First Mid-Illinois Bancshares, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts below are in millions unless stated otherwise. The company is a bank holding company operating primarily in central and southern Illinois. Comparisons with 2015 are affected by the 12-branch Old National Bank acquisition, which closed in August 2015, and the December 2015 acquisition of Illiana Insurance.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $15.97 | $13.34 | $32.06 | $25.96 |
| Provision for loan losses | $0.73 | $0.14 | $0.85 | $0.41 |
| Other income | $6.46 | $4.54 | $13.10 | $9.34 |
| Other expense | $14.14 | $11.23 | $29.31 | $22.03 |
| Net income | $4.93 | $4.16 | $9.74 | $8.20 |
| Diluted EPS | $0.50 | $0.49 | $0.99 | $0.97 |
- For the first half, net income rose 18.8%; net interest income rose 23.5%, largely on higher average earning assets, while the net interest margin declined to 3.27% from 3.40% as asset yields weakened.
- Non-interest income increased 40.4% in the first half, benefiting from insurance commissions, ATM/debit activity, service charges, brokerage, and securities gains. Non-interest expense rose 33.0%, reflecting acquired operations, higher staffing and occupancy costs, intangible amortization, and $242,000 of costs related to the pending First Clover Leaf merger.
- Annualized first-half return on average assets was 0.92% (1.01% in 2015); return on average common equity was 9.76% (9.89% in 2015).
Financial position, cash flow, and credit
- At June 30, total assets were $2.12 billion, net loans $1.30 billion, and deposits $1.70 billion. Since year-end, net loans increased $32.3 million, while deposits declined $28.4 million.
- Cash and cash equivalents were $53.1 million, down $62.7 million since year-end. First-half operating cash flow was $12.5 million; investing used $65.6 million, including a $25 million bank-owned life insurance investment and net loan growth; financing used $9.6 million.
- Total borrowings reported on the balance sheet included $131.1 million of overnight repurchase agreements, $40.0 million of FHLB advances, and $20.6 million of junior subordinated debentures. FHLB advances doubled from year-end. Management said liquidity remained sufficient; available sources included $35 million in federal funds lines, approximately $97.3 million of additional FHLB capacity, and an undrawn $15 million revolving line.
- The allowance for loan losses was $15.2 million, or 1.15% of loans. First-half provision was $846,000 and net charge-offs were $258,000. Nonperforming loans were $4.63 million, up from $4.01 million at year-end; loans 30 or more days past due were 0.28% of loans.
- Regulatory capital ratios remained above stated well-capitalized thresholds for the bank: total risk-based capital 13.43%, Tier 1 risk-based capital 12.41%, and Tier 1 leverage 8.93%. Company total risk-based capital was 14.11%.
Material developments, outlook, and risks
- The Series C preferred stock converted mandatorily on May 16, 2016, into approximately 1.36 million common shares; preferred dividends ceased accruing after conversion.
- The company agreed to acquire First Clover Leaf Financial Corp. in April 2016, with closing anticipated in the second half of 2016, subject to shareholder approvals and customary conditions. Federal Reserve approval was received July 15, 2016.
- A shareholder lawsuit challenges the proposed merger, alleging fiduciary-duty and disclosure shortcomings and seeking to enjoin the transaction. The defendants moved to dismiss and stated they intend to defend the case.
- Management provided no specific earnings or financial guidance. It noted pressure on asset yields from prolonged low interest rates and competition; its rate-sensitivity analysis showed liability sensitivity through the 12-month horizon, meaning rate increases could adversely affect net interest income.
- Credit exposures include agriculture (including $162.7 million in other grain-farming loans), hotels and motels, and commercial and residential property lessors. Management identified prolonged low commodity prices, drought or lower crop yields, and reduced regional travel as potential sources of higher problem loans and losses.
- One trust-preferred security had a $1.35 million unrealized loss and a $1.75 million fair value; it remained in payment-in-kind status and was valued using Level 3 inputs. The company recorded no new other-than-temporary impairment in the period but warned future defaults or deferrals could affect earnings.
- The company is evaluating several new accounting standards, including CECL, which was expected to require a transition adjustment; management had not quantified its impact.
Investor verification points
- Separate acquisition-driven growth from underlying organic growth, especially in revenue, deposits, loans, staffing, and expenses.
- Track net interest margin, asset yields, funding costs, and the effect of interest-rate changes on earnings.
- Monitor nonperforming and past-due loans, charge-offs, reserve coverage, and credit conditions in agriculture and commercial real estate.
- Confirm First Clover Leaf merger approvals, closing timing, integration costs, and any developments in the shareholder lawsuit.
- Assess liquidity after the cash decline and increased FHLB borrowing, including availability and terms of contingent funding sources.
- Evaluate the valuation and credit performance of the trust-preferred investment and the eventual effect of CECL adoption.