FIRST MID BANCSHARES, INC. 10-Q

ITEM 2. 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 and six months ended June 30, 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. 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. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of First Mid, are identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties, including, among other things, the possibility that any of the anticipated benefits of the merger between First Mid and Blackhawk will not be realized or will not be realized within the expected time period; changes in interest rates; general economic conditions and those in the market areas of First Mid; legislative and/or regulatory changes; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of First Mid’s loan or investment portfolios and the valuation of those investment portfolios; demand for loan products; deposit flows; competition, demand for financial services in the market areas of First Mid; accounting principles, policies and guidelines. Additional information concerning First Mid, including additional factors and risks that could materially affect First Mid’s financial results, are included in First Mid’s filings with the SEC, including its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. Forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise. Overview This overview of management’s discussion and analysis highlights selected information in this document and may not contain all the information that is important to you. 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 $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 40 the performance ratios for the year ended December 31, 2023: Six months ended Year ended June 30, 2024 June 30, 2023 December 31, 2023 Return on average assets 1.06 % 1.07 % 0.97 % Return on average common equity 10.14 % 11.07 % 10.10 % Average equity to average assets 10.44 % 9.66 % 9.61 % 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. Net interest income before the provision for loan losses was $112.2 million compared to net interest income of $85.6 million for the same period in 2023. The increase in net interest income was primarily due to the acquisition of Blackhawk Bank during the third quarter of 2023 and increased net interest margin as mentioned above. 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 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 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): Change in Net Income 2024 versus 2023 Three months ended Six months ended June 30, 2024 June 30, 2024 Net interest income $ 14,398 $ 26,677 Provision for credit losses (625 ) (1,085 ) Other income, including securities transactions 2,936 4,935 Other expenses (11,349 ) (23,134 ) Income taxes (2,182 ) (2,892 ) Increase in net income $ 3,178 $ 4,501 Credit quality is an area of importance to the Company. 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 $1.5 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 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. 41 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. The initial impact of adoption of ASU 2016-13, as well as 25% of the quarterly increases in the allowance for credit losses subsequent to adoption of ASU 2016-13 ("CECL adjustments"), was be delayed for two years. The cumulative amount of these adjustments is being phased out of the regulatory capital calculation over a three-year period, with 75% of the adjustments included in 2022, 50% of the adjustments included in 2023 and 25% of the adjustments included in 2024. After five years, the temporary delay of ASU 2016-13 adoption will be fully reversed. The Company has elected this option. The Company’s liquidity position remains sufficient to fund operations and meet the requirements of borrowers, depositors, and creditors. The Company maintains various sources of liquidity to fund its cash needs. See the discussion under the heading “Liquidity” for a full listing of sources and anticipated significant contractual obligations. The Company enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. 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. As FDIC-insured institutions, First Mid Bank is required to pay deposit insurance premium assessments to the FDIC. Several requirements with respect to the FDIC insurance system have affected results, including insurance assessment rates. 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 The Company has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Company’s consolidated financial statements. The significant accounting policies of the Company are described in the footnotes to the consolidated financial statements included in the Company’s 2023 Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. 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. Investment in Debt and Equity Securities. The Company classifies its investments in debt and equity securities as either held-to-maturity or available-for-sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which was codified into ASC 320. Securities classified as held-to-maturity are recorded at amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the financial position, results of operations and cash flows of the Company. If the estimated value of investments is less than the cost or amortized cost, the Company evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and the Company determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income (loss). Loans. Loans are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase discounts and premiums, fair value hedge accounting adjustments and deferred loan fees and costs. Accrued interest is reported separately and is included in interest receivable in the consolidated balance sheets. Allowance for Credit Losses - Loans. The Company believes the allowance for credit losses for loans is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. The allowance for credit losses for loans represents the best estimate of losses inherent in the existing loan portfolio. 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 42 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. The allowance for credit losses is estimated using a discounted cash flow (DCF) methodology. The DCF projects future cash flows over the life of the loan portfolio. Probability of default (PD) and loss given default (LGD) are key components in calculating expected losses in this model. The PD is forecasted using a regression model that determines the likelihood of default with a forward-looking forecast of unemployment rates. The LGD is the percentage of defaulted loans that is ultimately charged off. The allowance is calculated as the net present value of the expected cash flows less the amortized cost basis of the loans. Prior to 2022, the allowance for credit losses was measured on a collective (pool) basis for non-individually evaluated loans with similar risk characteristics. Historical credit loss experience provided the basis for the estimate of expected credit losses. Adjustments to expected losses are made using qualitative factors for relevant to each loan segment including merger & acquisition activity, economic conditions, changes in policies, procedures & underwriting, and concentrations. In addition, a forecast, using reasonable and supportable future conditions, is prepared that is used to estimate expected changes to existing and historical conditions in the current period. The Company estimates the appropriate level of allowance for credit losses for individually evaluated loans by evaluating them separately. A specific allowance is assigned to an impaired loan when expected cash flows or collateral are less than the carrying amount of the loan. Allowance for Credit Losses - Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period that the Company is exposed to credit risk via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is included in other liabilities in the consolidated balance sheets. Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value temporarily declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. Mortgage Servicing Rights. The Company has elected to record mortgage servicing rights under the amortization method. Using this method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation reserve, to the extent that fair value is less than the carrying amount of the servicing assets. Fair value in excess of the carrying amount of servicing assets is not recognized. Deferred Income Tax Assets/Liabilities. The Company’s net deferred income tax asset arises from differences in the dates that items of income and expense enter our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If the Company were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve. Additionally, the Company reviews its uncertain tax positions annually under FASB Interpretation No. 48 (FIN No. 48), “ Accounting for Uncertainty in Income Taxes ,” codified within ASC 740. An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the "more likely than not" test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense. Impairment of Goodwill and Intangible Assets. Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on the Company’s consolidated balance sheets. 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 43 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. As a result of the Company’s acquisition activity, goodwill, an intangible asset with an indefinite life, is reflected on the consolidated balance sheets. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually. Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. The Company’s valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded. SFAS No. 157, “ Fair Value Measurements” , which was codified into ASC 820, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows: • Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. • Level 3 — inputs that are unobservable and significant to the fair value measurement. At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 7 – Fair Value of Assets and Liabilities. Results of Consolidated Operations Net Interest Income The largest source of revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds. Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is presented on a full tax equivalent ("TE") basis in the table that follows. The federal statutory rate in effect of 21% for 2024 and 2023 was used. 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 $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. 44 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 Average Average Average Average Balance Interest Rate Balance Interest Rate Assets Interest-bearing deposits with other financial institutions $ 127,962 $ 1,667 5.24 % $ 35,093 $ 456 5.21 % Federal funds sold 23 8 139.89 % 8,025 98 4.90 % Certificates of deposit 3,745 43 4.62 % 1,715 14 3.27 % Investment securities: Taxable 883,503 5,417 2.45 % 950,755 5,270 2.22 % Tax-exempt (1) 271,488 2,516 3.71 % 276,719 2,434 3.52 % Loans net of unearned income (TE) (2) 5,529,211 79,628 5.79 % 4,777,319 58,602 4.92 % Total earning assets 6,815,932 89,279 5.27 % 6,049,626 66,874 4.43 % Cash and due from banks 95,891 135,574 Premises and equipment 101,562 89,974 Other assets 606,493 464,899 Allowance for credit losses (67,929 ) (58,617 ) Total assets $ 7,551,949 $ 6,681,456 Liabilities and stockholders' equity Interest-bearing deposits Demand deposits $ 3,021,299 $ 17,286 2.30 % $ 2,318,119 $ 9,467 1.64 % Savings deposits 688,057 185 0.11 % 619,426 168 0.11 % Time deposits 977,265 8,867 3.65 % 983,323 6,945 2.83 % Total interest-bearing deposits 4,686,621 26,338 2.26 % 3,920,868 16,580 1.70 % Securities sold under agreements to repurchase 205,711 1,615 3.16 % 226,734 1,723 3.05 % FHLB advances 249,187 2,248 3.63 % 486,920 4,084 3.36 % Federal funds purchased — — — % — — 0.00 % Subordinated Debt 106,033 1,180 4.48 % 94,606 988 4.19 % Junior subordinated debt 24,140 537 8.95 % 19,427 390 8.05 % Total borrowings 585,071 5,580 3.84 % 827,687 7,185 3.48 % Total interest-bearing liabilities 5,271,692 31,918 2.44 % 4,748,555 23,765 2.01 % Non interest-bearing demand deposits 1,439,414 1.91 % 1,228,395 1.59 % Other liabilities 44,595 46,163 Stockholders' equity 796,248 658,343 Total liabilities and equity $ 7,551,949 $ 6,681,456 Net interest income $ 57,361 $ 43,109 Net interest spread 2.83 % 2.42 % Impact of non interest-bearing funds 0.53 % 0.42 % TE net yield on interest-bearing assets 3.36 % 2.84 % 45 Six months ended June 30, 2024 Six months ended June 30, 2023 Average Average Average Average Balance Interest Rate Balance Interest Rate Assets Interest-bearing deposits with other financial institutions $ 150,664 $ 4,074 5.44 % $ 25,444 $ 665 5.27 % Federal funds sold 559 25 9.03 % 7,890 183 4.68 % Certificates of deposit 2,645 63 4.76 % 1,752 28 3.28 % Investment securities: Taxable 894,351 10,887 2.43 % 954,298 10,433 2.19 % Tax-exempt (1) 275,478 4,966 3.61 % 278,796 4,920 3.53 % Loans net of unearned income (TE) (2) 5,526,698 157,552 5.73 % 4,782,757 115,071 4.85 % Total earning assets 6,850,395 177,567 5.21 % 6,050,937 131,300 4.38 % Cash and due from banks 99,407 135,361 Premises and equipment 101,546 90,159 Other assets 615,348 469,933 Allowance for credit losses (68,494 ) (59,085 ) Total assets $ 7,598,202 $ 6,687,305 Liabilities and stockholders' equity Interest-bearing deposits Demand deposits $ 3,029,068 $ 33,898 2.25 % $ 2,410,582 $ 19,122 1.60 % Savings deposits 697,953 363 0.10 % 629,829 359 0.11 % Time deposits 1,002,655 18,173 3.64 % 842,110 9,866 2.36 % Total interest-bearing deposits 4,729,676 52,434 2.23 % 3,882,521 29,347 1.52 % Securities sold under agreements to repurchase 235,149 3,671 3.14 % 228,861 3,186 2.81 % FHLB advances 253,871 4,562 3.61 % 513,391 8,958 3.52 % Federal funds purchased — — — % 387 9 4.69 % Subordinated debt 106,412 2,374 4.49 % 94,587 1,975 4.21 % Junior subordinated debentures 24,112 1,079 9.00 % 19,406 769 7.99 % Total borrowings 619,544 11,686 3.79 % 856,632 14,897 3.51 % Total interest-bearing liabilities 5,349,220 64,120 2.41 % 4,739,153 44,244 1.88 % Non interest-bearing demand deposits 1,403,606 1.91 % 1,248,710 1.49 % Other liabilities 51,826 53,408 Stockholders' equity 793,550 646,034 Total liabilities and equity $ 7,598,202 $ 6,687,305 Net interest income $ 113,447 $ 87,056 Net interest spread 2.80 % 2.50 % Impact of non interest-bearing funds 0.50 % 0.39 % TE net yield on interest-earning assets 3.30 % 2.89 % 1. The tax-exempt income is shown on a tax equivalent basis. 2. Nonaccrual loans and loans held for sale are included in the average balances. Balances are net of unaccreted discount related to loans acquired. 46 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 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) Total Total Change Volume (1) Rate (1) Change Volume (1) Rate (1) Earning assets: Interest-bearing deposits $ 1,211 $ 1,208 $ 3 $ 3,409 $ 3,387 $ 22 Federal funds sold (90 ) (760 ) 670 (158 ) (422 ) 264 Certificates of deposit investments 29 22 7 35 18 17 Investment securities: Taxable 147 (1,715 ) 1,862 454 (1,504 ) 1,958 Tax-exempt (2) 82 (47 ) 129 46 (59 ) 105 Loans (2) (3) 21,026 9,901 11,125 42,481 19,608 22,873 Total interest income $ 22,405 $ 8,609 $ 13,796 $ 46,267 $ 21,028 $ 25,239 Interest-bearing liabilities: Interest-bearing deposits Demand deposits $ 7,819 $ 3,360 $ 4,459 $ 14,776 $ 5,720 $ 9,056 Savings deposits 17 17 — 4 71 (67 ) Time deposits 1,922 (295 ) 2,217 8,307 2,161 6,146 Securities sold under agreements to repurchase (108 ) (436 ) 328 485 92 393 FHLB advances (1,836 ) (3,835 ) 1,999 (4,396 ) (5,064 ) 668 Federal funds purchased — — 1 (9 ) (5 ) (4 ) Subordinated debt 192 122 70 399 260 139 Junior subordinated debentures 147 101 46 310 204 106 Total interest expense 8,153 (966 ) 9,120 19,876 3,439 16,437 Net interest income $ 14,252 $ 9,575 $ 4,676 $ 26,391 $ 17,589 $ 8,802 1. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate. 2. The tax-exempt income is shown on a tax-equivalent basis. 3. Nonaccrual loans have been included in the average balances. 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 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: • Average interest-bearing deposits with other financial institutions increased $125.2 million or 492.1%. • Average federal funds sold decreased $7.3 million or 92.9%. • Average certificates of deposits investments increased $893,000 or 51.0%. • Average loans increased by $743.9 million or 15.6%. • Average securities decreased by $63.3 million or 5.1%. • Average interest-bearing customer deposits increased by $847.2 million or 21.8%. • Average securities sold under agreements to repurchase increased by $6.3 million or 2.7%. • Average borrowings and other debt decreased by $243.4 million or 38.8%. 47 • 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 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. Other Income 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 and six months ended June 30, 2024 and 2023 (in thousands): Three months ended June 30, Six months ended June 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change Wealth management revenues $ 5,405 $ 5,341 $ 64 1.2 % $ 10,727 $ 10,855 $ (128 ) -1.2 % Insurance commissions 6,531 5,737 794 13.8 % 15,744 14,217 1,527 10.7 % Service charges 3,227 2,386 841 35.2 % 6,183 4,589 1,594 34.7 % Security gains (losses), net (156 ) (6 ) (150 ) 2500.0 % (156 ) (52 ) (104 ) 200.0 % Mortgage banking revenue, net 1,038 332 706 212.7 % 1,744 482 1,262 261.8 % ATM/debit card revenue 4,281 3,265 1,016 31.1 % 8,336 6,348 1,988 31.3 % Bank owned life insurance 1,192 1,189 3 0.3 % 2,313 2,830 (517 ) -18.3 % Other 904 1,242 (338 ) -27.2 % 2,009 2,696 (687 ) -25.5 % Total other income $ 22,422 $ 19,486 $ 2,936 15.1 % $ 46,900 $ 41,965 $ 4,935 11.8 % 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 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. • $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 $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. 48 Other Expense 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, 2024 2023 $ Change % Change 2024 2023 $ Change % Change Salaries and employee benefits $ 30,164 $ 23,544 $ 6,620 28.1 % $ 60,612 $ 49,615 $ 10,997 22.2 % Net occupancy and equipment expense 7,507 6,035 1,472 24.4 % 15,067 12,040 3,027 25.1 % Net other real estate owned expense 85 27 58 214.8 % 64 160 (96 ) -60.0 % FDIC insurance 902 1,076 (174 ) -16.2 % 1,771 1,539 232 15.1 % Amortization of intangible assets 3,340 1,477 1,863 126.1 % 6,837 2,999 3,838 128.0 % Stationery and supplies 370 315 55 17.5 % 761 607 154 25.4 % Legal and professional 2,536 1,780 756 42.5 % 4,985 3,470 1,515 43.7 % Marketing and donations 814 908 (94 ) -10.4 % 1,676 1,562 114 7.3 % ATM/debit card expense 1,281 1,016 265 26.1 % 2,472 2,239 233 10.4 % Other operating expenses 4,392 3,864 528 13.7 % 10,508 7,388 3,120 42.2 % Total other expense $ 51,391 $ 40,042 $ 11,349 28.3 % $ 104,753 $ 81,619 $ 23,134 28.3 % 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 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 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. Income Taxes 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. federal and state of Florida, Illinois, Indiana, Missouri, Texas, and Wisconsin income tax returns. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2020. 49 Analysis of Consolidated Balance Sheets Securities The Company’s overall investment objectives are to insulate the investment portfolio from undue credit risk, maintain adequate liquidity, insulate capital against changes in market value and control excessive changes in earnings while optimizing investment performance. 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 June 30, 2024 and December 31, 2023 (dollars in thousands): June 30, 2024 December 31, 2023 Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 224,831 1.31 % $ 237,875 1.28 % Obligations of states and political subdivisions 334,386 2.30 % 337,835 2.31 % Mortgage-backed securities: GSE residential 684,817 1.91 % 714,216 1.91 % Other securities 69,352 4.13 % 76,081 3.65 % Total securities $ 1,313,386 2.02 % $ 1,366,007 2.00 % 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 June 30, 2024 for investment securities (in thousands): Average Credit Rating of Fair Value at June 30, 2024 (1) Amortized Cost Estimated Fair Value AAA AA +/- A +/- BBB +/- < BBB - Not rated Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 224,831 $ 199,582 $ 26,033 $ 173,549 $ — $ — $ — $ — Obligations of state and political subdivisions 334,386 277,066 36,051 193,360 45,536 — — 2,119 Mortgage-backed securities (2) 684,817 571,054 — — — — — 571,054 Other securities 67,075 62,948 3,107 6,307 17,661 3,439 — 32,434 Total available-for-sale $ 1,311,109 $ 1,110,650 $ 65,191 $ 373,216 $ 63,197 $ 3,439 $ — $ 605,607 Held-to-maturity: Other securities 2,277 2,277 — — — — — 2,277 Total held-to-maturity $ 2,277 $ 2,277 $ — $ — $ — $ — $ — $ 2,277 Equity securities: Federal Agricultural Mtg Corp 85 434 — — — — — 434 Midwest Independent BankersBank 150 203 — — — — — 203 Equalize Community Development Fund 3,621 3,621 — — — — — 3,621 Total equity securities $ 3,856 $ 4,258 $ — $ — $ — $ — $ — $ 4,258 1. Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency. 2. Mortgage-backed securities include mortgage-backed securities (MBS) and collateralized mortgage obligation (CMO) issues from the following government sponsored enterprises: FHLMC, FNMA, GNMA and FHLB. While MBS and CMOs are no longer explicitly rated by credit rating agencies, the industry recognizes that they are backed by agencies which have an implied government guarantee. 50 Loans 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 June 30, 2024 and December 31, 2023 (in thousands): June 30, 2024 December 31, 2023 Amortized Cost % Outstanding Loans Amortized Cost % Outstanding Loans Construction and land development $ 195,389 3.5 % $ 205,077 3.7 % Agricultural real estate 387,015 7.0 % 391,132 7.0 % 1-4 family residential properties 507,517 9.1 % 542,469 9.7 % Multifamily residential properties 334,446 6.0 % 319,129 5.7 % Commercial real estate 2,406,955 43.4 % 2,384,704 42.8 % Loans secured by real estate 3,831,322 69.0 % 3,842,511 68.9 % Agricultural loans 213,997 3.8 % 196,272 3.5 % Commercial and industrial loans 1,268,646 22.8 % 1,266,159 22.7 % Consumer loans 70,841 1.3 % 91,014 1.6 % All other loans 175,811 3.1 % 184,609 3.3 % Total loans $ 5,560,617 100.0 % $ 5,580,565 100.0 % Loan balances decreased $19.9 million, or (0.4%). 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 $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. Because payments on loans secured by commercial real estate or equipment are often dependent upon the successful operation and management of the underlying assets, repayment of such loans may be influenced to a great extent by conditions in the market or the economy. The Company does not have any sub-prime mortgages or credit card loans outstanding which are also generally considered to be higher credit risk. Loans are geographically dispersed throughout Illinois, the St. Louis Metro area, central Missouri, Texas, and southern Wisconsin. 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. 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 Principal balance % Outstanding Loans Principal balance % Outstanding Loans Other grain farming $ 490,232 8.82 % $ 472,456 8.47 % Lessors of non-residential buildings 1,067,550 19.20 % 1,086,152 19.46 % Lessors of residential buildings and dwellings 562,260 10.11 % 541,858 9.71 % Hotels and motels 223,067 4.01 % 215,386 3.86 % 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. 51 The following table presents the balance of loans outstanding as of June 30, 2024, by contractual maturities (in thousands): Maturity (1) One year or less (2) Over 1 through 5 years Over 5 years Total Construction and land development $ 40,912 $ 49,968 $ 104,509 $ 195,389 Agricultural real estate 26,255 131,374 229,386 387,015 1-4 family residential properties 26,043 105,577 375,897 507,517 Multifamily residential properties 36,481 234,740 63,225 334,446 Commercial real estate 200,582 1,415,947 790,426 2,406,955 Loans secured by real estate 330,273 1,937,606 1,563,443 3,831,322 Agricultural loans 163,360 48,382 2,255 213,997 Commercial and industrial loans 377,849 625,685 265,112 1,268,646 Consumer loans 2,955 64,992 2,894 70,841 All other loans 25,733 22,074 128,004 175,811 Total loans $ 900,170 $ 2,698,739 $ 1,961,708 $ 5,560,617 1. Based upon remaining contractual maturity. 2. Includes demand loans, past due loans and overdrafts. 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. The Company has no general policy regarding renewals and borrower requests, which are handled on a case-by-case basis. Nonperforming Loans and Nonperforming Other Assets Nonperforming loans include: (a) loans accounted for on a nonaccrual basis; (b) accruing loans contractually past due ninety days or more as to interest or principal payments; and (c) loans not included in (a) and (b) above which are defined as “modified”. Repossessed assets include primarily repossessed real estate and automobiles. The Company’s policy is to discontinue the accrual of interest income on any loan for which principal or interest is ninety days past due. The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. Restructured loans are loans on which, due to deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven. Repossessed assets represent property acquired as the result of borrower defaults on loans. These assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure or repossession. Write-downs occurring at foreclosure are charged against the allowance for loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. 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 June 30, 2024 and December 31, 2023 (dollars in thousands): June 30, 2024 December 31, 2023 Nonaccrual loans $ 17,854 $ 18,832 Modified loans which are performing in accordance with revised terms 1,225 1,296 Total nonperforming loans 19,079 20,128 Repossessed assets 1,478 1,164 Total nonperforming loans and repossessed assets $ 20,557 $ 21,292 Nonperforming loans to loans, before allowance for credit losses 0.34 % 0.36 % Nonperforming loans and repossessed assets to loans, before allowance for credit losses 0.37 % 0.38 % 52 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): June 30, 2024 December 31, 2023 Balance % of Total Balance % of Total Construction and land development $ 6 — % $ — — % Agricultural real estate 1,125 6.3 % 1,146 6.1 % 1-4 family residential properties 4,896 27.4 % 4,940 26.2 % Commercial real estate 10,421 58.4 % 10,237 54.3 % Loans secured by real estate 16,448 92.1 % 16,323 86.6 % Commercial and industrial loans 1,015 5.7 % 1,931 10.3 % Consumer loans 391 2.2 % 578 3.1 % Total loans $ 17,854 100.0 % $ 18,832 100.0 % 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): June 30, 2024 December 31, 2023 Balance % of Total Balance % of Total Construction and land development $ 1,131 76.5 % $ 1,130 97.1 % 1-4 family residential properties 187 12.7 % 33 2.8 % Total real estate 1,318 89.2 % 1,163 99.9 % Consumer loans 160 10.8 % 1 0.1 % Total repossessed collateral $ 1,478 100.0 % $ 1,164 100.0 % 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. Repossessed assets sold during the same period in 2023 resulted in net gains of $115,000 related to real estate asset sales and net losses of $21,000 related to other asset sales. The Company also recognized no deferred losses and recorded $164,000 of writedowns on real estate properties owned. Loan Quality and Allowance for Credit Losses The allowance for credit losses represents management’s estimate of the reserve necessary to adequately account for probable losses existing in the current portfolio. The provision for loan losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for loan losses. In determining the adequacy of the allowance for loan losses, and therefore the provision to be charged to current earnings, management relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty. Factors considered by management in evaluating the overall adequacy of the allowance include a migration analysis of the historical net loan losses by loan segment, the level and composition of nonaccrual, past due and renegotiated loans, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates. Management reviews economic factors including the potential for reduced cash flow for commercial operating loans from reduction in sales or increased operating costs, decreased occupancy rates for commercial buildings, reduced levels of home sales for commercial land developments, the uncertainty regarding grain prices, increased operating costs for farmers, and increased levels of unemployment and bankruptcy impacting consumer’s ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. Management considers the allowance for loan losses a critical accounting policy. Management recognizes there are risk factors that are inherent in the Company’s loan portfolio. All financial institutions face risk factors in their loan portfolios because risk exposure is a function of the business. The Company’s operations (and therefore its loans) are concentrated in east central Illinois, an area where agriculture is the dominant industry. Accordingly, lending and other business relationships with agriculture-based businesses are critical to the Company’s success. At June 30, 2024, the Company’s loan portfolio 53 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. Total loans to borrowers whose businesses are directly related to agriculture increased $13.2 million from $588.5 million at December 31, 2023 while loans concentrated in other grain farming increased $17.8 million from $472.5 million at December 31, 2023. 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. The structure of the Company’s loan approval process is based on progressively larger lending authorities granted to individual loan officers, loan committees, and ultimately the Board of Directors. Outstanding balances to one borrower or affiliated borrowers are limited by federal regulation; however, limits well below the regulatory thresholds are generally observed. Most of the Company’s loans are to businesses located in the geographic market areas served by the Company’s branch bank system. Additionally, a significant portion of the collateral securing the loans in the portfolio is located within the Company’s primary geographic footprint. In general, the Company adheres to loan underwriting standards consistent with industry guidelines for all loan segments. The Company minimizes credit risk by adhering to sound underwriting and credit review policies. Management and the board of directors of the Company review these policies at least annually. Senior management is actively involved in business development efforts and the maintenance and monitoring of credit underwriting and approval. The loan review system and controls are designed to identify, monitor and address asset quality problems in an accurate and timely manner. The board of directors and management review the status of problem loans each month and formally determine a best estimate of the allowance for loan losses on a quarterly basis. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for loan losses. 54 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, 2024 2023 2024 2023 Average loans outstanding, net of unearned income $ 5,529,211 $ 4,777,319 $ 5,526,698 $ 4,782,757 Allowance-prior year end of period 67,936 58,223 68,675 59,093 Allowance - beginning of period 67,936 58,223 68,675 59,093 Charge-offs: Construction and land development — 14 — 14 Agricultural real estate — — — — 1-4 family residential 34 16 101 56 Commercial real estate — 25 — 25 Agricultural 209 276 261 276 Commercial and industrial 368 49 642 62 Consumer 374 200 800 627 Total charge-offs 985 580 1,804 1,060 Recoveries: 1-4 family residential 100 78 149 102 Commercial real estate 5 327 166 331 Agricultural — 7 — 10 Commercial and industrial 44 37 108 293 Consumer 129 169 292 309 Total recoveries 278 618 715 1,045 Net charge-offs (recoveries) 707 (38 ) 1,089 15 Provision for credit losses 1,083 458 726 (359 ) Allowance-end of period $ 68,312 $ 58,719 $ 68,312 $ 58,719 Ratio of annualized net charge-offs to average loans 0.05 % 0.00 % 0.04 % 0.00 % Ratio of allowance for credit losses to loans outstanding (at amortized cost) 1.23 % 1.22 % 1.23 % 1.22 % Ratio of allowance for credit losses to nonperforming loans 358 % 315 % 358 % 315 % 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. Deposits 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 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 Year ended December 31, 2023 Average Balance Weighted Average Rate Average Balance Weighted Average Rate Average Balance Weighted Average Rate Demand deposits: Non-interest-bearing $ 1,403,606 —% $ 1,248,710 —% $ 1,312,023 —% Interest-bearing 3,029,068 2.25 % 2,410,582 1.60 % 2,618,452 1.83 % Savings 697,953 0.10 % 629,829 0.11 % 663,760 0.11 % Time deposits 1,002,655 3.64 % 842,110 2.36 % 961,162 2.98 % Total average deposits $ 6,133,282 1.72 % $ 5,131,231 1.16 % $ 5,555,397 1.40 % During the first six months of 2024, the average balance of deposits increased by $577.9 million from the average balance for the 55 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. Approximately 99% of the Company’s deposit accounts are less than $250,000. 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 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 Year ended December 31, 2023 High month-end balances of total deposits $ 6,242,937 $ 5,219,585 $ 6,346,324 Low month-end balances of total deposits 6,104,309 5,030,778 5,030,778 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 June 30, 2024 and December 31, 2023 (in thousands): June 30, 2024 December 31, 2023 3 months or less $ 160,053 $ 183,619 Over 3 through 6 months 285,205 231,187 Over 6 through 12 months 155,223 170,641 Over 12 months 81,575 117,657 Total $ 682,056 $ 703,104 56 Repurchase Agreements and Other Borrowings Securities sold under agreements to repurchase are short-term obligations of First Mid Bank. These obligations are collateralized with certain government securities that are direct obligations of the United States or one of its agencies. These retail repurchase agreements are offered as a cash management service to its corporate customers. 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 June 30, 2024 and December 31, 2023 is presented below (dollars in thousands): June 30, 2024 December 31, 2023 Securities sold under agreements to repurchase $ 205,955 $ 213,721 Federal Home Loan Bank advances: Fixed term – due in one year or less 40,000 60,000 Fixed term – due after one year 223,735 203,787 Subordinated debt 103,029 106,755 Junior subordinated debentures 24,169 24,058 Total $ 596,888 $ 608,321 Average interest rate at end of period 3.80 % 4.41 % Maximum outstanding at any month-end: Securities sold under agreements to repurchase $ 282,285 $ 231,650 Federal Home Loan Bank advances: FHLB – overnight — 150,000 Fixed term – due in one year or less 65,000 105,024 Fixed term – due after one year 223,744 415,005 Other borrowings: Subordinated debt 106,934 106,755 Junior subordinated debentures 24,169 24,058 Averages for the period (YTD): Securities sold under agreements to repurchase $ 235,149 $ 225,307 Federal Home Loan Bank advances: FHLB – overnight — 55,104 Fixed term – due in one year or less 55,495 95,669 Fixed term – due after one year 198,376 311,424 Other borrowings: Federal funds purchased — 192 Subordinated debt 106,412 99,638 Junior subordinated debentures 24,112 21,337 Total $ 619,544 $ 808,671 Average interest rate during the period 3.79 % 2.16 % 57 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 June 30, 2024 the fixed term advances, consisted of $263.6 million as follows: Advance Term (in years) Interest Rate Maturity Date 25,000,000 2.0 4.59% November 8, 2024 10,000,000 5.0 1.45% December 31, 2024 5,000,000 5.0 0.91% March 10, 2025 3,605,826 10.0 2.64% December 23, 2025 25,000,000 3.0 4.40% June 15, 2026 25,000,000 3.0 4.37% May 10, 2027 25,000,000 3.0 4.32% May 17, 2027 50,000,000 4.0 3.49% December 8, 2027 25,000,000 5.0 3.82% June 29, 2028 25,000,000 5.0 3.95% June 29, 2028 25,000,000 5.0 3.93% June 27, 2029 5,000,000 10.0 1.15% October 3, 2029 5,000,000 10.0 1.12% October 3, 2029 10,000,000 10.0 1.39% December 31, 2029 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 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 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”). The Notes were issued pursuant to the Indenture, dated as of October 6, 2020 (the “Base Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by the First Supplemental Indenture, dated as of October 6, 2020 (the “Supplemental Indenture”), between the Company and the Trustee. The Base Indenture, as amended and supplemented by the Supplemental Indenture, governs the terms of the Notes and provides that the Notes are unsecured, subordinated debt obligations of the Company and will mature on October 15, 2030. From and including the date of issuance to, but excluding October 15, 2025, the Notes will bear interest at an initial rate of 3.95% per annum. 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. The Company may also redeem the Notes at any time, including prior to October 15, 2025, at the Company’s option, in whole but not in part, if: (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) a subsequent event occurs that could preclude the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) the Company is required to register as an investment company under the Investment Company Act of 1940, as amended; in each case, at a redemption price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest to but excluding the redemption date. On August 15, 2023, the Company assumed, as part of the Blackhawk Bancorp, Inc. acquisition, $7.5 million principal amount of 3.5% Fixed-to-Floating Rate Subordinated Notes due 2031 (“Blackhawk Subordinated Debt I”). Blackhawk Subordinated Debt I was issued pursuant to Indenture between the Company and UMB Bank, as trustee (the “Trustee”). The Indenture governs the terms of the Notes and provides that the Notes are unsecured, subordinated debt obligations of the Company and will mature on May 14, 2031. From and including the date of issuance to, but excluding May 14, 2026, the Notes will bear interest at an initial rate of 3.5% per annum. From and including May 14, 2026 to, but excluding the maturity date, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 285 basis points. On August 15, 2023, the Company assumed, as part of the Blackhawk Bancorp, Inc. acquisition, $7.5 million principal amount of 3.875% Fixed-to-Floating Rate Subordinated Notes due 2036 (“Blackhawk Subordinated Debt II”). Blackhawk Subordinated Debt II was issued pursuant to Indenture between the Company and UMB Bank, as trustee (the “Trustee”). The Indenture governs the terms of the Notes and provides that the Notes are unsecured, subordinated debt obligations of the Company and will mature on May 14, 2036. From and including the date of issuance to, but excluding May 14, 2031, the Notes will bear interest at an initial rate of 3.875% 58 per annum. From and including May 14, 2031 to, but excluding the maturity date, the Notes will bear interest at a floating rate equal to three-month Term SOFR plus a spread of 255 basis points. On April 26, 2006, the Company completed the issuance and sale of $10 million of fixed/floating rate trust preferred securities through First Mid-Illinois Statutory Trust II (“Trust II”), a statutory business trust and wholly owned unconsolidated subsidiary of the Company, as part of a pooled offering. The Company established Trust II for the purpose of issuing the trust preferred securities. 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, 7.20% 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 (7.45% 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 (7.30% 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 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 (7.65% 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. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the calculation of Tier 1 capital for regulatory purposes. The final rule provided a five-year transition period, ending September 30, 2010, for application of the revised quantitative limits. On March 17, 2009, the Federal Reserve Board adopted an additional final rule that delayed the effective date of the new limits on inclusion of trust preferred securities in the calculation of Tier 1 capital until March 31, 2012. The application of the revised quantitative limits did not and is not expected to have a significant impact on its calculation of Tier 1 capital for regulatory purposes or its classification as well-capitalized. The Dodd-Frank Act, signed into law July 21, 2010, removes trust preferred securities as a permitted component of a holding company’s Tier 1 capital after a three-year phase-in period beginning January 1, 2013 for larger holding companies. For holding companies with less than $15 billion in consolidated assets, existing issues of trust preferred securities are grandfathered and not subject to this new restriction. Similarly, the final rule implementing the Basel III reforms allows holding companies with less than $15 billion in consolidated assets as of December 31, 2009 to continue to count toward Tier 1 capital any trust preferred securities issued before May 19, 2010. New issuances of trust preferred securities, however, would not count as Tier 1 regulatory capital. In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt certain rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This rule is generally referred to as the “Volcker Rule.” The rules permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets (such as the Company) if (1) the collateralized debt obligation was established and issued prior to May 19, 2010, (2) the banking entity reasonably believes that the offering proceeds received by the collateralized debt obligation were invested primarily in qualifying trust preferred collateral, and (3) the banking entity’s interests in the collateralized debt obligation was acquired on or prior to December 10, 2013. The Company does not currently anticipate that the Volcker Rule will have a material effect on the 59 operations of the Company or First Mid Bank. Interest Rate Sensitivity The Company seeks to maximize its net interest margin while maintaining an acceptable level of interest rate risk. Interest rate risk can be defined as the amount of forecasted net interest income that may be gained or lost due to changes in the interest rate environment, a variable over which management has no control. Interest rate risk, or sensitivity, arises when the maturity or repricing characteristics of interest-bearing assets differ significantly from the maturity or repricing characteristics of interest- bearing liabilities. The Company monitors its interest rate sensitivity position to maintain a balance between rate sensitive assets and rate sensitive liabilities. This balance serves to limit the adverse effects of changes in interest rates. The Company’s asset liability management committee (ALCO) oversees the interest rate sensitivity position and directs the overall allocation of funds. In the banking industry, a traditional way to measure potential net interest income exposure to changes in interest rates is through a technique known as “static GAP” analysis which measures the cumulative differences between the amounts of assets and liabilities maturing or repricing at various intervals. 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 June 30, 2024 (dollars in thousands): Rate Sensitive Within 1 years 1-2 years 2-3 years 3-4 years 4-5 years Thereafter Total Fair Value Interest-earning assets: Federal funds sold and other interest-bearing deposits $ 131,027 $ — $ — $ — $ — $ — $ 131,027 $ 131,027 Certificates of deposit investments 2,205 1,540 — — — — 3,745 3,745 Taxable investment securities 113,917 95,492 85,166 131,466 161,629 199,579 787,249 787,249 Nontaxable investment securities 8,196 1,830 11,871 5,330 14,216 288,493 329,936 329,936 Loans 2,430,780 951,498 1,014,578 557,196 252,544 354,021 5,560,617 5,219,573 Total $ 2,686,125 $ 1,050,360 $ 1,111,615 $ 693,992 $ 428,389 $ 842,093 $ 6,812,574 $ 6,471,530 Interest-bearing liabilities: Savings and NOW accounts $ 84,504 $ — $ — $ — $ — $ 2,498,870 $ 2,583,374 $ 2,583,374 Money market accounts 1,127,699 — — — — — 1,127,699 1,127,699 Other time deposits 881,366 54,310 21,342 46,392 6,615 1,345 1,011,370 935,228 Short-term borrowings/debt 205,955 — — — — — 205,955 205,955 Long-term borrowings/debt 164,169 125,953 50,000 — 25,000 25,811 390,933 383,885 Total $ 2,463,693 $ 180,263 $ 71,342 $ 46,392 $ 31,615 $ 2,526,026 $ 5,319,331 $ 5,236,141 Rate sensitive assets – rate sensitive liabilities $ 222,432 $ 870,097 $ 1,040,273 $ 647,600 $ 396,774 $ (1,683,933 ) $ 1,493,243 Cumulative GAP 222,432 1,092,529 2,132,802 2,780,402 3,177,176 1,493,243 Cumulative amounts as % of total Rate sensitive assets 3.3 % 12.8 % 15.3 % 9.5 % 5.8 % -24.7 % Cumulative Ratio 3.3 % 16.0 % 31.3 % 40.8 % 46.6 % 21.9 % 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. There are several ways the Company measures and manages the exposure to interest rate sensitivity, including static GAP analysis. The Company’s ALCO also uses other financial models to project interest income under various rate scenarios and prepayment/extension assumptions consistent with First Mid Bank’s historical experience and with known industry trends. ALCO meets at least monthly to review the Company’s exposure to interest rate changes as indicated by the various techniques and to make necessary changes in the composition terms and/or rates of the assets and liabilities. Capital Resources 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 $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. Bank holding companies follow minimum regulatory requirements established by the Board of Governors of the Federal Reserve System (“Federal Reserve System”), First Mid Bank follows similar minimum regulatory requirements established for banks by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation, as applicable. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Quantitative measures established by regulatory capital standards to 60 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 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. The initial impact of adoption of ASU 2016-13, as well as 25% of the quarterly increases in allowance for credit losses subsequent to adoption of ASU 2016-13 was delayed for two years. After two years, the cumulative amount of these adjustments is being phased out of the regulatory capital calculation over a three-year period, with 75% of the adjustments included in 2022, 50% of the adjustments included in 2023 and 25% of the adjustments included in 2024. After five years, the temporary delay of ASU 2016-13 adoption will be fully reversed. To be categorized as well-capitalized, total risk-based capital, Tier 1 risk-based capital, common equity Tier 1 risk-based capital and Tier 1 leverage ratios must be maintained as set forth in the following table (dollars in thousands): Actual Required Minimum For Capital Adequacy Purposes To Be Well-Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio June 30, 2024 Total capital (to risk-weighted assets) Company $ 925,512 15.46 % $ 628,710 > 10.50% N/A N/A First Mid Bank 871,011 14.59 % 626,728 > 10.50% $ 596,884 > 10.00% Tier 1 capital (to risk-weighted assets) Company 757,202 12.65 % 508,956 > 8.50% N/A N/A First Mid Bank 805,730 13.50 % 507,351 > 8.50% 477,507 > 8.00% Common equity tier 1 capital (to risk-weighted assets) Company 733,033 12.24 % 419,140 > 7.00% N/A N/A First Mid Bank 805,730 13.50 % 417,819 > 7.00% 387,974 > 6.50% Tier 1 capital (to average assets) Company 757,202 10.04 % 301,569 > 4.00% N/A N/A First Mid Bank 805,730 10.74 % 300,215 > 4.00% 375,269 > 5.00% December 31, 2023 Total capital (to risk-weighted assets) Company $ 894,259 14.84 % $ 632,724 >10.50% N/A N/A First Mid Bank 854,235 14.22 % 630,581 >10.50% $ 600,553 > 10.00% Tier 1 capital (to risk-weighted assets) Company 724,186 12.02 % 512,205 > 8.50% N/A N/A First Mid Bank 790,917 13.17 % 510,470 > 8.50% 480,443 > 8.00% Common equity tier 1 capital (to risk-weighted assets) Company 700,128 11.62 % 421,816 > 7.00% N/A N/A First Mid Bank 790,917 13.17 % 420,387 > 7.00% 390,360 > 6.50% Tier 1 capital (to average assets) Company 724,186 9.33 % 310,587 > 4.00% N/A N/A First Mid Bank 790,917 10.23 % 309,151 > 4.00% 386,439 > 5.00% 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. 61 Stock Plans Participants may purchase Company stock under the following three plans of the Company: The Deferred Compensation Plan, the Dividend Reinvestment Plan, and the Stock Incentive Plan. For more detailed information on these plans, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. At the Annual Meeting of Stockholders held April 26, 2017, the stockholders approved the 2017 Stock Incentive Plan ("SI Plan"). The SI Plan was implemented to succeed the Company’s 2007 Stock Incentive Plan, which had a ten-year term. The SI Plan is intended to provide a means whereby directors, employees, consultants and advisors of the Company and its Subsidiaries may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company and its Subsidiaries, thereby advancing the interests of the Company and its stockholders. Accordingly, directors and selected employees, consultants and advisors may be provided the opportunity to acquire shares of Common Stock of the Company on the terms and conditions established in the SI Plan. Following the stockholders’ approval at the 2021 annual meeting of the Company, a maximum of 399,983 shares of common stock may be issued under the SI Plan. The Company awarded 53,766 and 59,950 restricted stock awards during 2024 and 2023, respectively and 39,150 and 37,900 as stock unit awards during 2024 and 2023, respectively. Employee Stock Purchase Plan At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid-Illinois Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP is intended to promote the interests of the Company by providing eligible employees with the opportunity to purchase shares of common stock of the Company at a 15% discount through payroll deductions. The ESPP is also intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 600,000 shares of common stock may be issued under 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 Since August 5, 1998, the Board of Directors has approved repurchase programs pursuant to which the Company may repurchase a total of approximately $76.7 million of the Company’s common stock. During 2024, the Company did not repurchase any shares. The Company has approximately $4.1 million in remaining capacity under its existing repurchase program. Although the Company adopted the repurchase plan, the Company may make discretionary repurchases in the open market or in privately negotiated transactions from time to time. The timing, manner, price and amount of any such repurchases will be determined by the Company at its discretion and will depend upon a variety of factors including economic and market conditions, price, applicable legal requirements and other factors. Liquidity Liquidity represents the ability of the Company and its subsidiaries to meet all present and future financial obligations arising in the daily operations of the business. Financial obligations consist of the need for funds to meet extensions of credit, deposit withdrawals and debt servicing. The Company’s liquidity management focuses on the ability to obtain funds economically through assets that may be converted into cash at minimal costs or through other sources. The Company’s other sources of cash include overnight federal fund lines, Federal Home Loan Bank advances, deposits of the State of Illinois, the ability to borrow at the Federal Reserve Bank of Chicago, and the Company’s operating line of credit with The Northern Trust Company. Details of the Company's liquidity sources include: • First Mid Bank has $120 million available in overnight federal fund lines, including $30 million from First Horizon Bank, N.A., $20 million from U.S. Bank, N.A., $10 million from Wells Fargo Bank, N.A., $15 million from The Northern Trust Company, $25 million from Zions Bank, and $20 million from BMO Bank, N.A. 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 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. Availability of the funds is subject to the pledging of collateral to the Federal Home Loan Bank. Collateral that can be pledged includes one-to-four family residential real estate loans and securities. At June 30, 2024, the excess collateral at the FHLB would support approximately $1,631 million of additional advances for First Mid Bank. 62 • 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 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. The interest rate is floating at 2.25% over the federal funds rate. The loan is unsecured. 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: • lending activities, including loan commitments, letters of credit and mortgage prepayment assumptions; • deposit activities, including seasonal demand of private and public funds; • investing activities, including prepayments of mortgage-backed securities and call provisions on U.S. Treasury and government agency securities; and • operating activities, including scheduled debt repayments and dividends to stockholders. The following table summarizes significant contractual obligations and other commitments at June 30, 2024 (in thousands): Less than More than Total 1 year 1-3 years 3-5 years 5 years Time deposits $ 1,007,999 $ 877,995 $ 75,652 $ 53,007 $ 1,345 Debt 127,198 — 4,048 — 123,150 Other borrowing 469,690 245,956 78,734 125,000 20,000 Operating leases 17,143 3,216 5,595 4,152 4,180 Supplemental retirement 1,928 50 250 300 1,328 $ 1,623,958 $ 1,127,217 $ 164,279 $ 182,459 $ 150,003 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. Off-Balance Sheet Arrangements First Mid Bank enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, letters of credit and other commitments to extend credit. Each of these instruments involves, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies and requires similar collateral in approving lines of credit and commitments and issuing letters of credit as it does in making loans. The exposure to credit losses on financial instruments is represented by the contractual amount of these instruments. However, the Company does not anticipate any losses from these instruments. 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 Unused commitments and lines of credit: Commercial real estate $ 221,058 $ 219,117 Commercial operating 635,914 681,360 Home equity 105,047 104,142 Other 319,861 311,907 Total $ 1,281,880 $ 1,316,526 Standby letters of credit $ 18,352 $ 17,401 Commitments to originate credit represent approved commercial, residential real estate and home equity loans that generally are expected to be funded within ninety days. Lines of credit are agreements by which the Company agrees to provide a borrowing accommodation up to a stated amount as long as there is no violation of any condition established in the loan agreement. Both commitments to originate credit and lines of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the lines and some commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. 63 Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of customers to third parties. Standby letters of credit are primarily issued to facilitate trade or support borrowing arrangements and generally expire in one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers. The maximum amount of credit that would be extended under letters of credit is equal to the total off-balance sheet contract amount of such instrument. The Company's deferred revenue under standby letters of credit was nominal. The Company is also subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition of ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the market risk faced by the Company since December 31, 2023. For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.