter ended June 30, 2024 with the intent to replace them with higher yielding assets.

• The increase in mortgage banking income was due to an increase from loans sold in the secondary market and the acquisition of Blackhawk Bank.

• $10.6 million (representing 77 loans) for the three months ended March 31, 2024.

• $11.5 million (representing 75 loans) for the three months ended March 31, 2023.

• $52.4 million (representing 312 loans) for the six months ended June 30, 2024.

• $25.8 million (representing 176 loans) for the six months ended June 30, 2023.

First Mid Bank generally releases the servicing rights on loans sold into the secondary market.

• Revenue from ATMs and debit cards increased due to an increase in activity during the period and the acquisition of Blackhawk Bank.

• Bank owned life insurance income decreased approximately $520,000 during the first three months of 2024 compared to the same period in 2023 primarily due to a claim payout in 2023.

• Bank owned life insurance income decreased approximately $517,000 during the first six months of 2024 compared to the same period in 2023 primarily due to a claim payout in 2023.

• Other income decreased primarily due to late charges on loans being presented as interest income starting in 2024.

Other Expense

The following table sets forth the major components of other expense for the three months ended March 31, 2024 and 2023 (dollars in thousands):

Three months ended March 31,

The following table sets forth the major components of other expense for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

Three months ended June 30,

Six months ended June 30,

Salaries and employee benefits

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Total other expense

Following are explanations for the changes in these other expense categories for the three months ended March 31, 2024 compared to the same period in 2023:

• The increase in salaries and employee benefits, the largest component of other expense, is primarily due to the acquisition of Blackhawk Bank partially offset by the Company's efficiency improvement efforts.

There were 1,188 and 988 full-time equivalent employees at March 31, 2024 and 2023, respectively.

Following are explanations for the changes in these other expense categories for the three and six months ended June 30, 2024 compared to the same period in 2023:

• The increase in salaries and employee benefits, the largest component of other expense, is primarily due to the acquisition of Blackhawk Bank and regularly scheduled annual raises occurring during the quarter ended June 30, 2024.

This was partially offset by the Company's efficiency improvement efforts.

There were 1,185 and 995 full-time equivalent employees at June 30, 2024 and 2023, respectively.

• The increase in occupancy and equipment expense was primarily due to the acquisition of Blackhawk Bank.

• The decrease in net other real estate owned expense was primarily due to properties sold during 2023 that no longer have ongoing expense during 2024 and no write downs of other real estate owned during the period.

• Expense for amortization of intangible assets increased for the three months ended March 31, 2024 compared to 2023.

• The decrease in net other real estate owned expense for the six month period was primarily due to properties sold during 2023 that no longer have ongoing expense during 2024 and no write downs of other real estate owned during the period.

However, the increase in quarter to date expense in 2024 compared to 2023 can be explained by the addition of four properties to other real estate owned during the quarter ended June 30, 2024.

• Expense for amortization of intangible assets increased for the six months ended June 30, 2024 compared to 2023.

Core deposit intangibles and mortgage servicing rights increased due to the acquisition of Blackhawk Bank.

• The increase in other operating expenses during the first three months of 2024 was primarily due to nonrecurring costs from the acquisition of Blackhawk Bank during the period.

• On a net basis, all other categories of operating expenses increased during the period compared to last year primarily due to the the acquisition of Blackhawk Bank.

Total income tax expense amounted to $6.4 million (23.9% effective tax rate) for the three months ended March 31, 2024, compared to $5.7 million (23.0% effective tax rate) for the same period in 2023.

The increase in effective rate is related to a decrease in investment tax credits while pre-tax net income increased.

• The increase in other operating expenses during the first six months of 2024 was primarily due to the acquisition of Blackhawk Bank.

• On a net basis, all other categories of operating expenses increased during the period compared to last year primarily due to the acquisition of Blackhawk Bank.

Total income tax expense amounted to $13.4 million (25.0% effective tax rate) for the six months ended June 30, 2024, compared to $10.5 million (23.0% effective tax rate) for the same period in 2023.

The increase in effective rate is primarily related to a one time increase in income tax expense required because of the State of Illinois income apportionment law change that occurred during the quarter ended June 30, 2024.

The Company files U.S.

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The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions.

The following table sets forth the amortized cost of the available-for-sale and held-to-maturity securities as of March 31, 2024 and December 31, 2023 (dollars in thousands)

March 31, 2024

The following table sets forth the amortized cost of the available-for-sale and held-to-maturity securities as of June 30, 2024 and December 31, 2023 (dollars in thousands):

June 30, 2024

December 31, 2023

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Total securities

At March 31, 2024, the Company’s investment portfolio decreased by $21.1 million from December 31, 2023 primarily due to paydowns, calls and maturities of various securities.

At June 30, 2024, the Company’s investment portfolio decreased by $52.6 million from December 31, 2023 primarily due to the sale of 17 securities, paydowns, calls and maturities of various securities.

When purchasing investment securities, the Company considers its overall liquidity and interest rate risk profile, as well as the adequacy of expected returns relative to the risks assumed.

The table below presents the credit ratings as of March 31, 2024 for investment securities (in thousands):

Average Credit Rating of Fair Value at March 31, 2024 (1)

The table below presents the credit ratings as of June 30, 2024 for investment securities (in thousands):

Average Credit Rating of Fair Value at June 30, 2024 (1)

Available-for-sale:

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The loan portfolio is the largest category of the Company’s earning assets.

The following table summarizes the composition of the loan portfolio at amortized cost, including loans held for sale, as of March 31, 2024 and December 31, 2023 (in thousands):

March 31, 2024

The following table summarizes the composition of the loan portfolio at amortized cost, including loans held for sale, as of June 30, 2024 and December 31, 2023 (in thousands):

June 30, 2024

December 31, 2023

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The decrease was primarily due to seasonal pay downs in commercial and industrial loans as well as loan demand partially offset by an increase in agricultural loans due to seasonal demands.

The balance of real estate loans held for sale, included in the balances shown above, amounted to $4.8 million and $5.0 million as of March 31, 2024 and December 31, 2023, respectively.

The balance of real estate loans held for sale, included in the balances shown above, amounted to $7.8 million and $5.0 million as of June 30, 2024 and December 31, 2023, respectively.

Commercial and commercial real estate loans generally involve higher credit risks than residential real estate and consumer loans.

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While these regions have experienced some economic stress during 2024 and 2023, the Company does not consider these locations high risk areas since these regions have not experienced the significant changes in real estate values seen in some other areas in the United States.

The Company does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage of total risk-based capital for the periods shown above.

At March 31, 2024 and December 31, 2023, the Company did have industry loan concentrations that exceeded 25% of total risk-based capital in the following industries (dollars in thousands):

March 31, 2024

First Mid Bank does not have a concentration, as defined by the regulatory agencies, in construction and land development loans or commercial real estate loans as a percentage of the sum of Tier 1 Capital and allowance for loan loss for the periods shown above.

At June 30, 2024 and December 31, 2023, First Mid Bank did have industry loan concentrations that exceeded 25% of the sum of Tier 1 Capital and allowance for loan loss in the following industries (dollars in thousands):

June 30, 2024

December 31, 2023

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Lessors of residential buildings and dwellings

The Company had no further industry loan concentrations in excess of 25% of total risk-based capital.

The following table presents the balance of loans outstanding as of March 31, 2024, by contractual maturities (in thousands):

Hotels and motels

First Mid Bank had no further industry loan concentrations in excess of 25% of the sum of Tier 1 Capital and allowance for loan loss.

The following table presents the balance of loans outstanding as of June 30, 2024, by contractual maturities (in thousands):

Over 1 through

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Includes demand loans, past due loans and overdrafts.

As of March 31, 2024, loans with maturities over one year consisted of approximately $3.0 billion in fixed rate loans and approximately $1.7 billion in variable rate loans.

As of June 30, 2024, loans with maturities over one year consisted of approximately $3.0 billion in fixed rate loans and approximately $1.7 billion in variable rate loans.

The loan maturities noted above are based on the contractual provisions of the individual loans.

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Write-downs for subsequent declines in value are recorded in non-interest expense in other real estate owned along with other expenses related to maintaining the properties.

The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets at March 31, 2024 and December 31, 2023 (dollars in thousands):

March 31, 2024

The following table presents information concerning the aggregate amount of nonperforming loans and repossessed assets at June 30, 2024 and December 31, 2023 (dollars in thousands):

June 30, 2024

December 31, 2023

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Nonperforming loans and repossessed assets to loans, before allowance for credit losses

The $39,000 decrease in nonaccrual loans during 2024 resulted from the net of $2.2 million of loans put on nonaccrual status offset by $1.7 million of loans becoming current or paid-off, $183,000 of loans transferred to other real estate and $402,000 of loans charged off.

The $1 million decrease in nonaccrual loans during 2024 resulted from the net of $2.5 million of loans put on nonaccrual status offset by $2.5 million of loans becoming current or paid-off, $456,000 of loans transferred to other real estate and $544,000 of loans charged off.

The following table summarizes the composition of nonaccrual loans (dollars in thousands):

March 31, 2024

June 30, 2024

December 31, 2023

Construction and land development

Agricultural real estate

2 unchanged sentences

Loans secured by real estate

Agricultural loans

Commercial and industrial loans

Consumer loans

Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $267,000 and $79,000 for the three months ended March 31, 2024 and 2023, respectively.

The $243,000 increase in repossessed assets during the 2024 resulted from $243,000 of additional assets repossessed and no repossessed assets sold, no writedowns, and no change in fair value premiums and discounts.

Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $487,000 and $122,000 for the six months ended June 30, 2024 and 2023, respectively.

The $314,000 increase in repossessed assets during the 2024 resulted from $554,000 of additional assets repossessed and $240,000 repossessed assets sold, no writedowns, and no change in fair value premiums and discounts.

The following table summarizes the composition of repossessed assets (dollars in thousands):

March 31, 2024

June 30, 2024

December 31, 2023

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Total repossessed collateral

Repossessed assets sold during the first three months of 2024 resulted in no net gain or loss of related to real estate asset sales and net gains of $70,000 related to other asset sales.

Repossessed assets sold during the first six months of 2024 resulted in $17,000 net gain or loss of related to real estate asset sales and net gains of $69,000 related to other asset sales.

The Company also recognized no deferred losses and recorded no writedowns on real estate properties owned.

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Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company’s success.

At March 31, 2024, the Company’s loan

portfolio included $602.9 million of loans to borrowers whose businesses are directly related to agriculture.

At June 30, 2024, the Company’s loan portfolio

included $601.6 million of loans to borrowers whose businesses are directly related to agriculture.

Of this amount, $490.2 million was concentrated in other grain farming.

1 unchanged sentence

While the Company adheres to sound underwriting practices, including collateralization of loans, any extended period of low commodity prices, drought conditions, significantly reduced yields on crops and/or reduced levels of government assistance to the agricultural industry could result in an increase in the level of problem agriculture loans and potentially result in loan losses within the agricultural portfolio.

In addition, the Company has $223.1 million of loans to motels and hotels.

The performance of these loans is dependent on borrower specific issues as well as the general level of business and personal travel within the region.

While the Company adheres to sound underwriting standards, a prolonged period of reduced business or personal travel could result in an increase in nonperforming loans to this business segment and potentially in loan losses.

The Company also has $1.07 billion of loans to lessors of non-residential buildings, and $562.3 million of loans to lessors of residential buildings and dwellings.

11 unchanged sentences

In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses.

Analysis of the allowance for credit losses as of March 31, 2024 and 2023, and of changes in the allowance for the three months ended March 31, 2024 and 2023, is as follows (dollars in thousands):

Three months ended March 31,

Analysis of the allowance for credit losses as of June 30, 2024 and 2023, and of changes in the allowance for the three and six months ended June 30, 2024 and 2023, is as follows (dollars in thousands):

Three months ended June 30,

Six months ended June 30,

Average loans outstanding, net of unearned income

1 unchanged sentence

Allowance - beginning of period

Construction and land development

Agricultural real estate

1-4 family residential

Commercial real estate

Commercial and industrial

10 unchanged sentences

Ratio of allowance for credit losses to nonperforming loans

The decrease in the allowance for credit losses to nonperforming loans ratio is primarily due to an increase in the allowance for credit losses due to acquiring Blackhawk Bank at March 31, 2024 compared to March 31, 2023.

During the first three months of 2024, the Company had net charge offs of $382,000 compared to net charge offs of $53,000 in 2023.

During the first three months of 2024, there were one commercial operating loan to one borrower totaling $273,000.

During the first three months of 2023, there were no significant charge-offs.

The increase in the allowance for credit losses to nonperforming loans ratio is primarily due to an increase in the allowance for credit losses due to acquiring Blackhawk Bank at June 30, 2024 compared to June 30, 2023.

During the first six months of 2024, the Company had net charge offs of $1,089,000 compared to net charge offs of $15,000 in 2023.

During the first six months of 2024, there was one commercial real estate loan to one borrower totaling $193,000.

During the first six months of 2023, there were one agricultural loan to one borrower totaling $0.2 million.

Funding of the Company’s earning assets is substantially provided by a combination of consumer, commercial and public fund deposits.

The Company continues to focus its strategies and emphasis on retail core deposits, the major component of funding sources.

The following table sets forth the average deposits and weighted average rates for the three months ended March 31, 2024 and 2023 and for the year ended December 31, 2023 (dollars in thousands):

Three months ended

March 31, 2024

Three months ended

March 31, 2023

The following table sets forth the average deposits and weighted average rates for the six months ended June 30, 2024 and 2023 and for the year ended December 31, 2023 (dollars in thousands):

Six months ended

June 30, 2024

Six months ended

June 30, 2023

December 31, 2023

4 unchanged sentences

Total average deposits

During the first three months of 2024, the average balance of deposits increased by $585.1 million from the average balance for the year ended December 31, 2023.

During the first six months of 2024, the average balance of deposits increased by $577.9 million from the average balance for the

year ended December 31, 2023.

Average non-interest-bearing deposits increased by $91.6 million, average interest-bearing balances increased by $410.6 million, savings account balances increased $34.2 million and balances of time deposits increased $41.5 million.

1 unchanged sentence

The average account balance for all deposit customers is approximately $25,000.

The following table sets forth the high and low month-end balances for the three months ended March 31, 2024 and 2023 and for the year ended December 31, 2023 (in thousands):

Three months ended

March 31, 2024

Three months ended

March 31, 2023

The following table sets forth the high and low month-end balances for the six months ended June 30, 2024 and 2023 and for the year ended December 31, 2023 (in thousands):

Six months ended

June 30, 2024

Six months ended

June 30, 2023

December 31, 2023

2 unchanged sentences

Balances of time deposits, including brokered time deposits of $100,000 or more include time deposits maintained for public fund entities and consumer time deposits.

The following table sets forth the maturity of time deposits, including brokered time deposits of $100,000 or more at March 31, 2024 and December 31, 2023 (in thousands):

March 31, 2024

The following table sets forth the maturity of time deposits, including brokered time deposits of $100,000 or more at June 30, 2024 and December 31, 2023 (in thousands):

June 30, 2024

December 31, 2023

8 unchanged sentences

Other borrowings consist of Federal Home Loan Bank (“FHLB”) advances, federal funds purchased, loans (short-term or long-term debt) that the Company has outstanding and junior subordinated debentures.

Information relating to securities sold under agreements to repurchase and other borrowings as of March 31, 2024 and December 31, 2023 is presented below (dollars in thousands):

March 31, 2024

Information relating to securities sold under agreements to repurchase and other borrowings as of June 30, 2024 and December 31, 2023 is presented below (dollars in thousands):

June 30, 2024

December 31, 2023

26 unchanged sentences

Average interest rate during the period

Securities sold under agreements to repurchase decreased $3.0 million during the first three months of 2024 primarily due to the cash flow needs of various customers.

Securities sold under agreements to repurchase decreased $7.8 million during the first six months of 2024 primarily due to the cash flow needs of various customers.

FHLB advances represent borrowings by First Mid Bank to economically fund loan demand.

At March 31, 2024 the fixed term advances, consisted of $238.6 million as follows:

At June 30, 2024 the fixed term advances, consisted of $263.6 million as follows:

Term (in years)

14 unchanged sentences

The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $15 million.

There was no balance on this line of credit as of March 31, 2024.

There was no balance on this line of credit as of June 30, 2024.

This loan was renewed on April 5, 2024 for one year as a revolving credit agreement.

The interest rate is floating at 2.25% over the federal funds rate.

The Company and First Mid Bank, as applicable, were in compliance with the existing covenants at March 31, 2024 and 2023, and December 31, 2023.

The Company and First Mid Bank, as applicable, were in compliance with the existing covenants at June 30, 2024 and 2023, and December 31, 2023.

On October 6, 2020, the Company issued and sold $96.0 million in aggregate principal amount of its 3.95% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “Notes”).

4 unchanged sentences

From and including October 15, 2025 to, but excluding the maturity date or earlier redemption, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 383 basis points, or such other rate as determined pursuant to the Supplemental Indenture, provided that in no event shall the applicable floating interest rate be less than zero per annum.

On June 7, 2024, the Company repurchased and cancelled $4.0 million of the outstanding Notes in the open market.

The Company may, beginning with the interest payment date of October 15, 2025, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption.

20 unchanged sentences

The $10 million in proceeds from the trust preferred issuance and an additional $310,000 for the Company’s investment in common equity of Trust II, a total of $10,310 000, was invested in junior subordinated debentures of the Company.

The underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points, 7.19% and 7.25% at March 31, 2024 and December 31, 2023, respectively).

The underlying junior subordinated debentures issued by the Company to Trust II mature in 2036, bore interest at a fixed rate of 6.98% paid quarterly until June 15, 2011 and then converted to floating rate (LIBOR plus 160 basis points, 7.20% and 7.25% at June 30, 2024 and December 31, 2023, respectively).

On September 8, 2016, the Company assumed the trust preferred securities of Clover Leaf Statutory Trust I (“CLST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First Clover Financial.

The $4,000,000 of trust preferred securities and an additional $124,000 investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I.

The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (7.44% and 7.50% at March 31, 2024 and December 31, 2023, respectively) and resets quarterly.

The subordinated debentures mature in 2025, bear interest at three-month LIBOR plus 185 basis points (7.45% and 7.50% at June 30, 2024 and December 31, 2023, respectively) and resets quarterly.

On May 1, 2018, the Company assumed the trust preferred securities of FBTC Statutory Trust I (“FBTCST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of First BancTrust Corporation.

The $6,000,000 of trust preferred securities and an additional $186,000 investment in common equity of FBTCST I is invested in junior subordinated debentures issued to FBTCST I.

The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (7.29% and 7.35% at March 31, 2024 and December 31, 2023, respectively) and resets quarterly.

The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 170 basis points (7.30% and 7.35% at June 30, 2024 and December 31, 2023, respectively) and resets quarterly.

On August 15, 2023, the Company assumed the trust preferred securities of Blackhawk Statutory Trust I (“BHST I”), a statutory business trust that was a wholly owned unconsolidated subsidiary of Blackhawk Bancorp, Inc.

The $1,000,000 of trust preferred securities and an additional $31,000 investment in common equity of BHST I is invested in junior subordinated debentures issued to BHST I.

The subordinated debentures mature in 2032, bear interest at three-month LIBOR plus 325 basis points (8.82% and 8.87% at March 31, 2024 and December 31, 2023, respectively) and resets quarterly.

The subordinated debentures mature in 2032, bear interest at three-month LIBOR plus 325 basis points (8.82% and 8.87% at June 30, 2024 and December 31, 2023, respectively) and resets quarterly.

On August 15, 2023, the Company assumed the trust preferred securities of Blackhawk Statutory Trust II (“BHST II”), a statutory business trust that was a wholly owned unconsolidated subsidiary of Blackhawk Bancorp, Inc.

The $4,000,000 of trust preferred securities and an additional $124,000 investment in common equity of BHST II is invested in junior subordinated debentures issued to BHST II.

The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 205 basis points (7.64% and 7.69% at March 31, 2024 and December 31, 2023, respectively) and resets quarterly.

The subordinated debentures mature in 2035, bear interest at three-month LIBOR plus 205 basis points (7.65% and 7.69% at June 30, 2024 and December 31, 2023, respectively) and resets quarterly.

The trust preferred securities issued by Trust II, CLST I, FBTCST I, BHST I, and BHST II are included as Tier 1 capital of the Company for regulatory capital purposes.

20 unchanged sentences

By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities and repricing points at various times in the future, management can gain insight into the amount of interest rate risk embedded in the balance sheet.

The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at March 31, 2024 (dollars in thousands):

The following table sets forth the Company’s interest rate repricing GAP for selected maturity periods at June 30, 2024 (dollars in thousands):

Rate Sensitive Within

14 unchanged sentences

Cumulative Ratio

The static GAP analysis shows that at March 31, 2024, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon.

The static GAP analysis shows that at June 30, 2024, the Company was liability sensitive, on a cumulative basis, through the twelve-month time horizon.

This indicates that future increases in interest rates could have an adverse effect on net interest income.

3 unchanged sentences

Capital Resources

At March 31, 2024, the Company’s stockholders' equity increased $4.7 million or 0.6%, to $798.0 million from $793.2 million as of December 31, 2023.

During the first three months of 2024, net income contributed $20.5 million to equity before the payment of dividends to stockholders.

At June 30, 2024, the Company’s stockholders' equity increased $20.4 million or 2.6%, to $813.6 million from $793.2 million as of December 31, 2023.

During the first six months of 2024, net income contributed $40.2 million to equity before the payment of dividends to stockholders.

The change in market value of available-for-sale investment securities decreased stockholders' equity by $10.6 million, net of tax.

Dividends of $5.5 million were paid during the first three months of 2024.

Dividends of $10.9 million were paid during the first six months of 2024.

The Company is subject to various regulatory capital requirements administered by the federal banking agencies.

3 unchanged sentences

ensure capital adequacy require the Company and its subsidiary bank to maintain minimum capital amounts and ratios (set forth in the table below).

Management believes that, as of March 31, 2024 and December 31, 2023, the Company and First Mid Bank, as applicable, met all capital adequacy requirements.

Management believes that, as of June 30, 2024 and December 31, 2023, the Company and First Mid Bank, as applicable, met all capital adequacy requirements.

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, the Company elected the option to delay the estimated impact on regulatory capital of adopting ASU 2016-13, which was effective January 1, 2020.

8 unchanged sentences

Action Provisions

March 31, 2024

June 30, 2024

Total capital (to risk-weighted assets)

15 unchanged sentences

First Mid Bank

The Company's risk-weighted assets, capital, and capital ratios for March 31, 2024 are computed in accordance with Basel III capital rules which were effective January 1, 2015.

As of March 31, 2024, the Company and First Mid Bank had capital ratios above the required minimums for regulatory capital adequacy, and First Mid Bank had capital ratios that qualified it for treatment as well-capitalized under the regulatory framework for prompt corrective action with respect to banks.

The Company's risk-weighted assets, capital, and capital ratios for June 30, 2024 are computed in accordance with Basel III capital rules which were effective January 1, 2015.

As of June 30, 2024, the Company and First Mid Bank had capital ratios above the required minimums for regulatory capital adequacy, and First Mid Bank had capital ratios that qualified it for treatment as well-capitalized under the regulatory framework for prompt corrective action with respect to banks.

Participants may purchase Company stock under the following three plans of the Company:

13 unchanged sentences

A maximum of 600,000 shares of common stock may be issued under the ESPP.

As of March 31, 2024, 102,340 shares have been issued pursuant to the ESPP.

During the three months ended March 31, 2024 and 2023, 8,612 shares and 7,963 shares, respectively, were issued pursuant to the ESPP.

As of June 30, 2024, 109,663 shares have been issued pursuant to the ESPP.

During the six months ended June 30, 2024 and 2023, 15,935 shares and 17,138 shares, respectively, were issued pursuant to the ESPP.

Stock Repurchase Program

12 unchanged sentences

Availability of the funds is subject to First Mid Bank meeting minimum regulatory capital requirements for total capital to risk-weighted assets and Tier 1 capital to total average assets.

As of March 31, 2024, First Mid Bank met these regulatory requirements.

As of June 30, 2024, First Mid Bank met these regulatory requirements.

• First Mid Bank can borrow from the Federal Home Loan Bank as a source of liquidity.

1 unchanged sentence

Collateral that can be pledged includes one-to-four family residential real estate loans and securities.

At March 31, 2024, the excess collateral at the FHLB would support approximately $1,683 million of additional advances for First Mid Bank.

At June 30, 2024, the excess collateral at the FHLB would support approximately $1,631 million of additional advances for First Mid Bank.

• First Mid Bank is a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged.

• In addition, as of March 31, 2024, the Company had a revolving credit agreement in the amount of $15 million with The Northern Trust Company with an outstanding balance of $0 and $15 million in available funds.

• In addition, as of June 30, 2024, the Company had a revolving credit agreement in the amount of $15 million with The Northern Trust Company with an outstanding balance of $0 and $15 million in available funds.

This loan was renewed on April 5, 2024 for one year as a revolving credit agreement.

1 unchanged sentence

The loan is unsecured.

The Company and its subsidiary bank were in compliance with the existing covenants at March 31, 2024 and 2023 and December 31, 2023.

The Company and its subsidiary bank were in compliance with the existing covenants at June 30, 2024 and 2023 and December 31, 2023.

Management continues to monitor its expected liquidity requirements carefully, focusing primarily on cash flows from:

4 unchanged sentences

• operating activities, including scheduled debt repayments and dividends to stockholders.

The following table summarizes significant contractual obligations and other commitments at March 31, 2024 (in thousands):

The following table summarizes significant contractual obligations and other commitments at June 30, 2024 (in thousands):

Time deposits

2 unchanged sentences

Supplemental retirement

For the three months ended March 31, 2024, net cash of $29.0 million was provided by operating activities, $97.4 million was provided by investing activities, and $86.2 million was provided by financing activities.

For the six months ended June 30, 2024, net cash of $53.0 million was provided by operating activities, $69.3 million was provided by investing activities, and $29.9 million was used in financing activities.

In total, cash and cash equivalents increased by $92.4 million since year-end 2023.

6 unchanged sentences

However, the Company does not anticipate any losses from these instruments.

The off-balance sheet financial instruments whose contract amounts represent credit risk at March 31, 2024 and December 31, 2023 were as follows (in thousands):

March 31, 2024

The off-balance sheet financial instruments whose contract amounts represent credit risk at June 30, 2024 and December 31, 2023 were as follows (in thousands):

June 30, 2024

December 31, 2023

18 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis