First Mid Bancshares, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2019. First Mid is a regional banking and financial services company operating primarily in Illinois and Missouri. The Soy Capital Bank (SCB) banking offices were merged into First Mid Bank on April 6, 2019; the comparison with 2018 is affected by the timing of the First Bank and SCB acquisitions.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $31.3 million | $27.5 million | $63.6 million | $50.6 million |
| Provision for loan losses | $0.1 million | $1.9 million | $1.0 million | $2.9 million |
| Total other income | $13.6 million | $8.4 million | $28.2 million | $15.8 million |
| Total other expense | $30.2 million | $20.8 million | $58.5 million | $39.2 million |
| Net income | $11.0 million | $10.0 million | $24.3 million | $18.4 million |
| Diluted EPS | $0.66 | $0.72 | $1.45 | $1.38 |
- Growth and earnings: Q2 net income increased about 9%; six-month net income rose about 32%. Q2 diluted EPS declined despite higher net income, while six-month EPS increased. The company’s weighted-average share count was substantially higher than in 2018.
- Interest income and margins: Six-month net interest income increased 25.5% on growth in average earning assets, including acquired loans and securities. Tax-equivalent net interest margin was 3.69%, down from 3.73%; management attributed the decrease mainly to higher deposit and borrowing costs, partly offset by higher asset yields and acquisition-related accretion.
- Noninterest revenue and costs: Six-month other income increased 78.1%, led by insurance commissions and wealth management revenue associated substantially with SCB, plus higher ATM/debit activity. Other expense increased 49.3%, reflecting acquisition-related staffing, occupancy, intangible amortization, loan collection costs and SCB integration expenses.
- Profitability: Annualized return on average assets was 1.26% for the first six months, versus 1.23% in 2018; return on average common equity was 9.89%, versus 11.06%.
Financial position, cash flow and liquidity
- At June 30, 2019, assets were $3.84 billion, essentially unchanged from year-end 2018. Deposits were $3.01 billion, up $23.8 million; stockholders’ equity was $509.0 million, up $33.1 million.
- Net loans were $2.52 billion, down $98.4 million from year-end. Management cited seasonal agricultural paydowns and acquired-loan payoffs, alongside declines in several commercial and residential categories. Investment securities rose $65.4 million to $827.2 million carrying value, including available-for-sale and held-to-maturity securities.
- Cash and cash equivalents increased $27.0 million to $168.4 million. For the six months, operating cash flow was $32.0 million, investing cash flow provided $48.2 million, and financing activities used $53.2 million.
- Borrowings included $152.3 million of repurchase agreements, $95.8 million of FHLB advances and $29.1 million of junior subordinated debentures. Total reported liabilities were $3.33 billion. The company also reported $12.8 million of lease liabilities following adoption of the new lease standard.
- Management described liquidity as sufficient. Sources included $75 million of overnight federal funds lines, approximately $524.6 million of additional FHLB borrowing capacity supported by excess collateral, and an unused $10 million corporate revolver.
- Capital ratios remained above stated regulatory minimums. The company reported 14.82% total risk-based capital and 13.92% Tier 1 risk-based capital; First Mid Bank’s total risk-based ratio was 13.82%, and management said the bank qualified as well-capitalized.
Credit, material changes and notable items
- Nonperforming loans were $25.8 million, down from $29.7 million at December 31, 2018; nonaccrual loans were $23.0 million. Repossessed assets increased to $3.6 million from $2.6 million. Loans 30 or more days past due were 1.19% of loans, versus 1.06% at year-end.
- The allowance for loan losses was $26.4 million, or 1.04% of loans, compared with $26.2 million, or 0.93%, at year-end. Six-month net charge-offs were $0.9 million, broadly similar to 2018. The provision declined year over year, which management attributed primarily to lower loan volume.
- Credit exposures warrant attention: $348.6 million of loans were to agriculture-related borrowers, including $264.1 million in other grain farming; the company also reported $127.1 million of motel and hotel loans, $235.0 million to lessors of non-residential buildings, $288.4 million to lessors of residential buildings and dwellings, and $90.1 million to other gambling industries. Management cited commodity prices, drought, crop yields, government assistance and regional travel as potential risk factors.
- SCB acquisition-related pretax expenses totaled $2.7 million in the first half of 2019; First Bank acquisition-related costs were $0.2 million. The SCB acquisition also contributed $18.3 million of goodwill, while First Bank goodwill was $26.5 million. Acquisition integration and purchase-accounting effects influenced both revenue and expenses.
- Available-for-sale securities generated $13.7 million of after-tax other comprehensive income in the first half, reversing the year-end accumulated loss position. Management did not consider the reported unrealized losses other-than-temporary, but warned that future impairment could arise if cash-flow expectations deteriorate or market conditions change.
- The company adopted lease accounting effective January 1, 2019, recognizing $12.8 million of right-of-use assets and $12.8 million of lease liabilities at June 30. The company was preparing for CECL adoption, with parallel processing using the new credit-loss model expected to begin in Q3 2019; the financial impact remained under evaluation.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management noted pressure on asset yields from low interest rates and loan competition, and its interest-rate gap analysis showed the company was liability-sensitive cumulatively over the next 12 months, meaning rising rates could adversely affect net interest income. Other key risks include agricultural and commercial credit concentrations, deposit and funding costs, acquisition integration, securities valuation and changes in economic conditions. Customer commitments and lines of credit totaled $527.9 million, with $10.2 million of standby letters of credit; actual funding needs may be lower because some commitments may expire unused. Management said ordinary-course litigation was not expected to have a material adverse effect, while acknowledging outcomes cannot be predicted with certainty.
Investor facts to verify
- Whether acquisition-driven noninterest revenue and expected integration efficiencies persist after SCB’s bank merger, and how acquisition costs and purchase-accounting accretion trend.
- Whether rising deposit costs continue to outpace asset-yield growth, and the resulting impact on net interest margin and earnings.
- Credit trends in agriculture and other concentrated sectors, including past-due loans, nonperforming assets, charge-offs and allowance adequacy.
- The company’s CECL implementation progress and eventual opening allowance and retained-earnings impact.
- Liquidity and capital resilience, including deposit pricing and mix, borrowing maturities, unused credit commitments and regulatory capital ratios.