First Mid Bancshares, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. First Mid Bancshares is a bank holding company operating through banking, wealth management and insurance subsidiaries, primarily in Illinois and Missouri. This unaudited filing covers the quarter and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. The company identifies COVID-19 as a source of substantial economic uncertainty.
Financial performance and condition
- Q3 earnings: Net income was $11.6 million, versus $11.7 million in Q3 2019. Diluted EPS was $0.69, compared with $0.70.
- Nine-month earnings: Net income was $31.7 million, down from $36.0 million; diluted EPS was $1.89 versus $2.15. The $15.5 million loan-loss provision, compared with $3.7 million in 2019, was the principal earnings pressure.
- Net interest: Nine-month net interest income was $94.0 million, down from $94.7 million. Tax-equivalent net interest margin declined to 3.30% from 3.66%; management cited lower yields on loans and investments. Q3 tax-equivalent net interest margin was 3.17%, versus 3.60%.
- Noninterest income and expense: Nine-month noninterest income increased 6.9% to $44.0 million, led by insurance commissions and mortgage banking. Service charges fell 25.9%. Noninterest expense decreased 4.3% to $80.8 million, partly due to lower occupancy, amortization and acquisition costs.
- Assets and lending: Total assets were $4.51 billion, up from $3.84 billion at year-end 2019. Loans before allowance were $3.24 billion, up 20.1%; growth included $183 million of loans purchased in the St. Louis market and $261.7 million of PPP loans outstanding. Net loans were $3.19 billion.
- Deposits and funding: Deposits were $3.62 billion, up from $2.92 billion. Noninterest-bearing deposits were $837.6 million. Cash and cash equivalents rose to $232.4 million from $85.1 million.
- Credit quality: The allowance for credit losses was $41.9 million, or 1.30% of loans (1.41% excluding fully guaranteed PPP loans), versus $26.9 million, or 1.02%, at September 2019. Nonperforming loans were $22.4 million, down from $27.8 million at year-end 2019; loans 30 or more days past due were 0.55% of loans. Nine-month net charge-offs were $2.2 million.
- Capital and liquidity: Stockholders’ equity was $561.0 million. The company’s total risk-based capital ratio was 15.73%, and First Mid Bank’s was 14.03%; the bank reported ratios meeting well-capitalized standards. Management reported $1.6 billion of total available liquidity sources and stated that liquidity was sufficient.
- Cash flow and distributions: For the first nine months, operating activities provided $33.1 million, investing activities used $519.6 million, and financing activities provided $633.9 million. Cash increased $147.3 million. Dividends paid were $6.3 million; declared dividends were $0.40 per share year to date.
Material changes and notable developments
- The company adopted CECL on January 1, 2020, recording a $717,000 reduction to retained earnings. The transition included a $1.7 million increase in the loan allowance and a $69,000 allowance for off-balance-sheet exposures. Management attributed the much higher year-to-date provision both to CECL and expected COVID-19-related losses.
- In April, First Mid Bank purchased $183 million of loans in the St. Louis metropolitan area; none were identified as purchased with deteriorated credit.
- On September 25, the company agreed to acquire LINCO Bancshares for aggregate consideration of $116.5 million in cash and 1,262,246 First Mid shares, subject to terms and adjustments. LINCO is also to pay a $13 million special dividend before closing. Completion was anticipated in Q1 2021, subject to customary and regulatory conditions.
- After quarter-end, on October 6, the company issued $96 million of unsecured subordinated notes due 2030. The notes bear 3.95% interest through October 2025 and then float at three-month Term SOFR plus 383 basis points, subject to the indenture’s terms.
Outlook, risks and contingencies
- Management described the company’s financial position and existing operations as strong, but expects credit reserves to remain elevated amid economic uncertainty. The filing does not provide specific earnings or margin guidance.
- As of September 30, $181.6 million of customer loans had been deferred under COVID-19 accommodation programs. The bank had 2,631 PPP loans totaling $261.7 million outstanding; management understood these to be fully government-guaranteed.
- Key credit exposures include agriculture ($397.3 million, including $326.9 million in grain farming), hotels and motels ($124.6 million), lessors of non-residential buildings ($411.6 million), residential building lessors ($298.1 million), nursing care facilities ($112.4 million), and other gambling industries ($122.7 million). Prolonged weakness in travel, business activity, agriculture or local economies could increase problem loans and losses.
- Management warned that pandemic duration and severity could impair borrower repayment, collateral values, liquidity, revenue and operations, and could lead to further credit provisions or asset impairment. The company also noted operational, third-party, cybersecurity and payment-fraud risks.
- Off-balance-sheet commitments to extend credit and lines of credit totaled $648.4 million; standby letters of credit totaled $11.1 million. Management did not expect losses from these instruments. Ordinary-course litigation was not considered likely to have a material adverse effect.
- Interest-rate sensitivity analysis showed the company asset-sensitive on a cumulative basis through twelve months; management cautioned that further rate decreases could adversely affect net interest income. The filing reported no material change in market risk since year-end 2019.
Important facts for investors to verify
- How loan deferrals, PPP forgiveness and the economic recovery affect delinquency, charge-offs, nonperforming loans and future CECL provisions.
- Whether margin pressure persists as low asset yields interact with deposit pricing and funding costs.
- LINCO merger approvals, closing timing, final consideration and integration plans.
- The use and capital impact of the $96 million subordinated-note proceeds, including the floating-rate terms beginning in 2025.
- The evolution of concentrations in agriculture, hospitality, commercial real estate and other exposed industries, and the adequacy of reserves and collateral valuations.
- Liquidity, deposit stability and capital ratios as loan growth and merger-related funding needs develop.