Business context and reporting period
First Mid Bancshares, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company operates as a bank holding company and reports as one segment. Comparisons below are with the corresponding 2021 period or December 31, 2021, as applicable. Unless noted, dollar amounts are in millions.
The February 14, 2022 acquisition of Delta Bancshares added Jefferson Bank; Jefferson Bank was merged into First Mid Bank on June 11, 2022. The acquisition involved approximately $15.2 million cash and 2.29 million First Mid shares, and added $28.6 million of provisional goodwill.
Financial results and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $46.8 | $42.7 | $90.3 | $79.5 |
| Provision for credit losses | $0.9 | $(0.6) | $3.9 | $11.6 |
| Total other income | $18.6 | $18.3 | $39.7 | $36.0 |
| Total other expense | $41.5 | $46.0 | $81.9 | $83.6 |
| Net income | $17.8 | $12.2 | $34.4 | $16.3 |
| Diluted earnings per share | $0.86 | $0.68 | $1.72 | $0.92 |
- For the first six months, tax-equivalent net interest margin was 3.13%, down from 3.18% a year earlier; management attributed the decline primarily to lower yields on loans and investments. Net interest income growth primarily reflected the Jefferson Bank acquisition.
- Six-month noninterest income increased 10.1%, supported by wealth management, insurance commissions, service charges, and Jefferson Bank. Mortgage banking revenue fell 75.2% amid reduced refinancing and secondary-market loan sales.
- At June 30, total assets were $6.66 billion, up from $5.99 billion at year-end; net loans were $4.59 billion, up from $3.94 billion. Total deposits were $5.32 billion, versus $4.96 billion. Growth in loans and assets was primarily acquisition-related.
- Cash and cash equivalents were $137.5 million, down $31.1 million from year-end. For the six months, operating activities provided $20.1 million, investing activities used $93.8 million, and financing activities provided $42.6 million. Management reported $2.4 billion of available liquidity capacity.
- Borrowings and repurchase agreements totaled approximately $675.0 million, including $376.3 million of FHLB borrowings, $174.9 million of repurchase agreements, and $104.5 million of subordinated and junior subordinated debt. FHLB borrowings rose substantially from $86.4 million at year-end.
- Stockholders’ equity was $626.3 million, down 1.2% from year-end, despite net income and acquisition-related share issuance. A $127.4 million after-tax decline in available-for-sale securities value was the main pressure on equity; accumulated other comprehensive loss reached $128.2 million.
- Six-month return on average assets was 1.07% versus 0.59%; return on average common equity was 10.48% versus 5.44%. Company Tier 1 and total risk-based capital ratios were 12.16% and 15.05%, respectively; the bank remained above well-capitalized regulatory thresholds.
Material changes, outlook, and risks
- Nonperforming loans were $20.0 million, or 0.43% of loans, compared with $22.0 million and 0.55% at year-end 2021. The allowance for credit losses was $59.1 million, or 1.27% of loans, and 296% of nonperforming loans. Six-month net charge-offs were $0.3 million.
- The lower six-month provision versus 2021 primarily reflects the prior-year $11.5 million initial provision associated with LINCO, compared with a $2.0 million initial provision for Jefferson Bank in 2022. Delta acquisition costs of approximately $1.75 million pre-tax were recognized, including $1.5 million during 2022.
- Management described the company’s financial position and existing operations’ earning capabilities as strong and said it did not currently anticipate material changes or deficiencies in capital or liquidity. The filing provides no specific earnings or margin guidance; management cautioned that economic uncertainty could produce worse outcomes than expected.
- Interest-rate risk is notable: the company was liability-sensitive cumulatively through the one-year horizon in its static gap analysis, indicating that rising rates could adversely affect net interest income. Available-for-sale securities had $181.4 million of gross unrealized losses; management did not consider these other-than-temporary but acknowledged future impairment charges could be required.
- Credit exposures include $492.6 million to agriculture-related borrowers, including $366.6 million in grain farming; $203.0 million to hotels and motels; and $902.0 million to lessors of non-residential buildings. Management cited commodity prices, crop yields, travel demand, economic conditions, and commercial-property performance as potential credit risks.
- Outstanding lending commitments and lines were $1.14 billion, with $17.8 million of standby letters of credit. Management did not anticipate losses from these instruments. Ordinary-course litigation was not expected to have a material adverse effect. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and balance-sheet growth is sustainable after the Delta acquisition and integration, and how purchase accounting and provisional goodwill may change.
- Whether margin performance holds as rates change, given the disclosed one-year liability-sensitive position and increased FHLB borrowing.
- Whether the $181.4 million of unrealized securities losses remain temporary and how further market-value changes may affect reported equity and capital.
- Credit quality in agriculture, hotels and motels, and commercial real estate, including changes in criticized loans, nonperformers, charge-offs, and allowance adequacy.
- Liquidity and funding trends, including deposit behavior, near-term borrowing maturities, and the company’s ability to maintain capital ratios above regulatory requirements.