First Mid Bancshares, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statements are unaudited. The company changed its name from First Mid-Illinois Bancshares, Inc. on April 25, 2019.
Business context and reporting period
First Mid is a regional banking and financial services company operating primarily in Illinois and Missouri. It reports as a single segment. Results include First BancTrust, acquired in May 2018, and SCB Bancorp, acquired in November 2018; therefore, year-over-year comparisons reflect a larger company and are not purely organic. Soy Capital Bank merged into First Mid Bank on April 6, 2019, after quarter-end.
Financial performance and position
| Metric | Q1 2019 | Comparable / reference |
|---|---|---|
| Interest income | $38.1 million | $25.2 million in Q1 2018 |
| Net interest income | $32.3 million GAAP; $32.8 million tax-equivalent | $23.2 million GAAP; $23.7 million tax-equivalent in Q1 2018 |
| Provision for loan losses | $0.9 million | $1.1 million in Q1 2018 |
| Noninterest income | $14.6 million | $7.5 million in Q1 2018 |
| Noninterest expense | $28.3 million | $18.4 million in Q1 2018 |
| Net income | $13.3 million | $8.4 million in Q1 2018 |
| Diluted EPS | $0.80 | $0.66 in Q1 2018 |
| Tax-equivalent net interest margin | 3.74% | 3.65% in Q1 2018 |
| Return on average assets / common equity | 1.38% / 11.02% | 1.18% / 10.86% in Q1 2018 |
Net interest income growth reflected higher average earning assets, including acquired loans and securities, higher loan and investment yields, and acquisition-related accretion; higher deposit and borrowing costs partly offset the benefit. Noninterest income gains were led by insurance commissions and wealth management, substantially reflecting SCB-related business.
At March 31, total assets were $3.90 billion, up from $3.84 billion at December 31, 2018. Deposits were $3.05 billion, versus $2.99 billion; stockholders’ equity was $497.2 million, versus $475.9 million. Net loans were $2.57 billion, down $47.8 million from year-end, primarily due to seasonal agricultural paydowns and acquired-loan payoffs.
Cash and cash equivalents rose $91.1 million to $232.5 million. Q1 cash provided was $17.4 million from operating activities, $52.0 million from investing activities, and $21.7 million from financing activities. Investing cash flow included a $45.2 million net decrease in loans; financing cash flow included a $57.5 million increase in deposits and a $34.6 million decrease in repurchase agreements.
Quarter-end borrowings included $157.8 million of repurchase agreements, $119.8 million of FHLB advances, $29.0 million of junior subordinated debentures, and $6.3 million of other borrowings. The company reported $13.5 million of lease liabilities following adoption of the new lease standard. It cited $65 million of overnight federal funds lines, approximately $450.2 million of additional FHLB borrowing capacity supported by excess collateral, and an undrawn $10 million revolving credit facility. Management stated liquidity was sufficient.
Capital remained above regulatory minimums. The company reported a 13.55% Tier 1 risk-based capital ratio, 14.45% total risk-based capital ratio, 12.57% common equity Tier 1 ratio, and 10.77% Tier 1 leverage ratio. The company paid no dividends during the quarter.
Material changes versus the prior comparable period
- Net income increased $4.9 million and diluted EPS rose from $0.66 to $0.80. Acquisitions materially expanded the balance sheet and contributed to both revenue and expense growth.
- Net interest income increased $9.1 million on a tax-equivalent basis; the reported margin improved 9 basis points to 3.74%.
- Noninterest income increased $7.2 million, mainly from insurance commissions and wealth management. Noninterest expense increased $9.9 million, including higher salaries, occupancy costs, and acquired intangible amortization.
- Nonperforming loans were $26.0 million, compared with $17.9 million at March 31, 2018, but below $29.7 million at December 31, 2018. Repossessed assets were $3.9 million, up from $2.6 million at year-end.
- Other comprehensive income was $7.6 million, compared with a $6.2 million loss in Q1 2018, largely reflecting the change in unrealized available-for-sale securities gains and losses.
Outlook, commentary, risks, and unusual items
- No numerical earnings or financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management described the capital position as strong and liquidity as sufficient. However, static gap analysis showed the company liability-sensitive on a cumulative basis through 12 months; management warned that rising rates could adversely affect near-term net interest income. It also cited pressure on asset yields from low rates and loan competition.
- Credit exposures include $355.6 million of loans to agriculture-related borrowers, including $267.1 million concentrated in other grain farming, and $128.0 million in motel and hotel loans. Management identified prolonged low commodity prices, drought, reduced crop yields or government assistance, and reduced travel as potential sources of credit deterioration. Real estate-related loans represented 66.7% of the loan portfolio.
- Net charge-offs were $0.4 million, versus $0.3 million in Q1 2018. The allowance for loan losses was $26.7 million, or 1.03% of loans; coverage of nonperforming loans was 103%. The filing identifies the allowance estimate as a critical accounting judgment.
- Q1 included $436,000 of pre-tax acquisition expenses ($153,000 for First BancTrust and $283,000 for SCB). Acquisition-related purchase accounting increased pre-tax income by $1.55 million in aggregate, according to management. Acquired intangibles contributed to higher amortization expense.
- The company adopted lease accounting guidance effective January 1, 2019, recognizing $13.5 million of right-of-use assets and $13.5 million of lease liabilities at March 31. Management was preparing for CECL, expected to begin parallel processing with its existing allowance model in Q2 2019, and had not yet determined the standard’s financial-statement impact.
- Available-for-sale securities had $3.6 million of gross unrealized losses at March 31. Management did not consider the losses other-than-temporary but noted future impairment losses could arise. The company reported $601 million of off-balance-sheet lending commitments and standby letters of credit.
- Management stated ordinary-course litigation was not expected to have a material adverse effect; outcomes remain uncertain. The filing reported no material change in market risk since year-end and no material changes in internal control over financial reporting.
Important facts for investors to verify
- How much of the year-over-year earnings and revenue increase is attributable to acquisitions versus organic growth, and whether expected integration savings are being realized after the April Soy Capital Bank merger.
- Whether nonperforming loans, past-due loans, repossessed assets, and the allowance remain manageable, particularly in agriculture, commercial real estate, and hotel lending.
- Whether deposit pricing and other funding costs continue to rise faster than asset yields, given the disclosed 12-month liability-sensitive position.
- The eventual CECL adoption effect on the allowance, retained earnings, implementation controls, and disclosures.
- Whether liquidity capacity, capital ratios, and the $601 million of lending commitments remain adequate as customer funding needs and acquired operations evolve.