FIRST MID BANCSHARES, INC. quarterly report, Q2 FY2021

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First Mid Bancshares, Inc. — Q2 2021 Form 10-Q

Business context and reporting period

Unaudited results cover the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. First Mid is a bank holding company with banking, wealth management and insurance operations, reported as one segment. Results are materially affected by the February 22 acquisition of LINCO Bancshares and the addition of Providence Bank operations; comparisons with 2020 are therefore not purely organic.

Financial performance and condition

  • Q2 earnings: Net income was $12.2 million versus $10.1 million a year earlier; diluted EPS was $0.68 versus $0.60. Net interest income increased to $42.7 million from $31.6 million. The quarter included a $0.6 million provision reversal, compared with $6.1 million of provision expense in Q2 2020.
  • First-half earnings: Net income was $16.3 million versus $20.1 million, down about 18.9%; diluted EPS was $0.92 versus $1.20. Reported net interest income rose to $79.5 million from $61.5 million, while other income increased 18.5% to $36.0 million. Other expense increased 55.3% to $83.6 million.
  • Margins and returns: Tax-equivalent net interest margin was 3.18% for the first half, down from 3.37% in 2020; Q2 tax-equivalent margin was 3.22% versus 3.25%. Annualized first-half return on average assets was 0.59% versus 0.99%, and return on average common equity was 5.44% versus 7.48%.
  • Balance-sheet growth: Total assets were $5.79 billion, up from $4.73 billion at year-end. Net loans were $3.74 billion, up $644 million; deposits were $4.74 billion, up $1.05 billion. Management attributes much of the growth to the LINCO/Providence acquisition. Available-for-sale securities were $1.22 billion, up from $879 million.
  • Credit quality: The allowance for credit losses was $54.6 million, or 1.44% of loans (1.50% excluding fully guaranteed PPP loans). Nonperforming loans were $30.4 million, or 0.80% of loans, versus $28.1 million and 0.90% at year-end. Net charge-offs for the first half were $963,000. Other real estate owned rose to $7.2 million from $2.5 million.
  • Cash flow and liquidity: First-half operating cash flow was $1.4 million, investing cash outflow $63.1 million and financing cash outflow $14.8 million. Cash and cash equivalents declined $76.5 million to $340.7 million. Management reported $2.3 billion of total available liquidity capacity and described liquidity as sufficient.
  • Debt and capital: At June 30, repurchase agreements were $151.4 million, FHLB borrowings $112.8 million, subordinated debt $94.3 million and junior subordinated debentures $19.1 million. The company reported a 13.91% total risk-based capital ratio and 10.92% Tier 1 risk-based ratio; First Mid Bank met its well-capitalized thresholds. The company’s total stockholders’ equity was $616.1 million.

Material changes versus comparable periods

  • First-half net income declined despite higher net interest income and other income, principally as expenses rose substantially. LINCO acquisition costs were approximately $8.8 million pretax, including $8.3 million recognized in the first half; the filing also cites expenses from Providence Bank operations.
  • First-half net interest income growth was primarily acquisition-driven. Management said lower yields on loans and investments reduced net interest margin.
  • The first-half loan-loss provision was $11.6 million, broadly similar to 2020, but included an initial $11.5 million provision for acquired Providence Bank loans. Q2 itself recorded a provision reversal.
  • Capital ratios declined from year-end 2020, primarily due to the LINCO acquisition and dividends, partly offset by retained earnings. Accumulated other comprehensive income also fell by $8.3 million, net of tax, during the first half, reflecting available-for-sale securities valuation changes.
  • Cash dividends declared were $0.205 per share in Q2 2021 versus $0.40 in Q2 2020; first-half dividends declared were $0.41 versus $0.40.

Outlook, risks and notable items

  • Management described the financial position and underlying earnings capacity as strong, but said credit reserves are expected to remain elevated compared with recent historical levels. It did not provide specific earnings or margin guidance.
  • COVID-19 effects remain uncertain. The company reported $10.1 million of customer loan deferrals outstanding at June 30 and 2,492 PPP loans totaling $165.1 million. Management noted that pandemic-related economic weakness could impair borrower repayment, collateral values, liquidity, capital and earnings.
  • Risks include agricultural exposure (about $400.5 million of loans to agriculture-related borrowers, including $278.6 million in grain farming), hotels and motels ($130.6 million), and commercial real estate. Prolonged weak commodity prices, drought, or reduced travel could increase credit losses.
  • On July 28, 2021, after quarter-end, First Mid agreed to acquire Delta Bancshares for approximately $15.2 million cash and 2,282,511 First Mid shares. Completion was anticipated in Q4 2021, subject to regulatory and Delta shareholder approvals. Delta’s bank had about $697 million of assets, $484 million of loans and $546 million of deposits at June 30.
  • The company also expected to acquire approximately $225 million of loans and $280 million of deposits in the St. Louis market, with closing expected in September 2021. Ordinary-course litigation was not expected by management to have a material adverse effect.

Important facts for investors to verify

  • Track integration costs, expense trends and whether acquisition-driven revenue translates into improved earnings and returns.
  • Review credit performance, allowance adequacy and nonperforming assets, particularly in agriculture, commercial real estate and hospitality.
  • Confirm completion, consideration and integration outcomes for the Delta transaction and the planned St. Louis loan-and-deposit purchase.
  • Assess sensitivity of net interest margin and earnings to interest rates, funding costs, deposit flows and securities valuation changes.
  • Reconcile the filing’s commitment figures: MD&A cites $892 million of outstanding commitments, while the detailed off-balance-sheet table lists $949.8 million of unused commitments and lines of credit, plus $11.6 million of standby letters of credit.