FIRST MID BANCSHARES, INC. quarterly report, Q2 FY2020

Business context and reporting period

First Mid Bancshares, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company is a one-segment banking and financial-services business operating primarily in Illinois and Missouri. Amounts below are in millions of dollars unless otherwise noted.

Financial performance and condition

• Q2 net income declined about 8% year over year; six-month net income declined about 17%. Higher credit-loss provision was the principal earnings headwind.
• Six-month tax-equivalent net interest margin was 3.37%, down from 3.69%. Management attributed the decline mainly to lower yields on loans and investments. Q2 tax-equivalent net interest yield was 3.25%, versus 3.64% a year earlier.
• Other income rose 7.7% for the six months, led by insurance commissions, mortgage banking revenue and securities gains; lower service charges partly offset the gains. Other expense fell 8.0%, including lower acquisition, occupancy and ATM/debit-card costs.
• At June 30, total assets were $4.46 billion, loans net of allowance were $3.16 billion, deposits were $3.39 billion and stockholders’ equity was $549.3 million. Compared with year-end 2019, loans net of allowance increased about $494 million and deposits increased about $468 million.
• Cash and cash equivalents were $238.5 million, up $153.4 million from year-end. Six-month operating cash flow was $25.2 million; investing cash outflow was $461.5 million and financing cash inflow was $589.7 million.
• The allowance for credit losses was $38.4 million, or 1.20% of loans (1.30% excluding fully guaranteed PPP loans), versus $26.9 million and 1.04% at year-end 2019. Six-month net charge-offs were $1.8 million.
• Regulatory capital remained above minimum requirements. Company Tier 1 and total risk-based capital ratios were 14.07% and 15.19%; First Mid Bank’s ratios were 12.65% and 13.79%. The bank qualified as well-capitalized.
• Borrowings included $350.3 million in overnight repurchase agreements, $103.9 million in FHLB advances and $18.9 million in junior subordinated debentures. Repurchase agreements rose $142.2 million from year-end; FHLB advances declined about $10 million.

Material changes and notable items

• The bank acquired $183 million of loans in the St. Louis metro market on April 21; the filing reports no purchased loans with deteriorated credit.
• Commercial and industrial loans grew to $811 million from $529 million at year-end, and total loans grew 18.9% on the portfolio basis reported in MD&A. Loan growth includes 2,508 outstanding PPP loans totaling $259.3 million.
• The company adopted the CECL credit-loss standard on January 1, recording a $717,000 reduction to retained earnings. The transition increased the loan allowance by $1.7 million and established a $69,000 off-balance-sheet credit allowance; the filing also describes an $833,000 allowance adjustment for previously credit-impaired acquired loans.
• Accumulated other comprehensive income increased to $17.1 million from $8.4 million at year-end, primarily reflecting unrealized gains on available-for-sale securities.
• The quarterly dividend declared was $0.40 per share, versus $0.36 in Q2 2019. No shares were repurchased during the quarter.

Outlook, risks and contingencies

• Management described the financial position and underlying earning capacity as strong, but said the uncertain COVID-19 outlook could produce more adverse effects than anticipated. It expects credit reserves to remain elevated relative to recent historical trends. No quantitative earnings or margin guidance was provided.
• As of June 30, $368 million of commercial loans had been deferred under a 90-day program, primarily for hotel and restaurant borrowers. A separate 180-day consumer and residential mortgage program covered 230 customers with $3.9 million in balances. These short-term accommodations were not treated as troubled debt restructurings under the cited interagency guidance.
• COVID-19-sensitive exposures include agriculture-related borrowers ($400.8 million, including $330.5 million in grain farming), hotels and motels ($126.5 million), nursing care facilities ($117.4 million), and other gambling industries ($124.9 million). Management warned that prolonged economic stress, reduced travel, lower commodity prices or reduced government support could increase problem loans and losses.
• Management cited $140 million of loan losses as the amount the company could absorb before capital fell below regulatory well-capitalized levels. The company elected regulatory relief that delays much of CECL’s capital impact.
• The filing says liquidity is sufficient, but its COVID-19 discussion states total available liquidity capacity of “$1.5 million,” an amount that appears inconsistent with the listed facilities: $100 million of overnight federal-funds lines, approximately $517 million of additional FHLB borrowing capacity and a $15 million undrawn corporate credit line. Verify the stated liquidity figure.
• Interest-rate sensitivity analysis shows the company asset-sensitive cumulatively through 12 months; management cautioned that further rate decreases could pressure net interest income. Credit, collateral-value, liquidity, operational, cyber and payment-fraud risks may be exacerbated by the pandemic. Ordinary-course litigation was not expected by management to have a material adverse effect.

Most important facts for investors to verify

1. Reconcile the filing’s stated $1.5 million of available liquidity with its disclosed borrowing facilities and collateral capacity.
2. Track performance of deferred commercial loans, PPP forgiveness and repayment, and exposures to hotels, restaurants, agriculture and other stressed sectors.
3. Assess whether the $38.4 million allowance and CECL assumptions remain adequate as economic forecasts and borrower conditions change.
4. Monitor loan yields, deposit costs and net interest margin following rate cuts, along with the effects of rapid loan and deposit growth.
5. Confirm cash-flow disclosures against the financial statements: the statements report a $153.4 million increase in cash and equivalents, while the MD&A liquidity discussion describes a $461.5 million increase.