Business context and reporting period
First Mid Bancshares, Inc. is a bank holding company operating through banking, wealth management and insurance subsidiaries, primarily in Illinois, Missouri and Texas. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. The six-month year-over-year comparison is affected by the February 2022 acquisition of Delta Bancshares.
Financial results and condition
Unless otherwise noted, dollar amounts are in millions.
- Profit: Second-quarter net income was $16.6, down from $17.8 in Q2 2022; diluted EPS was $0.80 versus $0.86. First-half net income was $35.7 versus $34.4, and diluted EPS was $1.74 versus $1.72.
- Net interest and margins: Q2 net interest income was $42.4 versus $46.8. First-half net interest income was $85.6 versus $90.3. Tax-equivalent net interest margin declined to 2.89% from 3.13%, as higher deposit and borrowing costs more than offset higher asset yields. First-half tax-equivalent net interest income was $87.1 versus $91.9.
- Other income and costs: First-half noninterest income increased 5.7% to $42.0; noninterest expense decreased 0.4% to $81.6. Insurance commissions and bank-owned life insurance income increased, while wealth-management and mortgage-banking revenue declined. The effective tax rate was 23.0%, versus 22.5%.
- Assets and loans: Total assets were $6.704 billion, versus $6.744 billion at year-end. Net loans were $4.752 billion, down $14.8; gross loans decreased about $12.8. Commercial real estate represented 42.8% of loans, and real-estate-secured loans 69.0%.
- Credit: The allowance for credit losses was $58.7, or 1.22% of loans, versus $59.1 at year-end. First-half provision was a credit of $0.4, compared with $3.9 expense in 2022; net charge-offs were $15,000. Nonperforming loans were $18.6, or 0.39% of loans, compared with $19.2 at year-end. Loans at least 30 days past due were 0.22% of loans.
- Deposits, debt and liquidity: Deposits totaled $5.220 billion, down $37.4 from year-end; noninterest-bearing deposits fell $85.5 while interest-bearing deposits rose $48.1. Cash and cash equivalents were $174.3. Repurchase agreements were $209.2, FHLB advances $450.0, subordinated debt $94.6 and junior subordinated debentures $19.4. The company reported $773.2 in these borrowings and repurchase obligations combined.
- Cash flow: First-half operating cash flow was $38.2 and investing cash flow was $57.2; financing activities used $73.5. Cash and cash equivalents increased $21.8.
- Capital and securities: Stockholders’ equity was $660.7, up $27.5 from year-end. Company Tier 1 risk-based capital was 12.82% and total risk-based capital 15.67%; the bank met the regulatory definition of well-capitalized. Available-for-sale securities had $213.5 of gross unrealized losses at quarter-end, reflected in accumulated other comprehensive loss of $151.6 after tax.
Changes, outlook, risks and unusual items
- Management attributed the weaker net interest income and margin mainly to sharply higher deposit and borrowing costs. Average loans grew year over year, while average securities and interest-bearing deposits declined.
- Management described liquidity as sufficient. Available sources include $100 million in overnight federal funds lines, $565 million of additional FHLB borrowing capacity supported by excess collateral, and an undrawn $15 million revolving credit line.
- The company was cumulatively liability-sensitive through the 12-month horizon in its static gap analysis; management cautioned that rising rates could adversely affect net interest income. The filing reports no material change in market risk since year-end.
- Credit risks include agricultural exposure ($540.5 of loans to agriculture-related businesses, including $417.6 in other grain farming), hotels and motels ($215.2), and commercial real estate. Management cited risks from low commodity prices, drought or reduced crop yields, weaker travel, economic conditions and borrower cash-flow pressure. Loans to lessors of non-residential buildings totaled $991.1.
- First Mid had agreed to acquire Blackhawk Bancorp for approximately 3.33 million First Mid shares, subject to customary conditions and approvals; completion was anticipated in Q3 2023. The filing warns that closing, timing, integration costs and anticipated benefits are uncertain.
- During Q2, First Mid acquired insurance business Purdum, Gray, Ingledue, Beck, Inc.; approximately $6.0 of goodwill was recorded. The filing also reports $1.153 billion of unused commitments and lines of credit and $9.2 of standby letters of credit. Management said ordinary-course litigation was not expected to have a material adverse effect.
- No quantified earnings or margin guidance is provided. Management notes interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the Blackhawk transaction closed as anticipated, its final share issuance and consideration, and integration costs and benefits.
- Subsequent deposit trends, deposit pricing and funding mix, and the effect on net interest margin and earnings.
- Whether the substantial unrealized securities losses affect liquidity, capital or the ability to sell securities without realizing losses.
- Trends in nonperforming loans, criticized credits, charge-offs and allowance adequacy, particularly in commercial real estate and agriculture.
- Liquidity availability and borrowing needs, along with regulatory capital ratios after the acquisition and ongoing CECL transition adjustments.