FIRST MID BANCSHARES, INC.

Net Interest Income

The largest source of revenue for the Company is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest-bearing liabilities. The amount of interest income is dependent upon many factors, including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest-bearing liabilities and the rates paid to attract and retain such funds.

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is presented on a full tax equivalent ("TE") basis in the table that follows. The federal statutory rate in effect of 21% for 2025 and 2024 was used. The TE analysis portrays the income tax benefits associated with the tax-exempt assets. The year-to-date net yield on interest-earning assets excluding the TE adjustments of $753,000 and $616,000 for 2025 and 2024, respectively were 3.56% and 3.20% at March 31, 2025 and 2024, respectively.

The Company’s average balances, fully tax equivalent interest income and interest expense, and rates earned or paid for major balance sheet categories are set forth for the three months ended March 31, 2025 and 2024 in the following table (dollars in thousands):

The tax-exempt income is shown on a tax equivalent basis.

Nonaccrual loans and loans held for sale are included in the average balances. Balances are net of unaccreted discount related to loans acquired.

During the first quarter 2025, the Company changed the methodology utilized for the calculation of net interest margin to be more consistent with what is typically used by peer banks and research analysts. The calculation now is the annualized net interest income on a tax equivalent basis divided by average interest earning assets.

Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income for the three months ended March 31, 2025, compared to the same period in 2024 (in thousands):

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.

The tax-exempt income is shown on a tax-equivalent basis.

Nonaccrual loans have been included in the average balances.

Tax equivalent net interest income increased $4.1 million, or 7.3%, to $60.2 million for the three months ended March 31, 2025, from $56.1 million for the same period in 2024. Net interest income and net interest margin increased primarily due to an increase in earning asset yields and a decrease in deposit and borrowing rates.

For the three months ended March 31, 2025, average earning assets decreased $115.0 million, or 1.7%, and average interest-bearing liabilities decreased $219.9 million or 4.1% compared with average balances for the same period in 2024.

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

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Average interest-bearing deposits with other financial institutions decreased $102.7 million or 59.2%.

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Average federal funds sold decreased $1.0 million or 93.1%.

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Average certificates of deposits investments increased $1.6 million or 104.7%.

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Average loans increased by $81.6 million or 1.5%.

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Average securities decreased by $94.6 million or 8.0%.

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Average interest-bearing customer deposits decreased by $70.2 million or 1.5%.

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Average securities sold under agreements to repurchase decreased by $62.9 million or 23.8%.

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Average borrowings and other debt decreased by $86.7 million or 22.3%.

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Net interest margin increased to 3.60% for the first three months of 2025 from 3.25% for the first three months of 2024.

Provision for Loan Losses

The provision for credit losses for the three months ended March 31, 2025 and 2024 was $1.7 million and ($357,000), respectively. Net charge offs were $1.8 million for the three months ended March 31, 2025, compared to net charge offs of $382,000 for March 31, 2024. Nonperforming loans were $26.6 million and $20.1 million as of March 31, 2025 and 2024, respectively. For information on loan loss experience and nonperforming loans, see discussion under the “Nonperforming Loans” and “Loan Quality and Allowance for Loan Losses” sections below.

Other Income

An important source of the Company’s revenue is other income. The following table sets forth the major components of other income for the three months ended March 31, 2025 and 2024 (in thousands):

Following are explanations of the significant changes in these other income categories for the three months ended March 31, 2025 compared to the same period in 2024:

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Wealth management revenues increased for the three month period due to increased brokerage fees and trust fees, and agricultural services fee incomes.

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Insurance commissions increased primarily due to the acquisition of MRIG during the third quarter of 2024.

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The increase in mortgage banking income was due to an increase from loans sold in the secondary market. First Mid Bank generally releases the servicing rights on loans sold into the secondary market.

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$28.5 million (representing 140 loans) for the three months ended March 31, 2025.

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

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Revenue from ATMs and debit cards decreased due to an decrease in activity during the period resulting in less service charges.

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Bank owned life insurance income increased approximately $566,000 during the first three months of 2025 compared to the same period in 2024 primarily due the gain recognized on a death claim filed in 2025.

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Other income decreased due to a loss recognized on the repayment of the Company's subordinated debentures shown as offsetting the company's other income and numerous other miscellaneous decreases.

Other Expense

The following table sets forth the major components of other expense for the three months ended March 31, 2025 and 2024 (dollars in thousands):

Following are explanations for the significant changes in these other expense categories for the three months ended March 31, 2025 compared to the same period in 2024:

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The increase in salaries and employee benefits, the largest component of other expense, is primarily due to regularly scheduled annual raises. There were 1,194 and 1,188 full-time equivalent employees at March 31, 2025 and 2024, respectively.

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The increase in occupancy and equipment and legal and professional fees expenses are primarily due to nonrecurring technology project expenses in the first quarter of 2025.

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ATM/Debit card expense increased primarily due to a negotiated settlement from a related vendor resulting in a credit during the first quarter of 2024.

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The decrease in all other operating expenses during the first three months of 2025 was primarily due to integration related expenses for Blackhawk Bank occurring during the first quarter of 2024.

Income Taxes

Total income tax expense amounted to $6.0 million (21.2% effective tax rate) for the three months ended March 31, 2025, compared to $6.4 million (23.9% effective tax rate) for the same period in 2024. The decrease in effective rate is primarily related the interest expense disallowance decreasing due to the Company beginning to utilize an investment subsidiary during the second quarter of 2024 and a decrease in nondeductible expenses.

The Company files U.S. federal and state of Florida, Illinois, Indiana, Missouri, Texas, and Wisconsin income tax returns. As of March 31, 2025, the Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2021.