ITEM 1A. RISK FACTORS
Various risks and uncertainties, some of which are difficult to predict and beyond the Company’s control, could negatively impact the Company. As a financial institution, the Company is exposed to credit risk, interest rate and liquidity risk, operational risk, risks from economic and market conditions, and general business risks among others. Adverse experience with these or other risks could have a material impact on the Company’s financial condition and results of operations, as well as the value of its common stock.
Credit Risks
Loan customers or other counterparties may not be able to perform their contractual obligations resulting in a negative impact on the Company’s earnings. Overall economic conditions affecting businesses and consumers, including the current economic conditions and market disruptions, could impact the Company’s credit losses. In addition, real estate valuations could also impact the Company’s credit losses as the Company maintains $4.1 billion in loans secured by commercial, agricultural, and residential real estate. A significant decline in real estate values could have a negative effect on the Company’s financial condition and results of operations. In addition, the Company’s total loan balances by industry exceeded 25% of total risk-based capital for each of four industries as of December 31, 2025. A
11
listing of these industries is contained in under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Loans” herein. A significant change in one of these industries such as a significant decline in agricultural crop prices, could adversely impact the Company’s credit losses.
Deterioration in the real estate market could lead to losses, which could have a material adverse effect on the business, financial condition and results of operations or the Company. 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. Increases in commercial and consumer delinquency levels or declines in real estate market values would require increased net charge-offs and increases in the allowance for credit losses, which could have a material adverse effect on our business, financial condition and results of operations and prospects.
The allowance for credit losses may prove inadequate or be negatively affected by credit risk exposures. The Company’s business depends on the creditworthiness of its customers. Management periodically reviews the allowance for loan and lease losses for adequacy considering economic conditions and trends, collateral values, and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. There is no certainty that the allowance for credit losses will be adequate over time to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries, or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for credit losses is not adequate, the Company’s business, financial condition, liquidity, capital, and results of operations could be materially adversely affected.
The Company depends on the accuracy and completeness of information furnished by and on behalf of our customers and counterparties. In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. The Company may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause the Company to enter into unfavorable transactions, which could have a material adverse effect on financial condition and results of operations.
Interest Rate and Liquidity Risks
Changes in interest rates may negatively affect our earnings. Changes in market interest rates and prices may adversely affect the Company’s financial condition or results of operations. The Company’s net interest income, its largest source of revenue, is highly dependent on achieving a positive spread between the interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in interest rates could negatively impact the Company’s ability to attract deposits, make loans, and achieve a positive spread resulting in compression of the net interest margin.
Declines in the value of securities held in the investment portfolio may negatively affect the Company’s earnings and capital. The value of an investment in the portfolio could decrease due to changes in market factors. The market value of certain investment securities is volatile and future declines or other-than-temporary impairments could materially adversely affect the Company’s future earnings and capital. Continued volatility in the market value of certain investment securities, whether caused by changes in market perceptions of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities. This could have a material adverse impact on the Company’s accumulated other comprehensive loss and shareholders’ equity depending upon the direction of the fluctuations.
Furthermore, future downgrades or defaults in these securities could result in future classifications as other-than-temporarily impaired. The Company has invested in trust preferred securities issued by financial institutions and insurance companies, corporate securities of financial institutions, and stock in the Federal Home Loan Bank of Chicago and Federal Reserve Bank of Chicago. Deterioration of the financial stability of the underlying financial institutions for these investments could result in other-than-temporary impairment charges to the Company and could have a material impact on future earnings. For further discussion of the Company’s investments, see Note 4 – “Investment Securities.”
The Company may not have sufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs and for other corporate purposes. This type of liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. The Company’s liquidity can be affected by a variety of factors, including general economic conditions, market disruption, operational problems affecting third parties or the Company, unfavorable pricing, competition, the Company’s credit rating and regulatory restrictions. (See “Liquidity” herein for management’s actions to mitigate this risk.)
If the Company were unable to borrow funds through access to capital markets, it may not be able to meet the cash flow requirements of its depositors, creditors, and borrowers, or the operating cash needed to fund corporate expansion and other corporate activities. As seen starting in the middle of 2007, significant turmoil and volatility in worldwide financial markets can result in a disruption in the liquidity of financial markets and could directly impact the Company to the extent it needs to access capital markets to raise funds to support its business and overall liquidity position. These types of situations could affect the cost of such funds or the Company’s ability to raise such funds. If the Company were unable to access any of these funding sources when needed, it might be unable to meet customers’ needs, which could adversely impact its financial condition, results of operations, cash flows, and level of regulatory-qualifying capital. For further discussion, see the “Liquidity” section.
Operational Risks
A failure in or breach of the Company's operational or security systems, or those of its third-party service providers, including as a result of cyber-attacks, could disrupt the Company's business, result in unintentional disclosure or misuse of confidential or proprietary information, damage the Company's reputation, increase our costs, and cause losses. As a financial institution, the Company's operations rely heavily on the secure processing, storage, and transmission of confidential and other information on its computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in the Company's online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of these systems could be threatened by a variety of interruptions or information security breaches, including those
12
caused by computer hacking, cyber-attacks, electronic fraudulent activity, or attempted theft of financial assets. Management cannot assert that any such failures, interruption or security breaches will not occur, or if they do occur that they will be adequately addressed. While certain protective policies and procedures are in place, the nature and sophistication of the threats continue to evolve. The Company may be required to expend significant additional resources in the future to modify and enhance these protective measures.
Additionally, the Company faces the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate its business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, its operational systems. Any failures, interruptions or security breaches in the Company's information systems could damage its reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.
If the Company’s stock price declines from levels at December 31, 2025, management will evaluate the goodwill balance for impairment, and if the values of the business has declined, the Company could recognize an impairment charge for its goodwill. Management performed its annual goodwill impairment assessment as of September 30, 2025. Based on these analyses, management concluded that the fair value of the Company’s reporting units exceeded the fair value of its assets and liabilities and, therefore, goodwill was not considered impaired. It is possible that management’s assumptions and conclusions regarding the valuation of the Company’s lines of business could change adversely, which could result in the recognition of impairment for goodwill, which could have a material effect on the Company’s financial position and future results of operations.
Human error, inadequate or failed internal processes and systems, and external events may have adverse effects on the Company. Operational risk includes compliance or legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards. Operational risk also encompasses transaction risk, which includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Losses resulting from operational risk could take the form of explicit charges, increased operational costs, harm to the Company’s reputation or forgone opportunities. Any of these could potentially have a material adverse effect on the Company’s reputation, financial condition, and results of operations.
The Company is exposed to various business risks that could have a negative effect on the financial performance of the Company. These risks include changes in customer behavior, changes in competition, new litigation or changes to existing litigation, claims and assessments, environmental liabilities, real or threatened acts of war or terrorist activity, adverse weather, changes in accounting standards, legislative or regulatory changes, taxing authority interpretations, and an inability on the Company’s part to retain and attract skilled employees.
In addition to these risks identified by the Company, investments in the Company’s common stock involve risk. The market price of the Company’s common stock may fluctuate significantly in response to a number of factors including volatility of stock market prices and volumes, rumors or erroneous information, changes in market valuations of similar companies, changes in securities analysts’ estimates of financial performance, and variations in quarterly or annual operating results.
Economic and Market Conditions Risks
Difficult economic conditions and market disruption have adversely impacted the banking industry and financial markets generally and may again significantly affect the business, financial condition, or results of operations of the Company. The Company’s success depends, to a certain extent, upon economic and political conditions, local and national, as well as governmental monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, money supply and other factors beyond the Company’s control may adversely affect its asset quality, deposit levels and loan demand and, therefore, its earnings. These adverse conditions could lead to the Company having a diminished capacity for dividend payments.
The Company’s profitability depends significantly on economic conditions in the geographic region in which it operates. A large percentage of the Company’s loans are to individuals and businesses in Illinois, consequently, any decline in the economy of this market area could have a materially adverse effect on the Company’s financial condition and results of operations.
Decline in the strength and stability of other financial institutions may adversely affect the Company’s business. The actions and commercial soundness of other financial institutions could affect the Company’s ability to engage in routine funding transactions. Financial services institutions are interrelated as a result of clearing, counterparty or other relationships. The Company has exposure to different counterparties and executes transactions with various counterparties in the financial industry. Recent defaults by financial services institutions, and even rumors or questions about one or more financial services institutions or the financial services industry in general, led to market-wide liquidity problems in recent years and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. Any such losses could materially and adversely affect the Company’s results of operations.
The Company is subject to Environmental, Social and Governance (“ESG”) risks that could adversely affect its reputation and the market price of its securities. The Company is subject to a variety of risks arising from ESG matters. ESG matters include climate risk, hiring practices, the diversity of the work force, and racial and social justice issues involving the Company’s personnel, customers and third parties with whom it otherwise does business. Risks arising from ESG matters may adversely affect, among other things, reputation and the market price of the Company’s securities. Further, the Company may be exposed to negative publicity based on the identity and activities of those to whom it lends and with which it otherwise does business and the public’s view of the approach and performance of its customers and business partners with respect to ESG matters. Any such negative publicity could arise from adverse news coverage in traditional media and could also spread through the use of social media platforms. The Company’s relationships and reputation with its existing and prospective customers and third parties with which it does business could be damaged if it were to become the subject of any such negative publicity. This, in turn, could have an adverse effect on the Company’s ability to attract and retain customers and employees and could have a negative impact on the market price for securities. Investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations to address ESG matters when making investment and operational decisions. Certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to the risks posed by climate change and other ESG matters into their investment theses. These shifts in investing priorities may result in adverse effects on the market price of the Company’s securities to the extent that investors determine that the Company has not made sufficient progress on ESG matters.
13
The Company’s business could suffer if it fails to attract and retain skilled people. The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best employees in most of the activities the Company engages in can be intense. The Company may not be able to hire the best people for key roles or retain them. In addition, increased work-from-home arrangements, may exacerbate the challenges of attracting and retaining talented and diverse employees as job markets may be less constrained by physical geography. Our current or future approach to in-office and work-from-home arrangements may not meet the needs or expectations of current or prospective employees or may not be perceived as favorable compared to the arrangements offered by competitors, which could adversely affect the Company’s ability to attract and retain employees. The loss of any key personnel or an inability to continue to attract, retain, and motivate key personnel could adversely affect the Company’s business.
Climate change could have a material negative impact on the Company and customers. The Company’s business, as well as the operations and activities of its customers, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to the Company and its customers, and these risks are expected to increase over time. Climate change presents multi-faceted risks, including: operational risk from the physical effects of climate events on the Company and its customers’ facilities and other assets; credit risk from borrowers with significant exposure to climate risk; transition risks associated with the transition to a less carbon-dependent economy; and reputational risk from stakeholder concerns about the Company’s practices related to climate change, the Company’s carbon footprint, and the Company’s business relationships with clients who operate in carbon-intensive industries. Federal and state banking regulators and supervisory authorities, investors, and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, and reputational risks and costs. The risks associated with climate change are changing and evolving in an escalating fashion, making them difficult to assess due to limited data and other uncertainties. The Company could experience increased expenses resulting from strategic planning, litigation, and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny, and reduced investor and stakeholder confidence due to the Company’s response to climate change and its climate change strategy, which, in turn, could have a material negative impact on business, results of operations, and financial condition.
Other Business Risks
The Company may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing stockholders. To maintain capital at desired or regulatory-required levels, to replace existing capital, or to complete acquisitions the Company may be required to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. The Company may sell these shares at prices below the current market price of shares, and the sale of these shares may significantly dilute stockholder ownership. The Company could also issue additional shares in connection with acquisitions of other financial institutions.
If the Company is unable to make favorable acquisitions or successfully integrate our acquisitions, the Company’s growth could be impacted. In the past several years, the Company has completed acquisitions of banks, bank branches and other businesses. We may continue to make such acquisitions in the future. When the Company evaluates acquisition opportunities, the Company evaluates whether the target institution has a culture similar to the Company, experienced management, and the potential to improve the financial performance of the Company. If the Company fails to successfully identify, complete, and integrate favorable acquisitions, the Company could experience slower growth. Acquiring other banks, bank branches or businesses involves various risks commonly associated with acquisitions, including, among other things: potential exposure to unknown or contingent liabilities or asset quality issues of the target institution, difficulty and expense of integrating the operations and personnel of the target institution, potential disruption to the Company (including diversion of management’s time and attention), difficulty in estimating the value of the target institution, and potential changes in banking or tax laws or regulations that may affect the target institution.
The Company and the banking industry are subject to government regulation, legislation, and policy. Government regulation, legislation and policy affect the Company and the banking industry as a whole, including the Company’s business and results of operations. The Company’s results of operations could be adversely affected by changes in how existing regulations are interpreted or applied by government agencies, or by the adoption of new government regulation, legislation, and policy. These changes may require the Company to invest significant funds and management attention and resources in order to reach compliance. In addition, any enforcement matters could impact supervisory and CRA ratings, which may restrict or limit the Company’s activities. Business results could be negatively effected by new regulatory accounting standards required to be implemented by the Company.
The Company operates in a highly competitive industry and market area. The Company faces substantial competition in all areas of its operations from a variety of different competitors, both within and beyond its principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and internet banks within the various markets in which the Company operates. The Company also faces competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Risk management and strategy
The Company’s Information Security strategy prioritizes the identification, analysis and response to known, anticipated or unexpected threats; effective management of security risks; and resiliency against incidents. The Company’s cybersecurity risk management processes include technical security controls, policy enforcement mechanisms, monitoring systems, employee training, contractual arrangements, tools and related services from third-party providers, and management oversight to
14
assess, identify and manage material risks from cybersecurity threats. The Company has policies in place, including an Information Security Program to implement risk-based controls to protect the Company’s information, information systems, business operations, products and related services, and the information of the Company’s customers. The Company has adopted security-control principles based on generally accepted industry-recognized standards, and contractual requirements, as applicable. The Company leverages industry associations, third-party benchmarking, the results from regular internal and third-party audits, including penetration testing, threat intelligence feeds, and other similar resources to inform the Company’s cybersecurity processes and allocate resources.
The Company maintains security programs that include physical, administrative and technical safeguards and maintains plans and procedures intended to assist the Company in preventing and appropriately responding to cybersecurity threats or incidents. Through the Company’s cybersecurity risk management process, the Company monitors on an ongoing basis cybersecurity vulnerabilities and potential attack vectors to Company systems, and evaluates the potential operational and financial effects of identified threats and related countermeasures. The Company also periodically engages third-party consultants to assist in assessing, enhancing, implementing, and monitoring the Company’s cybersecurity risk management programs and responding to incidents.
The Company conducts tabletop testing of business continuity plans as outlined in the Company’s Business Continuity Management Program. The Company has also established an Incident Response Plan that outlines steps and responsibilities to be taken during a cybersecurity incident. As part of the Company’s cybersecurity risk management process, the Company conducts an annual “tabletop” exercise during which the Company simulates cybersecurity incidents to assess preparedness and identify opportunities for improvement. These exercises are conducted at both the technical and senior management levels. In addition, all employees are required to complete mandatory annual cybersecurity training courses and participate in bi-weekly phishing simulations Designed to enhance awareness of social engineering threats.
The Company has established a Vendor Management Program that forms part of the Company’s Enterprise Risk Management program and is supported by the Company’s security, compliance, and third-party partners. Through this program, the Company assesses cybersecurity risks associated with third-party service providers with whom the Company shares personal identifying and confidential information. Vendors with access to personal identifying and confidential information are subject to more rigorous initial and more frequent ongoing due diligence, including reviews of Service Organization Control 2 reports, information security policies, vulnerability and penetration tests, human resource policies, and business continuity plans. The Company continues to enhance its oversight processes to mature how cybersecurity risks associated with third-party products and services are identified and managed.
The Company has experienced, and may in the future experience, whether directly or through the Company’s third-party partners, cybersecurity incidents. While prior incidents have not materially affected the Company’s business strategy, results of operations or financial condition, and although the Company’s processes are designed to help prevent, detect, respond to, and mitigate the impact of such incidents, there is no guarantee that a future cyber incident would not materially affect the Company’s business strategy, results of operations or financial condition. The Company maintains cyber insurance coverage intended to help mitigate certain potential losses related to cybersecurity incidents.
For further discussion about these risks, see “Item 1A. Risk Factors – Operational Risks”
The Company integrates its cybersecurity practices into the Company’s Enterprise Risk Management program to enhance the identification, assessment, and monitoring of cyber-related operational, regulatory, and compliance risks. The Enterprise Risk Management Program, Information Security Program, Incident Response Plan, Business Continuity Management Program, and Vendor Management Program are approved by the Company’s Risk Oversight Committee (ROC), which is a management committee overseen by the Company’s Board of Directors and chaired by the Company’s Chief Financial and Risk Officer. The ROC brings together a multidisciplinary group to take an enterprise-wide view risk and promote risk awareness and sound risk management practices. Subcommittees and working groups are also in place to discuss technical expertise on specific areas of risk within the Company and provide updates to ROC.
Governance
The Company’s Board of Directors has overall responsibility for risk oversight, with its committees assisting the Board in performing this function. Oversight of cybersecurity risk has been delegated to the Board Risk Committee and Audit Committee, each of which reports to the full Board on a quarterly basis. The Board Risk Committee oversees management’s implementation and maintenance of the Company’s cybersecurity risk program and management’s response to material issues. The Audit Committee reviews the Company’s cybersecurity processes and compliance with governance policies and procedures. The Enterprise Risk Management program is reviewed and approved by the Board Risk Committee.
The Company’s Information Security Risk Officer, who is a member of the risk management team reporting to the Chief Financial and Risk Officer, provides quarterly briefings to the ROC and the Board Risk Committee on cybersecurity risks. These briefings may include assessments of cyber risks, the threat landscape, updates on material incidents, and information regarding cybersecurity risk mitigation and governance. In the event of a potentially material cybersecurity incident, the Incident Response Team is notified and briefed, and meetings with the Incident Response Team, which includes management, are held, with the Board of Directors being briefed, as appropriate. The Information Security Risk Officer has over 20 years of experience in information security and network administration, including extensive experience in the banking industry, and holds multiple industry-recognized certifications.
The Company’s Chief Technology Officer, who reports to the Chief Information Officer, provides oversight of the Company’s cybersecurity program as part of broader technology leadership responsibilities. The Chief Technology Officer oversees the Company’s Security Operations Team, which supports the Company’s efforts to identify, prevent, detect, respond to and recover from cybersecurity threats. The Security Operations Team is comprised of personnel with extensive information technology experience across both public and private sectors.The Chief Technology Officer has over 25 years of experience across cybersecurity, software development, systems, networking, and other technology- disciplines, including significant experience in technology leadership roles.
15
ITEM 2. PROPERTIES
The Company's headquarters is located at 1421 Charleston Avenue, Mattoon Illinois and is owned and used by First Mid Bank for various operation purposes. In addition, First Mid Bank owns facilities located at 1420 Wabash Avenue, Mattoon, Illinois, which is used by branch support operations and 1100 Broadway Avenue, Mattoon, Illinois which is used by loan operations.
The main office of First Mid Bank is located at 1515 Charleston Avenue, Mattoon, Illinois and is owned by First Mid Bank. First Mid Bank also owns a building located at 1520 Charleston Avenue, which is used by First Mid Insurance, and by First Mid Bank for back-room operations. First Mid Insurance also uses a building owned by First Mid Bank at 1501 Broadway Avenue. First Mid Bank also conducts business through numerous facilities, owned, leased, and located on land only leases in twenty-seven counties throughout Illinois, six throughout Missouri, one county in Wisconsin, and one county in Texas. Of the seventy-six banking offices operated by First Mid Bank, fifty-five are owned, eighteen are leased from non-affiliated third parties, and three are located in land only leases with non-affiliated third parties. First Mid Bank also has an office in metro Indianapolis, Indiana that provides agency finance. In addition to having employees throughout the First Mid Bank footprint, First Mid Insurance Group and First Mid Wealth Management conduct business in numerous other facilities. First Mid Insurance leases facilities located in four counties in Illinois and two counties in Missouri from non-affiliated third parties. First Mid Wealth Management owns a facility located at 1321 Charleston Avenue, Mattoon, Illinois and leases facilities located in three counties in Illinois from non-affiliated third parties.
None of the properties owned by the Company are subject to any major encumbrances. The Company believes these facilities are suitable and adequate to operate its banking and related business. The net investment of the Company and subsidiaries in real estate and equipment at December 31, 2025 was $90.8 million.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and its subsidiaries may be involved in litigation that the Company believes is a type common to our industry. None of any such existing claims are believed to be individually material at this time to the Company, although the outcome of any such existing claims cannot be predicted with certainty.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER OF PURCHASES OF EQUITY SECURITIES
The Company’s common stock is included for quotation on the NASDAQ Stock Market, LLC under the trading symbol "FMBH".
The Company’s shareholders are entitled to receive dividends as are declared by the Board of Directors, which considered quarterly payment of dividends during 2025. The ability of the Company to pay dividends, as well as fund its operations, is dependent upon receipt of dividends from First Mid Bank. Regulatory authorities limit the amount of dividends that can be paid by First Mid Bank without prior approval from such authorities. For further discussion of the Bank’s dividend restrictions, see Item 1 – “Business” – “First Mid Bank” – “Dividends” and Note 16 – “Dividend Restrictions” herein.
The following table summarizes share repurchase activity for the fourth quarter of 2025:
ISSUER PURCHASES OF EQUITY SECURITIES
On June 24, 2025, the Board of Directors approved a repurchase program (the "2025 Repurchase Program"), which became effective on July 1, 2025. The 2025 Repurchase Program supersedes all previous repurchase plans and authorizes the Company to repurchase up to 1.2 million shares of the Company's common stock. During 2025, the Company did not repurchase any shares through this plan.
ITEM 6. [Reserved]
16
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are intended to provide a better understanding of the consolidated financial condition and results of operations of the Company and its subsidiaries for the years ended December 31, 2025, 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 report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses, and planned schedules. The Company 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 the Company, 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 those described in Item 1A. “Risk Factors” and other sections of the Company’s Annual Report on Form 10-K and the Company’s other filings with the SEC, and changes in interest rates, general economic conditions and those in the Company’s market area, legislative/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 the loan or investment portfolios and the valuation of the investment portfolio, the Company’s success in raising capital, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. Furthermore, 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.
For the Years Ended December 31, 2025, 2024, and 2023 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, you should carefully read this entire document. These have an impact on the Company’s consolidated financial condition and results of consolidated operations.
Net income was $91.7 million, $78.9 million, and $68.9 million and diluted earnings per share were $3.83, $3.30, and $3.15 for the years ended December 31, 2025, 2024, and 2023, respectively. The following table shows the Company’s annualized performance ratios for the years ended December 31, 2025, 2024, and 2023:
Average common equity to average assets (non-GAAP) 11.68 % 10.76 % 9.61 %
Total assets at December 31, 2025, 2024, and 2023 were $7.97 billion, $7.52 billion, and $7.59 billion, respectively. Net loan balances increased to $5.94 billion at December 31, 2025, from $5.60 billion at December 31, 2024, and from $5.51 billion at December 31, 2023. The increase in 2025 was primarily due to organic growth within the established footprint.
Total deposit balances increased to $6.40 billion at December 31, 2025 from $6.06 billion at December 31, 2024 which was a decrease from $6.12 billion at December 31, 2023. The increase in 2025 was primarily due to an increase in CD's, brokered CDs, and non-interest bearing deposits.
The decrease in 2024 was due primarily to a reduction in brokered CDs and purchased CDs as part of the Company's strategy to reduce its cost of funds.
Net interest margin (tax effected), defined as net interest income divided by average interest-earning assets, was 3.70% for 2025, 3.34% for 2024 and 3.05% for 2023. The increase in 2025 was primarily due to the continued efforts on improving loan yields for new and renewed loans, continued efforts to increase the performance of the investment portfolio, and a decrease in funding costs. The increase in 2024 was primarily due to efforts on improving loan yields for new and renewed loans.
Net interest income increased to $256.2 million in 2025 from $228.7 million in 2024 and $193.5 million in 2023. During 2025 and 2024, the increase in net interest income was primarily due to the previously mentioned explanation for the increase in net interest margin (tax effected).
Non-interest income decreased and increased, respectively, to $93.1 million in 2025 compared to $96.3 million in 2024 and $86.8 million in 2023. The decrease in 2025 was primarily due to the losses recognized on the sale of low performing securities in the investment portfolio. The increase in 2024 was primarily due to the Blackhawk Bank acquisition being present for a full calendar year and the increase in insurance commissions due to the acquisition of Mid Rivers Insurance Group in 2024.
Non-interest expenses increased to $222.2 million in 2025 compared to $215.0 million in 2024, and $185.7 million in 2023. The increase in 2025 was primarily due to the increase in incentive compensation related to over performance of budgeted financial metrics partially offset by gains on the sale of buildings as part of a branch optimization project that reduced in other expenses. The increase in 2024 is primarily due to increased employees and locations from the Blackhawk Bank acquisition being present for a full calendar year.
17
Following is a summary of the factors that contributed to the changes in net income (in thousands):
Provision for credit losses (4,286 ) 469
Other income, including securities transactions (3,235 ) 9,500
Increase (decrease) in net income $ 12,851 $ 9,963
Credit quality is an area of importance to the Company. Year-end total nonperforming loans were $31.9 million at December 31, 2025 compared to $29.8 million at December 31, 2024, and $20.1 million at December 31, 2023. Repossessed Assets balances totaled $2.9 million at December 31, 2025 compared to $2.7 million at December 31, 2024, and $1.2 million at December 31, 2023. The Company’s provision for credit losses was $9.9 million for 2025, compared to $5.6 million for 2024, and $6.1 million for 2023. The increase in provision expense for 2025 was expected as the industry returns to a normal credit cycle. The decrease of provision expense in 2024 was primarily due to the provision requirements in 2023 for the acquisition of Blackhawk Bank.
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 ratio to risk weighted assets ratio at December 31, 2025, 2024, and 2023 was 13.55%, 12.82%, and 12.02%, respectively. The Company’s total capital to risk weighted assets ratio at December 31, 2025, 2024, and 2023 was 15.67%, 15.37% and 14.84%, respectively. The increases in 2025 and 2024 were primarily due to net income of the Company exceeding dividends paid to shareholders.
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 “Liquidity” herein for a full listing of its 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 December 31, 2025, 2024, and 2023 were $1.4 billion, $1.4 billion, and $1.3 billion, respectively. See Note 17 – “Commitments and Contingent Liabilities” herein for further information.
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. 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.
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 is a valuation account to adjust the cost basis to the amount expected to be collected, based on the Company's loss experience, current conditions, and reasonable and supportable forecasts. It 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 loan loss experience, expected cash flows and estimated collateral values. In assessing these factors, the Company uses relevant available information, from internal and external sources, relating to, current conditions and reasonable and supportable forecasts.
In order to determine the allowance for credit losses, the portfolio is segregated into pools for not individually evaluated loans that share similar risk characteristics. The Company's credit loss experience provides the basis for the estimate of expected credit losses. Adjustments to this experience are made for relevant factors to each pool including merger and acquisition activity, economic conditions, changes in policies, procedures and underwriting, and concentrations. 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 a loan when expected cash flows or collateral are less than the carrying amount of the loan.
Income Taxes. The Company is subject to the federal income tax laws of the United States, and the tax laws of the states and other jurisdictions where we conduct business. Due to the complexity of these laws, taxpayers and the taxing authorities may subject these laws to different interpretations. Management must make conclusions and estimates about the application of these innately intricate laws, related regulations, and case law. When preparing the Company’s income tax returns, management attempts to make reasonable interpretations of the tax laws. Taxing authorities have the ability to challenge management’s analysis of the tax law or any reinterpretation management makes in its ongoing assessment of facts and the developing case law. Management assesses the reasonableness of its effective tax rate quarterly based on its current estimate of net income and the applicable taxes expected for the full year. On a quarterly basis, management also reviews circumstances and developments in tax law affecting the reasonableness of deferred tax assets and liabilities and reserves for contingent tax liabilities.
Results of Operations
Net Interest Income
The largest source of operating 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
18
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% was used for all years. 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 $3.1 million, $3.1 million, and $3.1 million for 2025, 2024, and 2023, respectively, were 3.65%, 3.28%, and 3.00% at December 31, 2025, 2024, and 2023, respectively. The Company’s average balances, fully tax equivalent interest income and interest expense, and rates earned or paid for major balance sheet categories are set forth in the following table (dollars in thousands):
Year Ended Year Ended Year Ended
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets
Liabilities and stockholders' equity
Deposits:
Other debt 361 24 7 % 1 — — % — — — %
TE net yield on interest-earning assets 3.70 % 3.34 % 3.05 %
(1)
Tax-exempt income is shown on a fully tax equivalent basis.
(2)
Nonaccrual loans have been included in the average balances. Balances are net of unaccreted discount related to loans acquired.
(3)
Includes loans held for sale
19
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 past two years (in thousands):
Increase (Decrease) Increase (Decrease)
Total Total
Change Volume (1) Rate (1) Change Volume (1) Rate (1)
Earning assets:
Certificates of deposit investments (41 ) (34 ) (7 ) 46 59 (13 )
Interest-bearing liabilities:
Deposits:
Federal funds purchased 6 — 6 (9 ) (5 ) (4 )
Other debt 24 — 24 — — —
(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)
Nonaccrual loans have been included in the average balances. Balances are net of unaccreted discount related to loans acquired.
Net interest income on a tax-effected basis increased $27.5 million or 11.8% in 2025 compared to an increase of $35.3 million or 17.9% in 2024. Net interest income on a tax-effected basis and tax effected net interest margin increased primarily due to the continued focus on loan yields for new and renewed loans, continued efforts to increase the performance of the investment portfolio, and a decrease in funding costs.
In 2025, average earning assets increased by $154.3 million, or 2.2%, and average interest-bearing liabilities increased by $46.4 million or 0.9%. These increases were primarily due to organic growth.
Provision for Credit Losses
The provision for credit losses in 2025 was $9.9 million compared to $5.6 million in 2024 and $6.1 million in 2023. Nonperforming loans increased to $31.9 million at December 31, 2025 from $29.8 million at December 31, 2024 and $20.1 million at December 31, 2023. The increase in provision expense in 2025 was expected as the industry returns to a normal credit cycle. The decrease in provision expense in 2024 was primarily due to the required provision in 2023 tied to the Blackhawk Bank acquisition. Net charge-offs were $5.2 million during 2025, $4.1 million during 2024 and $0.3 million during 2023. For information on credit loss experience and nonperforming loans, see “Nonperforming Loans and Nonperforming Other Assets” and “Loan Quality and Allowance for Credit Losses” herein.
20
Other Income
An important source of the Company’s revenue is derived from other income. The following table sets forth the major components of other income for the last three years (dollars in thousands):
Change From Prior Year
Total non-interest income decreased and increased, respectively, to $93.1 million in 2025 compared to $96.3 million in 2024 and $86.8 million in 2023. The primary reasons for the more significant year-to-year changes in other income components are as follows:
•
Wealth management revenues increased in 2024 primarily due to growth in net brokerage fees and trust management fees. Total assets under management were $6.6 billion at December 31, 2025 compared to $6.4 billion at December 31, 2024 and $6.1 billion at December 31, 2023.
•
Insurance commissions increased in 2025 primarily due to Mid Rivers Insurance Group Inc. acquisition being present the entire calendar year and the acquisition of part of AAdvantage Insurance Group LLC's book of business in July 2025 accompanied by organic growth. The increase in 2024 was primarily due the acquisition of Mid Rivers Insurance Group and Purdum, Gray, Ingledue, Beck Inc. Insurance being present the entire calendar year.
•
Fees from service charges increased in 2024 primarily due to Blackhawk Bank being present the entire calendar year.
•
Net securities losses in 2025 were $2.5 million compared to losses of $433,000 in 2024 and gains $3.4 million in 2023. The losses in 2025 and 2024 were due to management's efforts to improve earning asset yields through the sales of low-yielding bonds.
•
The increase in mortgage banking income during 2024 was primarily due to Blackhawk Bank being present the entire calendar year.
•
Revenue from ATMs and debit cards increased in 2024 primarily due to Blackhawk Bank being present the entire calendar year.
•
Other income decreased during 2025 primarily due to the repurchase of subordinated debt resulting in a gain in 2024 instead of a loss in 2025, recognition of contingent income accrued by Blackhawk Bank prior to their acquisition in 2024, and gains on the sale of fixed assets being presented in other income in 2024 compared to other expenses in 2025. Other income increased during 2024 primarily due to Blackhawk Bank being present the entire calendar year.
Other Expense
The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with day-to-day operations. The following table sets forth the major components of other expense for the last three years (dollars in thousands):
Change From Prior Year
Total non-interest expense increased to $222.2 million in 2025 from $215.0 million in 2024 and $185.7 million in 2023. The primary reasons for the more significant year-to-year changes in other expense components are as follows:
•
Salaries and employee benefits, the largest component of other expense, increased in 2025, which was primarily due to an increase in incentive compensation for exceeding budgeted financial metrics, increases for merit raises and applicable payroll taxes, and an increase in employee group insurance expense. The increase in 2024 was primarily due to former Blackhawk Bank employees being present the entire calendar year, increase in
21
incentive compensation, share based compensation, merit increases and applicable payroll taxes. There were 1,170 full-time equivalent employees at December 31, 2025, compared to 1,198 at December 31, 2024, and 1,187 at December 31, 2023.
•
Occupancy and equipment expense increase in 2025 was primarily due to the presentation of telecommunication expense in this category in 2025 compared to other expenses in 2024 and nonrecurring expense related to technology projects. The increase in 2024 was primarily due to additional properties added in the acquisition of Blackhawk Bank being present the entire calendar year.
•
Net other real estate owned expense decreased in 2024 primarily due to the large expenses occurring in 2023.
•
Amortization of other intangibles decreased in 2025 as expected due to the scheduled amortization of previously acquired intangible assets. The increase during 2024 was primarily due to additional core deposit intangibles added from the acquisition of Blackhawk Bank being present the entire calendar year.
•
Legal and professional expense decreased in 2025 primarily due to a decrease in the nonrecurring expenses present in 2024. The increase in 2024 was due to nonrecurring expenses associated with technology investment upgrades.
•
ATM and debit card expenses increased during 2024 primarily due to an increase in electronic transactions following the acquisition of Blackhawk Bank being present the entire calendar year.
•
Other operating expenses decreased in 2024 primarily due to the majority of acquisition costs associated with Blackhawk Bank occurring in 2023. The decrease in 2024 was primarily due to the above mentioned gains on the sale of fixed assets being presented in other income in 2024 compared to other expenses in 2025 and the above mentioned presentation of telecommunication expenses in this category in 2025 compared to other expenses in 2024.
Income Taxes
Income tax expense amounted to $25.3 million in 2025 compared to $25.5 million in 2024, and $19.5 million in 2023. Effective tax rates were 21.6% for 2025, 24.5% for 2024, and 22.0% for 2023. The Company files U.S. federal and state of Florida, Illinois, Indiana, Missouri, Texas, and Wisconsin income tax returns.
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 for the last three years (dollars in thousands):
December 31,
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
At December 31, 2025, the amortized cost of the Company’s investment portfolio decreased by $41.6 million from December 31, 2024 primarily due to calls, maturities, paydowns, and sales of securities partially offset by purchases designed to raise the rate of return of the portfolio. The decrease in 2024 was for the same previously mentioned reason as 2025. 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.
22
The table below presents the credit ratings as of December 31, 2025 for certain investment securities (in thousands):
Average Credit Rating of Fair Value at December 31, 2025 (1)
Amortized Estimated Not
Cost Fair Value AAA AA +/- A +/- BBB +/- < BBB - Rated
Available-for-sale:
Held-to-maturity:
Equity securities:
Federal Agricultural Mtg Corp $ 85 $ 450 $ 450
The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity presented at amortized cost at December 31, 2025 and the weighted average yield for each range of maturities (dollars in thousands):
One After 1 After 5
year or through through After
less 5 years 10 years ten years Total
Available-for-sale:
Held-to-maturity:
Other securities $ — $ — $ — $ 2,288 $ 2,288
Total held-to-maturity $ — $ — $ — $ 2,288 $ 2,288
Weighted average yield — % — % — % — % — %
Full tax equivalent yield — % — % — % — % — %
The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax equivalent yields have been calculated using a 21% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer, which the book value exceeded 10% of stockholders' equity at December 31, 2025. Investment securities carried at approximately $474 million and $633 million at December 31, 2025 and 2024, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.
23
Loans
The loan portfolio (net of unearned interest) is the largest category of the Company’s earning assets. The following table summarizes the composition of the loan portfolio, including loans held for sale, for the last five years (dollars in thousands):
Outstanding
Loan balances increased by $338.9 million or 6.0% from December 31, 2024 to December 31, 2025. Loan balances increased by $91.9 million or 1.6% from December 31, 2023 to December 31, 2024. The balances of loans sold into the secondary market were $167.6 million in 2025 compared to $125.3 million in 2024. The balance of real estate loans held for sale, included in the balances shown above, amounted to $5.2 million and $6.6 million as of December 31, 2025 and 2024, 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.
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 total risk-based capital for the periods shown above. At December 31, 2025 and 2024, First Mid Bank did have industry loan concentrations in excess of 25% of total risk-based capital in the following industries (dollars in thousands):
Principal % Outstanding Principal % Outstanding
balance Loans balance Loans
The Company had no further industry loan concentrations in excess of 25% of total risk-based capital.
The following table presents the balance of loans outstanding as of December 31, 2025, by contractual maturities (in thousands):
Maturity (1)
One yearor less(2) Over 1 through5 years Over5 years Total
(1)
Based upon remaining contractual maturity.
(2)
Includes demand loans, past due loans and overdrafts.
As of December 31, 2025, loans with maturities over one year consisted of approximately $2.5 billion in fixed rate loans and approximately $2.1 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.
24
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 credit 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 (dollars in thousands):
December 31,
The $2.3 million increase in nonaccrual loans during 2025 resulted from the net of $20.3 million of loans put on nonaccrual status, offset by no loans transferred to other real estate owned, $4.9 million of loans charged off and $13.1 million of loans becoming current or paid-off.
The following table summarizes the composition of nonaccrual loans (dollars in thousands):
Balance % of Total Balance % of Total
Construction and land development $ 5 — % $ 6 — %
Multifamily residential properties 371 1.20 % — — %
25
Interest income that would have been reported if nonaccrual and restructured loans had been performing totaled $1.2 million, $1.4 million and $412,000 for the years ended December 31, 2025, 2024, and 2023, respectively.
The $137,000 increase in repossessed assets during 2025 resulted from the net of $2.0 million of additional assets repossessed, $1.5 million of repossessed assets sold, $377,000 of write-downs on existing assets, and no deferred fair value marks were recognized. The following table summarizes the composition of repossessed assets (dollars in thousands):
Balance % of Total Balance % of Total
Repossessed assets sold during 2025 resulted in net gains of $52,000 related to real estate asset sales and $1,000 of net gains related to other assets sales. The Company also recognized no deferred gains, recorded $377,000 of write-downs on three real estate properties owned, and recorded no change in fair market value discount.
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 credit losses is the charge against current earnings that is determined by management as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit 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. Once identified, the magnitude of exposure to individual borrowers is quantified in the form of specific allocations of the allowance for credit losses. Management considers collateral values and guarantees in the determination of such specific allocations. Additional factors considered by management in evaluating the overall adequacy of the allowance include historical net credit losses, 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, the uncertainty regarding grain prices, increased operating costs for farmers, and increased levels of unemployment impacting consumers’ ability to pay. Each of these economic uncertainties was taken into consideration in developing the level of the reserve. Management considers the allowance for credit 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 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 December 31, 2025, the Company’s loan portfolio included $681.4 million of loans to borrowers whose businesses are directly related to agriculture. Of this amount, $577.9 million was concentrated in other grain farming. Total loans to borrowers whose businesses are directly related to agriculture increased $50.9 million from $630.6 million at December 31, 2024 while loans concentrated in other grain farming increased $70.3 million from $507.6 million at December 31, 2024. 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 credit losses within the agricultural portfolio. The Company also has $1.1 billion of loans to lessors of non-residential buildings, $225.6 million of loans concentrated in hotels and motels, and $641.8 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 network. 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.
26
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. On a quarterly basis, the Board of Directors and management review the status of problem loans and determine a best estimate of the allowance. In addition to internal policies and controls, regulatory authorities periodically review asset quality and the overall adequacy of the allowance for credit losses.
Analysis of the allowance for credit losses for the past five years and of changes in the allowance for these periods is summarized as follows (dollars in thousands):
Charge-offs:
Construction and land development 107 — 14 2 205
Recoveries:
Construction and land development — 5 — 100 —
Agricultural real estate 53 — — — —
The ratio of the allowance for credit losses to nonperforming loans was 234.4% as of December 31, 2025 compared to 235.2% as of December 31, 2024. The decrease in this ratio is primarily due to an increase in nonperforming loans. Management believes that the overall estimate of the allowance for credit losses appropriately accounts for probable losses attributable to current exposures.
During 2025, the Company had net charge-offs of $5.2 million compared to $4.1 million in 2024. During 2025, there were significant charge-offs of two commercial real estate loans to two borrowers of $1 million, one construction and land development loan to one borrower of $107,000, nine agricultural operating loans to eight borrowers of $1.8 million, and ten commercial operating loans to eight borrowers of $2.3 million. During 2024, there were significant charge-offs of two commercial real estate loans to two borrowers of $451,000, one agricultural operating loan to one borrower of $2.1 million, and a significant charge-off of one commercial operating loan to one borrower of $466,000.
At December 31, 2025, the allowance for credit losses amounted to $74.9 million or 1.25% of total loans. At December 31, 2024, the allowance for credit losses amounted to $70.2 million or 1.24% of total loans.
27
The allowance for credit losses, in management's judgment, was allocated as follows to cover probable credit losses (dollars in thousands):
% of loans to % of loans to % of loans to
% of loans to % of loans to
Allowance forcredit losses totalloans Allowance forcredit losses totalloans
Construction and land development $ 2,250 3.0 % $ 1,743 3.6 %
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 commercial and retail core deposits, the major component of funding sources. The following table sets forth the average deposits and weighted average rates for the years ended December 31, 2025, 2024, and 2023 (dollars in thousands):
Demand deposits:
As of December 31, 2025, 2024, and 2023, the Company held $1.7 billion, $1.6 billion, and $1.7 billion, respectively, of uninsured deposits for customers.
The following table sets forth the high and low month-end balances for the years ended December 31, 2025, 2024, and 2023 (in thousands):
In 2025, the average balance of deposits increased by $50.8 million from 2024. The increase in 2025 was primarily due to an increase in time deposits through organic growth and use of brokered CDs. The increase in 2024 was primarily due to deposits added in the acquisition of Blackhawk Bank being present the entire calendar year.
28
Balances of time deposits of more than $250,000 include time deposits maintained for public fund entities and consumer time deposits. The following table sets forth the maturity of time deposits of more than $250,000 (in thousands):
December 31,
The balance of time deposits of more than $250,000 increased $78.7 million from December 31, 2024 to December 31, 2025. The increase was primarily attributable to a combination of higher wholesale deposit balances and targeted internal marketing efforts, implemented to attract new time deposit funding to support the Company's liquidity needs. The balance of time deposits of more than $250,000 decreased $30.1 million from December 31, 2023 to December 31, 2024. The decrease was primarily due to intentional efforts to lower funding costs by reducing non-relationship time deports.
In 2025 the Company maintained account relationships with various public entities throughout its market areas. These public entities had total balances of $193.6 million and $261.2 million in various checking accounts and time deposits as of December 31, 2025 and 2024, respectively. These balances are subject to change depending upon the cash flow needs of the public entity.
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 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, subordinated debt and junior subordinated debentures.
29
Information relating to securities sold under agreements to repurchase and other borrowings as December 31, 2025, 2024, and 2023 is presented below (dollars in thousands):
Federal Home Loan Bank advances:
Other borrowings:
Federal funds purchased — — —
Debt due in one year or less — — —
Average interest rate at end of period 3.54 % 3.30 % 4.41 %
Maximum outstanding at any month-end:
Federal Home Loan Bank advances:
Other borrowings:
Federal funds purchased — — —
Debt due in one year or less 4,000 — —
Averages for the period (YTD):
Federal Home Loan Bank advances:
Other borrowings:
Federal funds purchased 39 — 192
Loans due in one year or less 361 — —
Average interest rate during the period 3.51 % 3.71 % 2.16 %
Securities sold under agreements to repurchase decreased $7.4 million during 2025 primarily due to the seasonal demands in balances and change in cash flow needs of various customers. FHLB advances represent borrowings by the First Mid Bank to economically fund loan demand. At December 31, 2025, FHLB advances totaled $270.0 million with a weighted-average interest rate of 3.44% and maturities from June 2026 to March 2035. At December 31, 2024, FHLB advances totaled $242.4 million with a weighted-average interest rate of 3.97% and maturities from March 2025 to December 2029.
The Company is party to a revolving credit agreement with The Northern Trust Company in the amount of $15 million. The balance on this line of credit was $0 as of December 31, 2025. This loan was renewed on April 4, 2025 for one year as a revolving credit agreement with a maximum available balance of $15 million. The interest rate is floating at 2.25% over the federal funds rate. The Company and its subsidiary banks were in compliance with the existing covenants at December 31, 2025 and 2024.
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 bore 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 (7.5% and 3.95% at December 31, 2025 and 2024, respectively). On June 7, 2024, August 27, 2024, and September 6, 2024, the Company repurchased in open market transactions and subsequently
30
cancelled $4.0 million, $15.0 million, and $1.0 million respectively, of the outstanding Notes. On October 15, 2025, the Company paid down $20 million of the outstanding Notes. As a result, as of December 31, 2025, $56 million in aggregate principal amount of the Notes remain issued and outstanding.
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. This Indenture governs the terms of the Blackhawk Subordinated Debt I and provides that such 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 February 5, 2025, the Company repurchased in open market transactions and subsequently cancelled $3.0 million of the outstanding Blackhawk Subordinated Debt I Notes. As a result, as of December 31, 2025, $4.5 million in aggregate principal amount of Blackhawk Subordinated Debt I Notes remain issued and outstanding.
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. This Indenture governs the terms of the Blackhawk Subordinated Debt II and provides that such 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% 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 February 5, 2025, the Company repurchased in open market transactions and subsequently cancelled $7.0 million of the outstanding Blackhawk Subordinated Debt II Notes. As a result, as of December 31, 2025, $500,000 in aggregate principal amount of Blackhawk Subordinated Debt II Notes remain issued and outstanding.
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 $10.0 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 $10.3 million, 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 (SOFR plus 160 basis points) after June 15, 2011 (5.59% and 6.81% at December 31, 2025 and 2024, respectively). The net proceeds to the Company were used for general corporate purposes, including the Company’s acquisition of Mansfield Bancorp, Inc. in 2006.
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 $4.0 million of trust preferred securities and an additional $124,000 additional investment in common equity of CLST I, is invested in junior subordinated debentures issued to CLST I. The subordinated debentures matured in 2025, bear interest at three-month SOFR plus 185 basis points (5.84% and 7.06% at December 31, 2025 and 2024, 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 $6.0 million of trust preferred securities and an additional $186,000 additional 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 SOFR plus 170 basis points (5.69% and 6.91% at December 31, 2025 and 2024, 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 $1.0 million 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 SOFR plus 325 basis points (7.20% and 8.17% at December 31, 2025 and 2024, 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 $4.0 million 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 SOFR plus 205 basis points (6.02% and 7.25% at December 31, 2025 and 2024, 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. New issuances of trust preferred securities, however, would not count as Tier 1 regulatory capital.
31
In addition to requirements of the Dodd-Frank Act discussed above, the act also required the federal banking agencies to adopt 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.” On December 10, 2013, the federal banking agencies issued final rules to implement the prohibitions required by the Volcker Rule. Following the publication of the final rule, and in reaction to concerns in the banking industry regarding the adverse impact the final rule’s treatment of certain collateralized debt instruments has on community banks, the federal banking agencies approved a final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities. Under the final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities under $15 billion in assets 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. Although the Volcker Rule impacts many large banking entities, the Company does not currently anticipate that the Volcker Rule will have a material effect on the 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. The Company has also assumed prepayments of loan assets in amounts consistent with market expectations. By comparing the volumes of interest-bearing assets and liabilities that have contractual maturities, repricing points, and prepayments 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 December 31, 2025 (dollars in thousands):
Rate Sensitive Within
1 year 1-3 years 3-5 years Thereafter Total Fair Value
Interest-earning assets:
Interest-bearing liabilities:
The static GAP analysis shows that at December 31, 2025, 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.
32
Capital Resources
At December 31, 2025, the Company’s stockholders' equity had increased approximately $112.3 million, or 13.3%, to $958.7 million from $846.4 million as of December 31, 2024. During 2025, net income contributed $91.7 million to equity before the payment of dividends to stockholders of $23.4 million. The change in market value of available-for-sale investment securities increased stockholders' equity by $41.1 million, net of tax.
Stock Plans
Deferred Compensation Plan. The Company follows the provisions of the Emerging Issues Task Force Issue No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested” (“EITF 97-14”), which was codified into ASC 710-10, for purposes of the First Mid Bancshares, Inc. Amended and Restated Deferred Compensation Plan (“DCP”). At December 31, 2025, the Company classified the cost basis of its common stock issued and held in trust in connection with the DCP of approximately $6.8 million as treasury stock. The Company also classified the cost basis of its related deferred compensation obligation of approximately $6.8 million as an equity instrument (deferred compensation).
The DCP was effective as of June 1984. The purpose of the DCP is to enable directors, advisory directors, and key employees the opportunity to defer a portion of the fees and cash compensation paid by the Company as a means of maximizing the effectiveness and flexibility of compensation arrangements. The Company invests all participants’ deferrals in shares of common stock. Dividends paid on the shares are credited to participants’ DCP accounts and invested in additional shares.
First Retirement and Savings Plan. The First Retirement Savings Plan ("401(k) plan") was effective beginning in 1985. Employees are eligible to participate in the 401(k) plan after three months of service with the Company.
Stock Incentive Plan. 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. At the Annual Meeting of Stockholders held on April 30, 2025, the stockholders approved amendments to the SI Plan to change the name of the plan to the 2025 Stock Incentive Plan and to extend the term of the plan to January 21, 2035. 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 2025 annual meeting of the Company, a maximum of 1 million shares of common stock may be issued under the SI Plan. During 2025, 2024, and 2023, the Company awarded 84,097 and 80,332, and 45,986 shares as stock and stock unit awards, respectively. This SI Plan is more fully described in Note 13 - Stock Incentive Plan.
Stock Repurchase Program. On June 24, 2025, the Board of Directors approved a repurchase program (the "2025 Repurchase Program"), which became effective on July 1, 2025. The 2025 Repurchase Program supersedes all previous repurchase plans and authorizes the Company to repurchase up to 1.2 million shares of the Company’s common stock. During 2025, the Company did not repurchase any shares. As of December 31, 2025, the Company had approximately 1.2 million shares or approximately $46.8 million in remaining capacity under the 2025 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.
Employee Stock Purchase Plan. At the Annual Meeting of Stockholders held April 25, 2018, the stockholders approved the First Mid Bancshares, Inc. Employee Stock Purchase Plan (“ESPP”). The ESPP provides eligible employees with the opportunity to purchase shares of common stock of the Company at a 15% discount through payroll deductions. The ESPP is 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 December 31, 2025, 2024, and 2023, 29,313, 32,936, and 38,989 shares, respectively were issued pursuant to ESPP. As of December 31, 2025, there were 444,023 shares unassigned but available to be issued under the ESPP.
Capital Ratios
For 2025, the minimum regulatory ratios required for minimum capital adequacy purposes plus the capital buffer are 10.5% for the Total Risk-based capital ratio, 8.5% for the Tier 1 Risk-based capital ratio, 7.0% for the Common Equity Tier 1 capital ratio, and 4.0% for the Tier 1 Leverage ratio. The Company and First Mid Bank have capital ratios above the minimum regulatory capital requirements and, as of December 31, 2025, the Company and First Mid Bank had capital ratios above the levels required for categorization as well-capitalized under the capital adequacy guidelines established by the bank regulatory agencies. A tabulation of the Company and First Mid Bank's capital ratios as of December 31, 2025 follows:
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
33
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, 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 for these sources include:
•
First Mid Bank has $130 million available in overnight federal fund lines, including $30 million from First Horizon Bank, N.A., $25 million from Zions Bank, $20 million from U.S. Bank, N.A., $20 million from BMO Bank, N.A., $20 million from Bankers' Bank., and $15 million from The Northern Trust Company. 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 December 31, 2025, 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 is pledged includes one-to-four family residential real estate loans, commercial real estate loans, multi-family loans, and farmland. At December 31, 2025, the excess collateral at the FHLB would support approximately $1.6 billion of additional advances for First Mid Bank.
•
First Mid Bank is a member of the Federal Reserve System and can borrow funds provided that sufficient collateral is pledged.
•
First Mid Bank has received formal approval from the Federal Reserve Bank and can participate in the Borrower-in-Custody (BIC) program. As a result, the Bank can pledge loans as collateral at the Federal Reserve Bank's Discount Window while retaining custody of the pledged loans. The program enhanced our contingent liquidity position by approximately $316.0 million as of December 31, 2025.
•
In addition, as of December 31, 2025, 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 4, 2025 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 banks were in compliance with the existing covenants at December 31, 2025 and 2024.
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 December 31, 2025 (in thousands):
Total Less than1 year 1-3 years 3-5 years More than5 years
For the year ended December 31, 2025, net cash of $130.9 million was provided from operating activities, $302.6 million was used in investing activities, and $305.5 million was provided by financing activities. In total cash and cash equivalents increased by $133.7 million from year-end 2024.
For the year ended December 31, 2024, net cash of $124.4 million was provided from operating activities, $7.5 million was used in investing activities, and $138.8 million was used in financing activities. In total cash and cash equivalents decreased by $21.8 million from year-end 2023.
For the year ended December 31, 2023, net cash of $72.4 million was provided from operating activities, $474.4 million was provided from investing activities, and $556.2 million was used in financing activities. In total cash and cash equivalents decreased by $9.4 million from year-end 2022.
Effects of Inflation
Unlike industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or experience the same magnitude of changes as goods and services, since such prices are affected by inflation. In the current economic environment, liquidity and interest rate adjustments are features of the Company’s assets and liabilities that are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset these potential effects.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s market risk arises primarily from interest rate risk inherent in its lending, investing and deposit taking activities, which are restricted to First Mid Bank. For a discussion of how management of the Company addresses and evaluates interest rate risk see also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity.”
Based on the financial analysis performed as of December 31, 2025, which considers how the specific interest rate scenario would be expected to impact each interest-earning asset and each interest-bearing liability, the Company estimates that changes in the prime interest rate would impact First Mid Bank's performance, on a consolidated basis, as follows:
Increase (Decrease) In
December 31, 2025 Net Interest Income Return OnAverage Equity
Prime rate is 6.75%
Prime rate increase of:
Prime rate decrease of:
The following table shows the same analysis for First Mid Bank performance as of December 31, 2024:
Increase (Decrease) In
December 31, 2024 Net Interest Income Return OnAverage Equity
Prime rate is 7.50%
Prime rate increase of:
Prime rate decrease of:
The Company's Board of Directors has adopted an interest rate risk policy that establishes maximum decreases in the percentage change in net interest income of 5% in a 100 basis point rate shift and 10% in a 200 basis point rate shift. No assurance can be given that the actual net interest income would increase or decrease by such amounts in response to a 100 or 200 basis point increase or decrease in the prime rate because it is also affected by many other factors. The results above are based on one-time “shock” moves and ramped rate increases and do not take into account any management response or mitigating action.
Interest rate sensitivity analysis is also used to measure the Company’s interest risk by computing estimated changes in the Economic Value of Equity (“EVE”) of the First Mid Bank under various interest rate shocks. EVE is determined by calculating the net present value of each asset and liability category by rate shock. The net differential between assets and liabilities is the EVE. EVE is an expression of the long-term interest rate risk in the balance sheet as a whole.
The following table presents the Company's projected change in EVE, on a consolidated basis, for the various rate shock levels at December 31, 2025 and 2024 (in thousands). All market risk sensitive instruments presented in the tables are held-to-maturity or available-for-sale. The Bank has no trading securities.
Changes In
Economic Value of Equity
Interest Rates(basis points) Amount of Change($000) Percent of Change (%)
35
As indicated above, at December 31, 2025, in the event of a sudden and sustained increase in prevailing market interest rates, the EVE would be expected to decrease if rates increased 100 or 200 basis points. In the event of a sudden and sustained decrease in prevailing market interest rates, the Company's EVE would be expected to increase. At December 31, 2025, the estimated changes in EVE were inside the Company’s policy guidelines that normally allow for a change in capital of +/-10% from the base case scenario under a 100 basis point shock and within the guidelines of +/- 20% from the base case scenario under a 200 basis point shock. The general level of interest rates are at historically low levels and the bank is monitoring its position and the likelihood of further rate changes.
Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and declines in deposit balances, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the computation of EVE. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in First Mid Bank's portfolio change in future periods as market rates change. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets 38
Consolidated Statements of Income 39
Consolidated Statements of Comprehensive Income 40
Consolidated Statements of Changes in Stockholders’ Equity 41
Consolidated Statements of Cash Flows 44
Notes to Consolidated Financial Statements 46
37
Consolidated Balance Sheets
December 31, 2025 and 2024
(In thousands, except share data) 2025 2024
Assets
Cash and due from banks:
Federal funds sold 76 75
Investment securities:
Equity securities, at fair value 4,588 4,439
Loans held for sale, at fair value 5,203 6,614
Less allowance for credit losses (74,875 ) (70,182 )
Liabilities and stockholders’ equity
Deposits:
Commitments and contingent liabilities (Note 17)
Stockholders’ equity:
See accompanying notes to consolidated financial statements.
38
Consolidated Statements of Income
For the years ended December 31, 2025, 2024, and 2023
Interest income:
Interest on investment securities
Interest on certificates of deposit 103 144 98
Interest on federal funds sold 3 53 419
Interest on deposits with other financial institutions 5,307 7,900 5,107
Interest expense:
Other income:
Other expense:
Per share data:
Basic net income per common share $ 3.84 $ 3.31 $ 3.17
Diluted net income per common share 3.83 3.30 3.15
See accompanying notes to consolidated financial statements.
39
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2025, 2024, and 2023
Other comprehensive income (loss)
See accompanying notes to consolidated financial statements.
40
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2025, 2024, and 2023
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Loss Stock Total
Other comprehensive income, net of tax — — — — 41,082 — 41,082
Dividends on common stock ($.98 per share) — — (23,395 ) — — — (23,395 )
Purchase of 17,121 treasury shares — — — — — (724 ) (724 )
Vested restricted shares/units compensation expense — 217 — 2,186 — — 2,403
See accompanying notes to consolidated financial statements.
41
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2025, 2024, and 2023
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
Other comprehensive loss, net of tax — — — — (5,956 ) — (5,956 )
Dividends on common stock ($.94 per share) — — (22,371 ) — — — (22,371 )
Issuance costs pursuant to acquisition of Blackhawk Bancorp, Inc. — — — — — — —
Purchase of 15,978 treasury shares — — — — — (659 ) (659 )
Vested restricted shares/units compensation expense — 222 — 1,966 — — 2,188
See accompanying notes to consolidated financial statements.
42
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2025, 2024, and 2023
(In thousands, except share and per share data)
Accumulated
Additional Other
Common Paid-In- Retained Deferred Comprehensive Treasury
Stock Capital Earnings Compensation Income (Loss) Stock Total
Other comprehensive income, net of tax — — — — 15,080 — 15,080
Dividends on common stock ($.92 per share) — — (19,557 ) — — — (19,557 )
Purchase of 13,481 treasury shares — — — — — (465 ) (465 )
Deferred compensation — — — (765 ) — (375 ) (1,140 )
Vested restricted shares/units compensation expense — 215 — 1,330 — — 1,545
See accompanying notes to consolidated financial statements.
43
Consolidated Statements of Cash Flows
For the years ended December 31, 2025, 2024, and 2023
Cash flows from operating activities:
Gain on cash surrender value of bank owned life insurance (487 ) — (976 )
Loss (gain) on sale of investment securities, net 2,509 433 (3,383 )
Loss (gain) on sale of other real property owned, net 325 (1,317 ) 4,080
Loss (gain) on sale of premises and equipment (1,890 ) 1,243 131
Gain on sale of loans held for sale, net (3,962 ) (3,596 ) (1,200 )
Loss (gain) on repayment of subordinated debentures 589 (493 ) —
Gain on repayment of other borrowings (85 ) — —
Increase in accrued interest receivable (1,310 ) (3,557 ) (2,696 )
(Decrease) Increase in other liabilities 3,534 (4,191 ) (1,674 )
Cash flows from investing activities:
Proceeds from maturities of certificates of deposit investments 2,660 245 1,180
Purchase of certificates of deposit investments (900 ) (2,275 ) (245 )
Proceeds from maturities of investment securities held-to-maturity — — 668
Purchase of held-to-maturity investment securities (64 ) (53 ) —
Purchases of premises and equipment (6,846 ) (4,945 ) (3,639 )
Proceeds from sale of premises and equipment 11,179 7 —
Proceeds from sales of other real property owned, net 811 3,637 2,461
Proceeds from bank owned life insurance death benefit 1,414 — 2,048
Net cash (used in) provided by acquisition (2,415 ) (8,944 ) 44,621
Cash flows from financing activities:
Proceeds from short-term debt 4,000 — —
Repayment of short-term debt (4,000 ) — —
Repayment of subordinated debentures (29,882 ) (19,455 ) —
Purchase of treasury stock (724 ) (659 ) (465 )
44
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 2025, 2024, and 2023
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Income taxes, net of refunds:
Supplemental disclosures of noncash investing and financing activities
Loans transferred to other real estate owned $ 159 $ 4,683 $ 681
Fixed assets transferred to other real estate owned 1,861 — —
Supplemental disclosure of purchase of capital stock
Consideration paid:
Common stock issued — — 93,508
Fair value of liabilities assumed $ — $ 2,449 $ 1,224,600
See accompanying notes to consolidated financial statements.
45
First Mid Bancshares, Inc.
Notes to Consolidated Financial Statements
Note 1 – Basis of Accounting and Consolidation
The accompanying consolidated financial statements include the accounts of First Mid Bancshares, Inc. (“Company”) and its wholly owned subsidiaries: First Mid Bank & Trust, N.A. (“First Mid Bank”), First Mid Wealth Management Company, First Mid Insurance Group, Inc. (“First Mid Insurance”) and First Mid Captive, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America.
Acquisitions
Ray Farm Management During the quarter ended December 31, 2025, Ray Farm Management Services, Inc's (RFMS) customer list was acquired by the Company for a purchase price of $764,000 and immediately assigned to First Mid Wealth Management.
AAdvantage Insurance Group LLC During the quarter ended September 30, 2025, a portion of AAdvantage Insurance Group LLC’s (AAIG) customer list was acquired by the Company for a purchase price of $2.8 million and immediately assigned to First Mid Insurance Group.
Mid Rivers Insurance Group, Inc. During the quarter ended September 30, 2024, Mid Rivers Insurance Group, Inc. was acquired by the Company for a purchase price of $10.1 million and instantly merged into First Mid Insurance Group.
Purdum, Gray, Ingledue, Beck, Inc. During the quarter ended June 30, 2024, Purdum, Gray, Ingledue, Beck, Inc. was acquired by the Company for a purchase price of $10.2 million and instantly merged into First Mid Insurance Group.
Blackhawk Bancorp, Inc. On March 20, 2023, the Company and Eagle Sub LLC, a newly formed Wisconsin limited liability company and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Blackhawk Merger Agreement”) with Blackhawk Bancorp, Inc., a Wisconsin corporation (“Blackhawk”), pursuant to which, among other things, agreed to acquire 100% of the issued and outstanding shares of Blackhawk pursuant to a business combination whereby Blackhawk merged with and into Merger Sub, whereupon the separate corporate existence of Blackhawk ceased and Merger Sub continued as the surviving company and a wholly-owned subsidiary of the Company (the “Blackhawk Merger”).
Subject to the terms and conditions of the Blackhawk Merger Agreement, at the effective time of the Blackhawk Merger, each share of common stock, par value $0.01 per share, of Blackhawk issued and outstanding immediately prior to the effective time of the Blackhawk Merger (other than shares held in treasury by Blackhawk and dissenting shares) were converted into and became the right to receive 1.15 shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration payable by the Company at the closing of the Blackhawk Merger to Blackhawk’s shareholders and equity award holders was 3,290,222 shares of Company common stock valued at $93.5 million and $2,000 of cash in lieu of fractional shares.
The Blackhawk Merger closed August 15, 2023 and Blackhawk Bank was merged into First Mid Bank on December 1, 2023.
Note 7 provides further information on the intangibles acquired in the above acquisitions.
Pending Acquisitions
On October 29, 2025, the Company and Star Sub LLC, a newly formed Iowa limited liability company and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the "Two Rivers Merger Agreement") with Two Rivers Financial Group, Inc. an Iowa corporation (Two Rivers), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Two Rivers pursuant to a business combination whereby Two Rivers will merge with and into Star Sub LLC, whereupon the separate corporate existence of Two Rivers will cease and Star Sub LLC will continue as a surviving company and a wholly-owned subsidiary of the Company (the "Two Rivers Merger").
Subject to the terms and conditions of the Two Rivers Merger Agreement, at the effective time of the Two Rivers Merger, each share of common stock of Two Rivers issued and outstanding immediately prior to the effective time of the Two Rivers Merger (other than shares held in treasury by Two Rivers) will be converted into and become the right to receive 1.225 shares of common stock of the Company, and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration payable by the Company at the closing of the Two Rivers Merger to Two Rivers' shareholders and equity award holders is approximately 2,556,140 shares of Company common stock. The Two Rivers Merger is anticipated to be completed on February 28, 2026, and has been approved by the appropriate regulatory authorities and the shareholders of Two Rivers. The Company will account for the Two Rivers Merger under ASC 805, Business Combinations, upon closing.
General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or 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.
46
Summary of Significant Accounting Policies
Segment Reporting
The Company operates as a single segment entity for financial reporting purposes and has adopted ASU 2023-07 during the year ended December 31, 2024. The Chief Financial and Risk Officer, Jordan Read (CFO), serves as the Company’s chief operating decision maker (CODM). The CODM allocates resources and assesses performance of the Company based on the consolidated performance, excluding all significant intercompany balances and transactions, of the Company and its wholly owned subsidiaries and does not significantly utilize disaggregated segment financial information for decision making and resource allocation. As of December 31, 2025, management has reviewed the requirements of ASU 2023-07 and has determined that no additional segment disclosures are required. Specifically,
•
the Company does not use the tracked performance on the disaggregated segment level for decision-making or resource allocation purposes,
•
no significant segment-specific expenses or performance metrics are used internally for decision-making or resource allocation purposes, and
•
the level of financial consolidation presented in these financial statements aligns with the CODM’s internal reporting and decision-making process
Based on this assessment the Company’s financial statement disclosures fully comply with ASU 2023-07, and no additional qualitative segment disclosures are necessary.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company uses estimates and employs the judgments of management in determining the amount of its allowance for credit losses and income tax accruals and deferrals, in its fair value measurements of investment securities, and in the evaluation of impairment of loans, goodwill, investment securities, and premises and equipment. As with any estimate, actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses. In connection with the determination of the allowance for credit losses, management obtains independent appraisals for significant properties.
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.
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 11 – “Disclosures of Fair Values of Financial Instruments.”
Cash and Cash Equivalents
For purposes of reporting cash flows, cash equivalents include non-interest-bearing and interest-bearing cash and due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.
Certificates of Deposit Investments
Certificates of deposit investments have original maturities of three to five years and are carried at cost.
Investment Securities
The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale in accordance with ASC 320. Securities classified as held-to-maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. 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.
For AFS securities, management determines whether the decline in fair value below the amortized cost basis (impairment) is due to credit-related or other factors. In making that evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Any impairment on AFS securities that is related to factors other than credit is recognized in other comprehensive income, net of related deferred income taxes. Credit-related impairment on AFS securities is recognized as an allowance for credit losses ("ACL") on the balance sheet based on the amount by which the amortized cost basis exceeds the fair value, with a corresponding charge to net income. Both the ACL and charge to net income may be reversed if conditions change. However, if the Company intends to sell, or more likely than not will be required to sell, an impaired AFS security before recovering its amortized cost basis, the entire impairment must be recognized in net
47
income with a corresponding adjustment to the security's amortized cost basis rather than through the establishment of an ACL. For HTM securities, management determines whether an ACL is necessary after considering the facts and circumstances of the underlying investment securities and evaluates expected credit losses by security type, aggregated by similar risk characteristics, based on historical credit losses adjusted for current conditions and supportable forecasts.
Loans
Loans are stated at the principal amount outstanding net of unearned discounts, unearned income, and the allowance for credit losses. Unearned income includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximate the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding.
The Company’s policy is to discontinue the accrual of interest income on any loan that becomes ninety days past due as to principal or interest or earlier when, in the opinion of management there is reasonable doubt as to the timely collection of principal or interest. 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 collectability of interest or principal.
Loans expected to be sold are classified as held for sale in the consolidated financial statements and are recorded at the lower of aggregate cost or fair value, taking into consideration future commitments to sell the loans.
Allowance for Credit Losses
The Company believes the allowance for credit losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. An estimate of potential losses inherent in the loan portfolio is 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 organizational history and experience with credit decisions and related outcomes. The allowance for credit losses represents the best estimate of losses inherent in the existing loan portfolio. The allowance for credit losses is increased by the provision for credit losses charged to expense and reduced by loans charged off, net of recoveries. The Company evaluates the allowance for credit losses at least quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for credit losses is adjusted.
The Company first bifurcates the loan portfolio into segments that share risk characteristics and then utilizes a DCF method to measure the ACL on loans collectively evaluated that are sub-segmented by credit risk levels. The DCF method incorporates assumptions for probability of default, loss given default, prepayments and curtailments over the contractual term of the loans. In determining the probability of default, the Company utilized regression analysis that includes the use of peer data to determine certain economic factors that are relevant loss drivers in the portfolio segments based on historical evaluations. National unemployment is a loss driver used in all portfolios.
The Company individually evaluates certain loans for impairment. A specific allowance is assigned to a loan when expected cash flows or collateral do not justify the carrying amount of the loan. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for credit losses would be required.
Premises and Equipment
Premises, equipment, and capitalized software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are charged to expense and determined principally by the straight-line method over the estimated useful lives of the assets. The estimated useful lives for each major depreciable classification of premises, equipment and capitalized software are as follows:
Buildings and improvements 20 years to 40 years
Leasehold improvements 5 years to 15 years
Furniture and equipment 3 years to 7 years
Capitalized Software 3 years to 10 years
Goodwill and Intangible Assets
The Company has goodwill from business combinations, identifiable intangible assets assigned to core deposit relationships and customer lists acquired, and intangible assets arising from the rights to service mortgage loans for others.
Identifiable intangible assets generally arise from branches acquired that the Company accounted for as purchases. Such assets consist of the excess of the purchase price over the fair value of net assets acquired, with specific amounts assigned to core deposit relationships and customer lists primarily related to the insurance agency and Wealth Management Company. Intangible assets are amortized by the straight-line method over various periods up to fifteen years. Management reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In accordance with GAAP, the Company performed its annual testing of goodwill for impairment as of September 30, 2025 and determined that, as of that date, goodwill was not impaired. The goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Management also concluded that the remaining amounts and amortization periods were appropriate for all intangible assets.
48
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 credit 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 non-interest expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expense.
Bank Owned Life Insurance
First Mid Bank has purchased life insurance policies on certain senior management. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts that are probable at settlement.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula and carried at cost. This investment is presented in other assets on the Consolidated Balance Sheet.
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax returns with each organization computing its taxes on a separate company basis. Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under tax laws.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences existing between the financial statement carrying amounts of assets and liabilities and their respective tax basis, as well as operating loss and tax credit carry forwards. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an increase or decrease in income tax expense in the period in which such change is enacted.
In accordance with GAAP, the Company reviews its uncertain tax positions annually. 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 actually 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.
Captive Insurance Company
First Mid Captive, Inc. ("the Captive"), a wholly owned subsidiary of the Company which was formed and began operations in December 2019, is a Nevada- based captive insurance company. The Captive insures against certain risks unique to the operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today's insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,850,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company's consolidated financial statements and its federal income return.
Wealth Management Assets
Assets held in fiduciary or agency capacities by First Mid Wealth Management Company are not included in the consolidated balance sheets since such items are not assets of the Company or its subsidiaries. Fees from trust activities are recorded on a cash basis over the period in which the service is provided. Fees are a function of the market value of assets managed and administered, the volume of transactions, and fees for other services rendered, as set forth in the underlying client agreement with the First Mid Wealth Management Company. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on asset valuations and transaction volumes. Any out-of-pocket expenses or services not typically covered by the fee schedule for trust activities are charged directly to the trust account on a gross basis as trust revenue is incurred. First Mid Wealth Management Company managed assets totaling $6.6 billion and $6.4 billion at December 31, 2025 and 2024, respectively.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
Stock Incentive Awards