First Mid Bancshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are shown in millions unless noted. The company operates as a bank holding company and reports one segment.
Financial performance and condition
- Q3 earnings: Net income was $18.3 million, up from $11.6 million in Q3 2020; diluted EPS was $1.01 versus $0.69. Net interest income was $45.5 million versus $32.5 million, while noninterest income was $16.4 million versus $13.6 million. Provision for loan losses declined to $1.1 million from $3.9 million. Noninterest expense rose to $36.3 million from $26.9 million.
- Nine-month earnings: Net income was $34.7 million versus $31.7 million; diluted EPS was $1.94 versus $1.89. Net interest income was $125.0 million versus $94.0 million, and noninterest income was $52.4 million versus $44.0 million. Provision was $12.7 million versus $15.5 million; noninterest expense increased to $119.9 million from $80.8 million.
- Margins and returns: Tax-equivalent net interest margin was 3.25% for the first nine months, down from 3.30%. Annualized return on average assets was 0.82% versus 1.01%, and return on average common equity was 7.58% versus 7.76%.
- Balance sheet at September 30: Assets totaled $6.04 billion, up from $4.73 billion at year-end 2020. Net loans were $3.89 billion versus $3.09 billion; available-for-sale securities were $1.35 billion versus $879.2 million. Deposits totaled $4.99 billion versus $3.69 billion. Stockholders’ equity was $627.2 million versus $568.2 million.
- Credit quality: Allowance for credit losses was $54.0 million, or 1.37% of loans, versus $41.9 million, or 1.30%, at year-end 2020. Nonperforming loans were $27.7 million, or 0.70% of loans, compared with $28.1 million, or 0.90%, at year-end. Net charge-offs for the first nine months were $2.68 million, compared with $2.17 million.
- Cash flow and liquidity: Nine-month operating cash flow was $46.7 million; investing activities used $348.9 million and financing activities provided $230.1 million. Cash and cash equivalents were $345.2 million, down $72.1 million from year-end. Management reported $2.1 billion of total available liquidity capacity, including about $670 million of additional FHLB borrowing capacity.
- Debt and capital: Repurchase agreements were $149.9 million, FHLB borrowings $112.6 million, subordinated debt $94.4 million, and junior subordinated debentures $19.2 million. Company total risk-based capital was 15.87% and Tier 1 risk-based capital was 12.53%; First Mid Bank remained above well-capitalized thresholds.
Material changes versus comparable periods
- Growth in assets, loans, deposits, and interest income principally reflects the February 2021 acquisition of LINCO Bancshares/Providence Bank and a September 2021 purchase of $208 million of St. Louis-area loans, accompanied by $215 million of assumed deposits.
- Nine-month net interest income increased, chiefly due to the acquired operations. Management attributed the modest decline in net interest margin to lower loan and investment yields.
- Nine-month noninterest expense rose 48.5%, driven by acquired Providence Bank expenses and LINCO-related costs. The company recorded about $9.0 million of LINCO acquisition costs pre-tax, including $8.5 million in the first nine months of 2021.
- Unrealized losses on available-for-sale securities reduced nine-month other comprehensive income by $11.5 million after tax; accumulated other comprehensive income fell to $5.6 million from $17.1 million at year-end 2020.
Outlook, risks, and unusual items
- No specific earnings or financial guidance is provided. Management described the financial position and existing operations’ earning capability as strong, but expected credit reserves to remain elevated amid economic uncertainty.
- COVID-19 accommodations totaled $7.2 million at September 30, 2021. The company also held 544 outstanding PPP loans totaling $59.4 million, which it said were guaranteed by the U.S. government.
- Management highlighted exposure to agriculture, hotels and motels, and commercial and residential property lessors. It cited potential risks from weak commodity prices, drought or lower crop yields, reduced travel, and adverse economic conditions. Agricultural-related business loans totaled $405.3 million; hotel and motel loans totaled $121.2 million.
- The company was asset-sensitive on a cumulative one-year static gap basis; management noted that further rate decreases could adversely affect net interest income. It also identified downward pressure on asset yields from low rates and loan competition.
- Delta Bancshares acquisition was pending at quarter-end. Consideration was expected to be approximately $15.2 million cash and 2,282,511 First Mid shares; Delta shareholders approved the transaction on October 28, 2021. Completion was anticipated in Q4 2021, subject to regulatory approval.
- Management did not expect ordinary-course litigation to materially affect the company. It cautioned that COVID-19, credit deterioration, acquisition integration, interest rates, and economic conditions could adversely affect results, liquidity, capital, or asset values.
Investor facts to verify
- Whether Delta closed as expected, the final consideration and share dilution, and the costs and timing of integration.
- How acquired-loan credit quality, nonperforming assets, charge-offs, and the allowance develop; the filing includes a large initial credit-loss provision associated with Providence Bank.
- Whether acquired-operation expenses and LINCO transaction costs subside, and whether earnings growth translates into improved returns and margins.
- The sensitivity of net interest income to rate movements and the effect of securities valuations on equity.
- Liquidity and capital capacity relative to $1.03 billion of outstanding credit commitments, and the effect of future lending, dividends, or acquisitions.