First Mid-Illinois Bancshares, Inc. — Q1 2017 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. The regional banking company also operates insurance, trust, brokerage and related businesses. First Clover Leaf, acquired in September 2016, materially expanded the business, so year-over-year comparisons reflect both acquisition growth and associated costs.
Financial performance and position
- Income: Net interest income rose 41.6% to $22.8 million. Net interest margin increased to 3.50% from 3.27%, with management citing higher earning assets and acquisition-related accretion. Other income was $7.5 million, up $0.9 million (12.8%).
- Profit: Net income increased to $6.3 million from $4.8 million; diluted EPS was $0.50 versus $0.49. The 2016 comparison included $0.55 million of preferred dividends. Annualized return on average assets was 0.88% (0.91% in Q1 2016); return on average common equity was 8.77% (9.35%).
- Expenses and credit costs: Noninterest expense rose 26.6% to $19.2 million, including approximately $1.7 million of merger-related costs. Provision for loan losses increased to $1.7 million from $0.1 million; net charge-offs were $0.6 million versus net recoveries of $0.05 million.
- Assets and lending: Total assets were $2.85 billion, down from $2.88 billion at year-end. Net loans were $1.78 billion, down $31.8 million, mainly due to seasonal agricultural paydowns and loan payoffs. Available-for-sale securities were $694.3 million, up from $619.8 million.
- Deposits, debt and liquidity: Deposits were essentially unchanged at $2.33 billion. Repurchase agreements fell $41.9 million to $143.9 million; FHLB borrowings remained about $40.1 million. Total cash and cash equivalents fell $62.7 million to $113.3 million. Operating cash flow was $11.6 million; investing and financing activities used $27.3 million and $46.9 million, respectively. Management said liquidity was sufficient and reported $166.5 million of additional FHLB borrowing capacity, subject to collateral.
- Capital: Stockholders’ equity was $290.7 million, up from $280.7 million. Company Tier 1 risk-based capital was 12.07%; total risk-based capital was 12.89%. Management reported that the company and bank met capital requirements, and the bank qualified as well-capitalized.
Material changes, outlook and risks
- Acquisition-driven growth lifted average earning assets and deposits, but also increased staffing, occupancy, amortization and operating costs. Management reported 590 full-time equivalent employees versus 516 a year earlier.
- Asset quality weakened: nonperforming loans were $27.7 million, compared with $18.2 million at year-end and $4.3 million a year earlier. Nonaccrual loans rose to $21.5 million, primarily due to three loans to one borrower totaling $9.2 million, secured by real estate and inventory. The allowance was $17.8 million, or 65% of nonperforming loans.
- Management identified agricultural lending as a key concentration and warned that prolonged low commodity prices, drought, reduced crop yields or reduced government assistance could increase losses. Other disclosed exposures include hotels and motels and commercial and residential property lessors.
- Interest-rate risk is material: static gap analysis showed the company liability-sensitive cumulatively through 12 months, which management said could make rate increases adverse to net interest income. Management also noted pressure on asset yields from low rates and loan competition. No specific earnings or revenue guidance was provided; interim results are not necessarily indicative of full-year results.
- The filing reports an unresolved shareholder lawsuit challenging the First Clover Leaf merger, alleging fiduciary-duty breaches, inadequate consideration and insufficient proxy disclosures. The company and individual defendants dispute the claims, have moved to dismiss and intend to defend; potential damages are not clearly quantified in the filing.
- The company reported no material change in market risk since year-end. It early adopted ASU 2017-08 with no significant impact; management was still evaluating the potential effects of CECL and other forthcoming accounting standards.
Important facts for investors to verify
- Whether the $9.2 million single-borrower exposure is resolved and whether nonperforming loans, charge-offs and provision expense stabilize.
- How much of earnings growth is sustainable after separating acquisition effects, purchase-accounting accretion and the $1.7 million of merger-related costs.
- Whether deposit funding, cash balances and borrowing capacity remain adequate as repurchase-agreement balances and seasonal funding needs change.
- How interest-rate changes affect net interest margin, funding costs and securities values, and whether the trust-preferred investment incurs further impairment.
- The status and possible financial consequences of the merger-related lawsuit, which are not quantified in this filing.