First Mid Bancshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results; First Mid operates as one reporting segment. Amounts below are USD unless stated otherwise.
Financial performance and condition
- Earnings: Net income was $10.0 million, down 24.9% from $13.3 million in Q1 2019. Diluted EPS was $0.60 versus $0.80. Return on average assets was 1.05% (1.38% prior year); return on average common equity was 7.48% (11.02%).
- Revenue and margin: Net interest income was $29.9 million, down from $32.3 million. Tax-equivalent net interest income was $30.4 million versus $32.8 million, and tax-equivalent net interest margin declined to 3.51% from 3.74%, primarily reflecting lower loan and investment yields and reduced investment balances. Noninterest income rose 12.8% to $16.5 million, supported by higher insurance commissions and $531,000 of securities gains.
- Credit costs and expenses: Provision for loan losses increased to $5.5 million from $947,000, reflecting CECL adoption and COVID-19-related expected losses. Noninterest expense was $27.7 million versus $28.3 million. Income tax expense was $3.2 million; the effective tax rate was 24.1%.
- Loans and credit quality: Gross loans were approximately $2.74 billion, up about $49.0 million from year-end; net loans were $2.71 billion. Allowance for credit losses was $32.9 million, or 1.20% of loans, versus 1.03% in Q1 2019. Net charge-offs were $1.2 million versus $432,000. Nonperforming loans were $24.5 million, down from $27.8 million at December 31, 2019; loans 30 or more days past due were 1.43% of loans.
- Balance sheet and liquidity: Total assets were $3.86 billion, compared with $3.84 billion at year-end. Deposits were $2.91 billion, down $8.7 million; cash and cash equivalents were $182.0 million, up $97.0 million. Management reported total available liquidity sources of $798.8 million at quarter-end.
- Debt and capital: Repurchase agreements were $231.6 million, FHLB borrowings $119.9 million, other borrowings $5.0 million, and junior subordinated debentures $18.9 million. Total stockholders’ equity was $533.1 million. Company total risk-based capital was 16.13% and Tier 1 risk-based capital was 15.05%; First Mid Bank’s total risk-based capital ratio was 14.46%. Management stated the bank remained well-capitalized.
- Cash flow: Operating activities provided $16.6 million, investing activities provided $59.4 million, and financing activities provided $20.9 million. Cash and cash equivalents increased $96.9 million during the quarter.
Material changes and notable items
- First Mid adopted CECL on January 1, 2020. Adoption increased the loan allowance by approximately $1.7 million and the off-balance-sheet credit allowance by $69,000, and reduced retained earnings by approximately $717,000, net of tax. The reported Q1 provision also reflects the changed economic outlook.
- Available-for-sale securities declined to $617.8 million from $686.0 million at year-end; held-to-maturity securities declined to $24.6 million from $69.5 million. The company recorded a $3.2 million after-tax other comprehensive loss, largely related to securities valuation changes.
- After quarter-end, First Mid Bank completed an April 21 purchase of $183 million of loans in the St. Louis metro market; the filing says none were identified as purchased credit-deteriorated loans.
Outlook, COVID-19, and risks
- Management described the company’s financial position and existing operations’ earnings capacity as strong, but said uncertainty prevented a reliable assessment of the pandemic’s duration and economic effects. It expected credit reserve levels to remain elevated versus recent historical trends; the filing provides no earnings or EPS guidance.
- At March 31, $30.3 million of commercial loans had 90-day deferrals. By April 17, a further 67 loans totaling $98 million had been deferred. Residential mortgage deferrals totaled $3.9 million through April 13. By April 17, the company had processed and received SBA approval for 1,384 PPP loans totaling $234.9 million; PPP loans carry a 1% rate and management expected most to be forgiven.
- Management reported capacity to absorb approximately $140 million of total loan losses before capital fell below regulatory well-capitalized levels, and said liquidity sources were adequate. These are management assessments, not assurances against future losses or funding pressure.
- Key exposures include COVID-affected hospitality, restaurants, retail and other businesses; the company had $119.7 million of hotel and motel loans and meaningful commercial real estate and commercial-and-industrial exposures. Agricultural lending is also material: $381.6 million of loans were to agriculture-related borrowers, including $309.4 million tied to corn and other grain farming. Management cited potential borrower stress, collateral-value declines, unemployment, operational disruption, cyber and payment-fraud risks, and possible future asset impairment.
- The company reported no material change in market risk since year-end, and management said ordinary-course litigation was not expected to have a material adverse effect. No dividends were paid in Q1; no shares were repurchased during the quarter.
Most important facts for investors to verify
- Whether COVID-related deferrals, PPP lending, and worsening economic conditions lead to higher delinquencies, charge-offs, or further reserve increases.
- Whether loan concentrations in hotels, restaurants, commercial real estate, agriculture, and other exposed sectors remain supportable as borrower performance and collateral values change.
- How lower interest rates and asset yields affect net interest margin, and whether deposit trends and wholesale funding costs remain favorable.
- Whether reported liquidity capacity and regulatory capital remain adequate under more adverse scenarios, including the effects of CECL transition relief.
- The realized performance and integration of the $183 million post-quarter loan acquisition, and the ultimate forgiveness, servicing economics, and credit treatment of PPP loans.
- The filing’s income statement reports Q1 other expense of $27.731 million, while the MD&A gives $27.748 million in one comparison table and $27.7 million elsewhere; investors should verify the intended figure against the filed financial statements.