First Mid-Illinois Bancshares, Inc. — Q1 2018 10-Q
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2018, compared with Q1 2017; balance-sheet comparisons are with December 31, 2017. The company operates as a single reporting segment, primarily serving Illinois and Missouri.
After quarter-end, on May 1, 2018, the company completed its acquisition of First BancTrust Corporation. First Bank had reported assets of $479.2 million, loans of $369.6 million and deposits of $391.6 million at March 31. First Mid issued 1,643,900 shares and paid approximately $10.275 million in cash, including cash for fractional shares. Acquisition accounting remained incomplete as of the filing.
Key financial metrics
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior date |
|---|---|---|
| Total assets | $2.837 billion | $2.842 billion at Dec. 31, 2017 |
| Loans, net of allowance | $1.956 billion | $1.918 billion at Dec. 31, 2017 |
| Total deposits | $2.292 billion | $2.275 billion at Dec. 31, 2017 |
| Net interest income | $23.2 million | $22.8 million in Q1 2017 |
| Net interest margin | 3.57% | 3.50% in Q1 2017 |
| Other income | $7.5 million | $7.5 million in Q1 2017 |
| Other expense | $18.4 million | $19.2 million in Q1 2017 |
| Net income / diluted EPS | $8.4 million / $0.66 | $6.3 million / $0.50 in Q1 2017 |
| Cash and cash equivalents | $54.8 million | $88.9 million at Dec. 31, 2017 |
| Stockholders’ equity | $310.6 million | $308.0 million at Dec. 31, 2017 |
Net cash provided by operating activities was $10.7 million; investing activities used $38.3 million and financing activities used $6.5 million. Cash and cash equivalents declined $34.0 million during the quarter. Net income increased 33.9% year over year. Return on average assets was 1.18% and return on average common equity was 10.86%.
At March 31, borrowings included $132.4 million of repurchase agreements, $60.0 million of FHLB advances, $9.4 million of other borrowings and $24.0 million of junior subordinated debentures. The company reported Tier 1 risk-based capital of 12.17% and total risk-based capital of 13.07%; First Mid Bank met the regulatory standards to be considered well-capitalized.
Material changes versus comparable periods
- Net interest income rose $0.4 million, or 1.9%. Higher loan balances and yields on loans and investments supported the increase, while higher deposit costs partly offset it.
- Provision for loan losses declined to $1.1 million from $1.7 million; net charge-offs were $0.3 million versus $0.6 million in Q1 2017.
- Non-interest expense fell $0.8 million, mainly because Q1 2017 included approximately $1.7 million of First Clover Leaf merger costs. Q1 2018 included higher salaries, occupancy and legal expenses, including costs associated with the First Bank acquisition.
- Income tax expense was $2.9 million versus $3.1 million; the effective tax rate fell to 25.4% from 33.0%, primarily reflecting the federal corporate tax rate reduction to 21%, partly offset by a higher Illinois tax rate.
- Other comprehensive loss was $6.2 million, largely from unrealized losses on available-for-sale securities, compared with $3.2 million of other comprehensive income in Q1 2017. Comprehensive income was $2.2 million versus $9.5 million.
- Net loans increased $37.1 million from year-end, led by commercial real estate, commercial and industrial, and other loans; agricultural loans declined seasonally. Deposits rose $17.3 million from year-end.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified earnings or operating guidance. Management said results for the interim period are not necessarily indicative of full-year results.
- Management described liquidity as sufficient. Available sources included $35 million in overnight federal funds lines, approximately $127 million of additional FHLB borrowing capacity subject to collateral, and an undrawn $10 million revolving credit facility.
- The company was cumulatively liability-sensitive through the 12-month repricing horizon. Management cautioned that rising rates could adversely affect net interest income; continued low rates and competition could also pressure asset yields and margins.
- Credit exposure is concentrated in the regional economy and includes $196.9 million of agriculture-related loans, including $158.3 million to other grain farming; $118.4 million to hotels and motels; and significant lending to property lessors and gambling businesses. Management cited risks from prolonged low commodity prices, drought, reduced crop yields, or weaker travel demand.
- Nonperforming loans were $17.9 million, or 0.90% of loans, versus $27.7 million at March 31, 2017 and $17.5 million at year-end. Loans past due 30 days or more were 0.75% of loans, up from 0.56% at year-end. The allowance was $20.8 million, equal to 1.05% of loans and 116% of nonperforming loans.
- Available-for-sale securities had $13.0 million of gross unrealized losses at quarter-end. The company reported no Q1 other-than-temporary impairment, but warned that future deterioration in its trust-preferred security or other securities could require impairment charges. The trust-preferred security had a $2.5 million fair value and a $0.3 million unrealized loss.
- Off-balance-sheet commitments and lines of credit totaled $398.5 million, with standby letters of credit of $8.7 million. The company said it did not anticipate losses, but these commitments carry credit and liquidity risk.
- A purported First Bank stockholder class action concerning merger disclosures was withdrawn with the plaintiff’s claims dismissed with prejudice after supplemental disclosures; the parties contemplated a possible attorneys’ fee award. The filing states other ordinary-course litigation was not believed individually material, though outcomes could not be predicted.
Important facts for investors to verify
- Final purchase accounting, acquired asset and liability valuations, integration costs and performance following the May 1 First BancTrust acquisition.
- Credit quality trends, particularly past-due loans, commercial real estate and agricultural exposures, and the adequacy of the allowance as the loan book grows.
- Net interest margin and funding costs as interest rates change, including the company’s liability-sensitive position and deposit repricing.
- Liquidity and funding after the quarterly cash decline, including the use of borrowing capacity and the behavior of large or public-fund deposits.
- Changes in available-for-sale securities’ unrealized losses and any impairment or cash-flow developments in the trust-preferred investment.
- Any attorneys’ fee award or further proceedings related to the merger litigation, and the effect of acquisition-related legal and other expenses.