First Mid Bancshares, Inc. — 2019 Q3 Form 10-Q
Business context and period. Unaudited consolidated results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. First Mid is a bank holding company operating primarily in Illinois and Missouri. The company reports as one segment. 2019 results include the full-period contribution of acquisitions that were only partly reflected in 2018, notably SCB and First Bank; Soy Capital Bank merged into First Mid Bank in April 2019.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $31.1 million | $30.1 million | $94.7 million | $80.7 million |
| Provision for loan losses | $2.7 million | $2.6 million | $3.7 million | $5.5 million |
| Other income | $12.9 million | $7.9 million | $41.1 million | $23.8 million |
| Other expense | $25.9 million | $24.5 million | $84.4 million | $63.7 million |
| Net income | $11.7 million | $8.2 million | $36.0 million | $26.7 million |
| Diluted EPS | $0.70 | $0.54 | $2.15 | $1.90 |
- Revenue and earnings: Nine-month net interest income rose about 17%, while other income increased 73% to $41.1 million. Management attributed much of the fee-income growth to the SCB acquisition, including wealth management and insurance commissions. Nine-month net income increased about 35%.
- Margins: Tax-equivalent net interest margin was 3.66% for the first nine months, down from 3.80% in 2018. Management cited higher deposit and borrowing costs, partly offset by higher asset yields and acquisition-related accretion. Q3 tax-equivalent net yield on interest-earning assets was 3.60%, versus 3.89% a year earlier.
- Expenses and unusual items: Nine-month other expense rose 32.6%, mainly reflecting acquired operations, more employees, occupancy costs, intangible amortization and SCB integration costs. 2019 included $2.7 million of SCB acquisition expenses and $172,000 related to First Bank. A $257,000 FDIC assessment credit reduced Q3 expense. Acquisition purchase-accounting accretion and amortization added $4.3 million to nine-month pretax income, according to management.
- Cash flow: For the first nine months, operating activities provided $42.2 million; investing activities used $4.9 million and financing activities used $70.5 million. Cash and cash equivalents declined $33.2 million to $108.2 million.
- Balance sheet and liquidity: Total assets were $3.84 billion at September 30, broadly unchanged from year-end 2018. Deposits were $2.99 billion. Net loans were $2.59 billion, down $24.6 million from year-end, while available-for-sale securities increased $44.4 million. The company reported $174.5 million of repurchase agreements, $80.9 million of FHLB borrowings and $29.1 million of junior subordinated debentures. Management said liquidity was sufficient; available additional FHLB advances were estimated at $536.5 million, subject to collateral.
- Capital: Stockholders’ equity was $522.0 million, up 9.7% from year-end. The company’s total risk-based capital ratio was 15.30% and Tier 1 risk-based ratio was 14.39%; First Mid Bank met the well-capitalized regulatory thresholds. The company repurchased 35,427 shares for approximately $1.1 million during the quarter, with about $5.1 million of plan capacity remaining.
Material changes and credit quality
- Nonperforming loans were $24.2 million, or 0.92% of loans, versus $29.7 million and 1.12% at December 31, 2018. Nonaccrual loans declined to $21.4 million. Repossessed assets, however, rose to $4.4 million from $2.6 million.
- The allowance for loan losses was $26.7 million, 1.02% of loans and 110% of nonperforming loans. Nine-month net charge-offs increased to $3.1 million from $1.6 million in 2018, despite lower provision expense.
- Agriculture-related lending totaled $351.6 million, including $270.5 million to other grain farming. Other disclosed concentrations include commercial and residential property lessors, hotels and motels, and gambling-related businesses. Management cautioned that prolonged low commodity prices, drought, lower crop yields or reduced government assistance could increase agricultural losses; reduced regional travel could affect hotel and motel credits.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management described the company as liability-sensitive through the one-year repricing horizon; rising rates could adversely affect net interest income. It also cited downward pressure on asset yields from historically low rates and loan competition.
- The company was preparing for CECL credit-loss accounting, began parallel processing in Q3 2019, and was still evaluating the financial-statement impact. The filing does not provide a clear estimate of the adoption effect.
- On October 7, 2019, after quarter-end, the company redeemed $10 million of junior subordinated debentures and the related trust preferred securities at par plus accrued distributions. This subsequent event reduces debt but also affects capital composition and future interest expense.
- Customer commitments, lines of credit and standby letters of credit totaled approximately $590.5 million at September 30, 2019. Management did not anticipate losses, but these commitments carry credit, liquidity and interest-rate risks. Ordinary-course litigation was not expected by management to have a material adverse effect; outcomes remain uncertain.
Important facts for investors to verify
- Whether acquisition-driven fee growth and purchase-accounting benefits persist as integration costs, acquired-loan runoff and intangible amortization evolve.
- Trends in net interest margin, deposit pricing and funding costs, particularly given the disclosed one-year liability sensitivity.
- Agricultural and commercial real estate credit performance, charge-offs, repossessed assets and the adequacy of the allowance as CECL implementation proceeds.
- The actual financial and regulatory-capital effects of the October 7, 2019 debt and trust-preferred redemption.
- The use of remaining share-repurchase authorization and the capacity to meet approximately $591 million of off-balance-sheet commitments alongside deposit and borrowing obligations.