First Mid Bancshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company is a bank holding company operating as one reportable segment. Results include Delta Bancshares, acquired February 14, 2022; Jefferson Bank was merged into First Mid Bank in June 2022. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $48.3 | $45.5 | $138.6 | $125.0 |
| Provision for credit losses | $0.1 | $1.1 | $4.0 | $12.7 |
| Other income | $16.8 | $16.4 | $56.5 | $52.4 |
| Other expense | $41.5 | $36.3 | $123.5 | $119.9 |
| Net income | $17.9 | $18.3 | $52.3 | $34.7 |
| Diluted earnings per share | $0.88 | $1.01 | $2.60 | $1.94 |
| Dividends declared per share | $0.23 | $0.22 | $0.67 | $0.63 |
- Q3 net income declined about 2% year over year as expense growth exceeded gains in net interest and other income. Nine-month net income rose about 51% year over year.
- Nine-month tax-equivalent net interest margin was 3.16%, down from 3.25%. Management attributed the decline to lower loan yields and higher deposit and borrowing costs; higher average loan balances and the Delta acquisition lifted net interest income.
- Nine-month other income increased 7.8%, led by wealth management, insurance commissions and service charges. Mortgage banking revenue fell 75.4% to $1.1 million, reflecting lower refinancing activity and secondary-market loan sales.
- Nine-month other expense increased 3.0%. Salaries and benefits rose 7.9%, partly due to compensation, inflation and acquired operations. The effective tax rate was 22.8%, compared with 22.6%.
Financial position, cash flow and capital
- At September 30, total assets were $6.65 billion, up from $5.99 billion at year-end 2021. Net loans were $4.66 billion, up $723 million; the increase primarily reflected the Delta acquisition. Total deposits were $5.48 billion, up $527 million.
- Cash and cash equivalents were $161.0 million, versus $168.6 million at year-end 2021. For the first nine months, operating cash flow was $54.3 million, investing cash flow was negative $105.0 million, and financing cash flow was positive $43.1 million.
- Borrowings and repurchase agreements totaled approximately $516 million: repurchase agreements of $220.7 million, FHLB borrowings of $176.2 million, federal funds purchased of $5.0 million, subordinated debt of $94.5 million and junior subordinated debentures of $19.3 million. Average period-end borrowing cost was 2.26%, versus 1.78% at year-end 2021.
- Management reported $2.2 billion of total available liquidity capacity. FHLB collateral supported approximately $714 million of additional advances; the company also had $15 million available under an unused revolving credit facility.
- Stockholders’ equity was $600.7 million, down 5.2% from year-end. Nine-month net income and $92.2 million of Delta-related stock issuance were more than offset by a $166.8 million after-tax decline in available-for-sale securities value and $13.1 million of dividends.
- Regulatory capital remained above well-capitalized thresholds. Company Tier 1 risk-based capital was 12.28% and total risk-based capital was 15.11% at September 30.
Credit quality and material changes
- Nonperforming loans were $20.8 million, compared with $22.0 million at December 31, 2021 and $27.7 million a year earlier. The allowance for credit losses was $58.8 million, or 1.25% of loans; allowance coverage of nonperforming loans was 282%.
- Nine-month net charge-offs were $0.7 million, versus $2.7 million. Loans 30 or more days past due were 0.34% of loans, compared with 0.62% at year-end 2021.
- Available-for-sale securities had fair value of $1.23 billion and gross unrealized losses of $236.2 million at September 30, compared with $18.3 million of gross unrealized losses at year-end 2021. After tax, accumulated other comprehensive loss was $167.7 million. Management did not consider the losses other-than-temporary but noted future impairment could be recognized if underlying cash flows deteriorate.
- Loans to agriculture-related businesses totaled $520.9 million, including $397.5 million in grain farming; hotel and motel loans totaled $209.4 million. Commercial real estate and commercial lending are significant portfolio exposures.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management described the company’s financial position and underlying earning capability as solid, and said it did not anticipate material changes or deficiencies in capital or liquidity, while cautioning that economic uncertainty could produce worse-than-expected effects.
- Interest-rate exposure is a key risk: static gap analysis showed a cumulative liability-sensitive position through 12 months, which management said could make rising rates adverse to net interest income. Deposit and borrowing costs were already increasing.
- Management cited agricultural risks from low commodity prices, drought, reduced crop yields or lower government support; hotel and motel exposure is sensitive to travel demand. Other stated risks include economic conditions, credit quality, liquidity, securities valuations, regulation and the continuing effects of COVID-19.
- Customer lending commitments and lines of credit totaled $1.21 billion, with $16.1 million of standby letters of credit. Management did not anticipate losses on these instruments. Ordinary-course litigation was not expected to have a material adverse effect; no existing claim was identified as individually material.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether rising funding costs and deposit repricing continue to pressure net interest margin and earnings.
- The size, duration and potential capital effect of unrealized securities losses, and whether any become credit-related impairments.
- Post-acquisition loan performance, integration costs and realized benefits from Delta and Jefferson Bank.
- Credit trends in agriculture, commercial real estate and hospitality, including criticized loans, nonperformers and charge-offs.
- Liquidity and capital levels under adverse scenarios, particularly alongside loan commitments and reliance on wholesale funding.