First Mid Bancshares, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Comparisons are with Q1 2020 for operating results and December 31, 2020 for balance-sheet changes. The acquisition of LINCO Bancshares, Inc. closed on February 22, 2021; its subsidiary, Providence Bank, is included in results from the acquisition date. Accordingly, reported year-over-year results are not fully comparable.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Interest income | $40.8 million | $34.7 million |
| Net interest income | $36.8 million | $29.9 million |
| Tax-equivalent net interest margin | 3.16% | 3.51% |
| Provision for loan losses | $12.1 million | $5.5 million |
| Noninterest income | $17.7 million | $16.5 million |
| Noninterest expense | $37.6 million | $27.7 million |
| Income before taxes | $4.8 million | $13.2 million |
| Net income / diluted EPS | $4.1 million / $0.24 | $10.0 million / $0.60 |
| Net cash from operating activities | $21.6 million | $16.6 million |
Net income declined $5.9 million year over year. Higher net interest income and noninterest income were more than offset by the larger loan-loss provision and higher operating expenses. The company cited acquisition-related costs and Providence Bank expenses as key expense drivers; $2.6 million of LINCO acquisition costs was recognized in Q1, within approximately $3.1 million of total pretax acquisition costs recognized to date.
Financial position, credit, and liquidity
- Scale and funding: Total assets were $5.84 billion, up $1.11 billion from year-end. Loans were $3.94 billion and deposits $4.74 billion; management attributed much of the increase to the LINCO/Providence acquisition. Cash and cash equivalents were $409.5 million.
- Credit quality: The allowance for credit losses was $55.4 million, or 1.41% of loans (1.50% excluding fully guaranteed PPP loans). Net charge-offs were $0.7 million, or 0.08% of average loans annualized. Nonperforming loans were $32.0 million (0.81% of loans); nonperforming loans plus repossessed assets were $45.3 million. Repossessed assets rose to $13.3 million, primarily reflecting assets acquired with Providence Bank.
- Cash flow: Investing activities used $81.3 million, including $177.1 million of available-for-sale security purchases and a $25 million investment in bank-owned life insurance. Financing activities provided $52.0 million. Cash and cash equivalents decreased $7.7 million during the quarter.
- Debt and capital: Period-end borrowings included $212.5 million of repurchase agreements, $116.9 million of FHLB borrowings, $94.3 million of subordinated debt, and $19.1 million of junior subordinated debentures. The company’s total risk-based capital ratio was 13.75% and Tier 1 risk-based capital ratio was 10.74%; subsidiary banks exceeded applicable well-capitalized thresholds. Stockholders’ equity was $601.9 million.
- Liquidity: Management reported $2.3 billion of total available liquidity capacity, including $812 million of additional FHLB borrowing capacity and a $15 million undrawn company credit line. Total outstanding commitments to extend credit and letters of credit were approximately $850 million.
Material changes and management commentary
- The LINCO acquisition was funded with $103.5 million cash and 1,262,246 First Mid shares; approximately $8.9 million of provisional goodwill was recorded. Acquired loans were approximately $838 million. Purchase accounting and integration benefits and costs remain subject to change; acquisition fair values may be refined for up to one year after closing.
- Net interest income increased, principally due to the acquired bank and higher average earning assets. Net interest margin fell 35 basis points year over year, which management attributed primarily to lower loan and investment yields.
- Available-for-sale securities generated a $12.0 million after-tax unrealized loss in other comprehensive income, reducing accumulated other comprehensive income from $17.1 million at year-end to $5.1 million.
- Management described the financial position and underlying earning capacity as strong, but expects credit reserves to remain elevated relative to recent historical trends because of economic uncertainty. It did not provide specific earnings or margin guidance; Q1 results are not necessarily indicative of full-year results.
- COVID-19 payment deferrals outstanding were $50.6 million. The company reported 2,732 PPP loans totaling $259.7 million, which it considers fully guaranteed by the U.S. government. Management cited continuing uncertainty about the pandemic’s duration and potential effects on borrowers, collateral values, liquidity, capital, and earnings.
Risks, contingencies, and unusual items
- Credit exposures include agriculture and grain farming, hotels and motels, commercial and residential property lessors, nursing care facilities, and gambling-related businesses. Prolonged weak commodity prices, crop disruption, reduced travel, or deterioration in local economic conditions could increase problem loans and losses.
- The company was cumulatively liability-sensitive through the one-year horizon in its static gap analysis; management said future rate increases could adversely affect net interest income. Continued low rates and loan-yield competition may also pressure margin.
- Unrealized securities losses could require impairment recognition if conditions change; management did not consider the March 31 losses other-than-temporary. Fair values of certain impaired loans, foreclosed assets, and mortgage servicing rights rely on less observable inputs.
- Ordinary-course litigation is pending, but management does not expect its resolution to have a material adverse effect. No specific material litigation outcome or contingency amount is stated in the filing.
Investor verification priorities
- Review subsequent credit performance of acquired Providence Bank loans, including nonperforming loans, foreclosed assets, charge-offs, and the adequacy of the allowance.
- Assess whether acquisition-related expenses decline and expected integration benefits emerge; verify purchase-accounting adjustments as fair values are finalized.
- Track net interest margin, deposit costs, loan yields, and sensitivity to interest-rate changes.
- Monitor concentrations and borrower performance in agriculture, lodging, real estate, nursing care, and gambling, as well as remaining COVID-19 deferrals and PPP exposures.
- Evaluate the effect of securities valuation changes on accumulated other comprehensive income and capital, alongside capital ratios after acquisition-related balance-sheet growth.