First Mid Bancshares, Inc. — 2021 Form 10-K
Business context and reporting period
First Mid Bancshares is a financial holding company operating community banks and providing insurance, wealth management, trust and related services, primarily across Illinois, Missouri and Texas. This filing covers the fiscal year ended December 31, 2021; comparisons are principally with 2020.
The company completed its acquisition of LINCO Bancshares, parent of Providence Bank, on February 22, 2021; Providence Bank was merged into First Mid Bank in May. It also purchased $208 million of Stifel Bank loans and assumed $219 million of related deposits. After year-end, on February 14, 2022, it completed the Delta Bancshares acquisition, issuing approximately 2.29 million shares and paying approximately $15.2 million in cash. Jefferson Bank, acquired with Delta, was expected to merge into First Mid Bank in the second quarter of 2022.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net income | $51.5 million | $45.3 million |
| Diluted earnings per share | $2.87 | $2.70 |
| Net interest income | $167.8 million | $127.4 million |
| Noninterest income | $69.8 million | $59.5 million |
| Noninterest expense | $155.6 million | $111.1 million |
| Provision for loan losses | $15.2 million | $16.1 million |
| Net interest margin, tax-equivalent | 3.21% | 3.27% |
| Return on average assets | 0.90% | 1.05% |
| Return on average common equity | 8.38% | 8.24% |
At year-end, total assets were $5.99 billion, net loans were $3.94 billion, deposits were $4.96 billion and stockholders’ equity was $633.9 million. Net loans and deposits grew substantially from 2020, primarily reflecting the Providence acquisition and loan purchase activity. Approximately 69.8% of loans were secured by real estate, including $1.67 billion of commercial real estate loans.
Net interest income increased 31.7%, mainly from growth in earning assets associated with acquisitions; lower interest rates and reduced accretion income contributed to margin compression. Noninterest income rose 17.2%, led by wealth management, ATM/debit-card revenue and acquired operations. Noninterest expense rose 40.1%, primarily due to Providence, including $8.6 million of 2021 acquisition costs, higher compensation and occupancy costs, and increased other real estate owned expense.
Net cash provided by operating activities was $69.6 million; investing activities used $482.5 million and financing activities provided $164.2 million. Cash and cash equivalents decreased $248.7 million to $168.6 million. The available-for-sale securities portfolio had a $17.9 million after-tax unrealized loss for the year; accumulated other comprehensive income moved from a $17.1 million gain to a $0.8 million loss.
Total borrowings were $346.3 million, comprising repurchase agreements, FHLB advances, subordinated debt and junior subordinated debentures. The $94.4 million subordinated notes carry a 3.95% fixed rate through October 2025, then a floating rate. The company reported $1.7 billion of total available liquidity capacity, including $699.7 million of additional FHLB borrowing capacity and a $15 million undrawn parent-company credit line. Regulatory capital ratios remained above well-capitalized thresholds: consolidated total risk-based capital was 15.79%, common equity Tier 1 was 12.06%, and leverage was 9.05%.
Material changes versus the prior comparable period
- Providence materially expanded the balance sheet and operating scale; assets increased from $4.73 billion to $5.99 billion, and year-end deposits rose from $3.69 billion to $4.96 billion.
- Net income increased by $6.2 million, but return on average assets declined to 0.90% from 1.05%. Earnings growth was supported by higher net interest income and noninterest income, partly offset by increased expenses and taxes.
- Credit indicators improved: nonperforming loans decreased to $22.0 million from $28.1 million, or 0.55% of loans versus 0.90%. The allowance for credit losses increased to $54.7 million from $41.9 million, equal to 1.37% of loans and 248% of nonperforming loans.
- Net charge-offs increased to $4.5 million from $2.8 million. Repossessed assets rose to $5.0 million from $2.5 million, and the company recorded $3.9 million of net other real estate owned expense.
- Consolidated total risk-based capital declined to 15.79% from 18.82%, primarily because of balance-sheet growth following the acquisition. Shareholders’ equity nevertheless increased 11.6% to $633.9 million.
Outlook, risks and unusual items
Management described the company’s financial position and underlying earnings capacity as strong, but said uncertainty around COVID-19 and the economy could cause adverse effects. Management expected reserve levels to remain elevated relative to recent historical trends and did not provide quantified earnings or growth guidance.
Key risks include credit deterioration in commercial real estate and concentrated industries, including agriculture, hotels and lessors of buildings; changing interest rates and potential margin compression; liquidity and deposit flows; cybersecurity and third-party operational disruptions; acquisition integration; and continuing COVID-19 effects. The filing also identifies climate-related, regulatory, competitive and LIBOR-transition risks.
Interest-rate modeling showed the company liability-sensitive on a cumulative basis through one year. Its year-end economic-value-of-equity sensitivity to rate decreases was outside the company’s stated policy guideline for a 100-basis-point shock; management said it was monitoring the position. These estimates depend on assumptions and do not reflect potential management actions. The company had approximately $1.0 billion of unused commitments and lines of credit and $14.4 million of standby letters of credit.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter because its estimate depends on significant assumptions and judgment. Management reported effective disclosure controls and internal control over financial reporting. The company stated that ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How much of 2021 earnings growth reflects acquired operations, and what recurring cost savings or integration costs remain after the Providence and Delta transactions?
- Whether the larger allowance adequately covers the portfolio, particularly commercial real estate, agriculture and hotel exposures, and whether charge-offs or nonperforming loans change materially.
- How securities valuation changes and interest-rate movements affect capital, net interest margin and the company’s out-of-policy economic-value-of-equity sensitivity.
- Whether deposit and liquidity trends remain sound as the company integrates Jefferson Bank and meets approximately $592 million of contractual obligations due within one year.
- How the company’s stated reserve outlook, COVID-19 exposure and $1.0 billion of off-balance-sheet lending commitments develop in subsequent filings.