First Mid Bancshares, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2023, compared with Q1 2022; balance-sheet comparisons are against December 31, 2022. First Mid is a bank holding company operating across Illinois, Missouri and Texas. Figures below are in U.S. dollars.
Financial results and position
- Profit: Net income was $19.2 million, up 15.4% from $16.6 million. Diluted EPS rose to $0.93 from $0.86. Return on average assets was 1.15% versus 1.05%; return on average common equity was 12.11% versus 9.95%.
- Interest income and margin: Interest income increased to $63.7 million from $47.1 million, while interest expense rose to $20.5 million from $3.6 million. Net interest income declined to $43.2 million from $43.5 million; tax-equivalent net interest margin fell to 2.94% from 3.07%.
- Noninterest results: Other income was $22.5 million, up 6.6%, led by insurance commissions. Other expense rose 2.9% to $41.6 million. Income before tax was $24.9 million; the effective tax rate was 23.0%, versus 21.9%.
- Credit costs and quality: The company recorded a $0.8 million provision benefit, compared with a $3.0 million provision in Q1 2022. Net charge-offs were $53,000. Nonperforming loans were $15.2 million, or 0.32% of loans, versus $19.2 million, or 0.40%, at year-end 2022. The allowance for credit losses was $58.2 million, 1.22% of loans.
- Balance sheet: Total assets were $6.68 billion, down $61.4 million from year-end. Net loans were $4.70 billion, down $65.4 million; deposits were $5.03 billion, down $226.2 million. Stockholders’ equity was $661.9 million, up $28.7 million.
- Liquidity and funding: Cash and cash equivalents were $169.1 million. FHLB borrowings increased $130.0 million to $595.0 million; repurchase agreements were $228.7 million. Total borrowings, including subordinated and junior subordinated debt, were approximately $937.7 million. The company reported $100 million of overnight federal funds lines, about $416 million of additional FHLB borrowing capacity supported by excess collateral, and an undrawn $15 million revolving credit line.
- Cash flow: Operating activities provided $20.3 million and investing activities provided $89.7 million; financing activities used $93.3 million. Cash and cash equivalents increased $16.7 million during the quarter.
- Capital: Company Tier 1 risk-based capital was 12.88% and total risk-based capital was 15.74%. The bank’s ratios exceeded the stated well-capitalized thresholds.
Material changes versus comparable periods
- Higher loan yields and earning-asset yields were offset by sharply higher deposit and borrowing costs; interest-bearing deposit cost rose to 1.35% from 0.22%.
- Net income growth primarily reflected the lower credit-loss provision and higher noninterest income, partly offset by lower net interest income, higher expenses and taxes. Q1 2022 provision included an initial $2.0 million provision related to Jefferson Bank.
- Deposits declined during Q1, with management attributing much of the decrease to the runoff of a previously identified temporary large customer balance. Approximately $50 million of that balance remained at March 31, 2023.
- Available-for-sale securities had $194.2 million of gross unrealized losses at quarter-end, compared with $213.5 million at year-end 2022. Accumulated other comprehensive loss improved to $137.9 million from $151.5 million.
Outlook, risks and unusual items
- On March 21, 2023, First Mid agreed to acquire Blackhawk Bancorp in a stock transaction expected to involve approximately 3.33 million First Mid shares. Closing was anticipated in Q3 2023, subject to regulatory and other customary conditions. Integration, approvals, timing and transaction costs remain risks.
- Management said liquidity was sufficient and capital remained strong. It reported increased rate competition late in the quarter and used promotional rates to support deposit flows; approximately $93 million of deposits were moved into the IntraFi network for deposit insurance coverage. Uninsured deposits were 25.9% of deposits at quarter-end; management said approximately 99% of deposit accounts were below $250,000.
- The company was cumulatively liability-sensitive through the one-year horizon in its static gap analysis, indicating that further rate increases could adversely affect net interest income. Management also identified sensitivity to deposit flows, funding costs and securities valuations.
- Credit exposures warrant monitoring: agriculture-related borrowers totaled $548.8 million, including $422.4 million in grain farming; hotel and motel loans were $211.4 million. Commercial real estate represented 42.2% of loans, and loans to lessors of non-residential buildings totaled $945.7 million. Management cited risks from weak commodity prices, drought, reduced travel and adverse economic conditions.
- Unusual income included a bank-owned life insurance claim payout; management attributed the year-over-year increase in BOLI income partly to that payout, higher rates and insurance acquired with Jefferson Bank. Q1 2023 also included a $46,000 net securities loss.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. No material change in market risk since year-end was reported. Interim results are not necessarily indicative of full-year results; the filing provides no specific earnings guidance.
Important facts for investors to verify
- Whether deposit runoff stabilizes and funding costs continue to pressure net interest margin; monitor uninsured deposits and reliance on borrowings.
- Progress, regulatory approvals, expected completion and potential costs or dilution from the Blackhawk acquisition.
- Credit quality trends in commercial real estate, agriculture and hotel lending, including criticized loans, delinquencies, charge-offs and allowance adequacy.
- Interest-rate exposure and the potential effect of changes in rates on earnings and the fair value of the securities portfolio.
- Reconcile quarter-end borrowings, available liquidity sources and capital ratios with subsequent filings and regulatory disclosures.