First Mid-Illinois Bancshares, Inc. — Q2 2015 Form 10-Q
Business context and period. The unaudited filing covers the three and six months ended June 30, 2015. The company is a one-segment banking organization operating primarily in central Illinois, with banking, insurance, trust and data-services subsidiaries. Interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2015 / June 30, 2015 | Comparison |
|---|---|---|
| Net income | $4.16 million for Q2; $8.20 million year to date | Q2: $4.03 million; six months: $7.64 million in 2014 |
| Net income available to common shareholders | $3.61 million for Q2; $7.10 million year to date | Q2: $2.93 million; six months: $5.43 million in 2014 |
| Diluted EPS available to common shareholders | $0.49 for Q2; $0.97 year to date | Q2: $0.48; six months: $0.91 in 2014 |
| Net interest income | $13.34 million for Q2; $25.96 million year to date | Q2: $12.81 million; six months: $25.36 million in 2014 |
| Net interest margin | 3.40% for the first six months | 3.43% for the first six months of 2014 |
| Total other income | $4.54 million for Q2; $9.34 million year to date | Q2: $4.99 million; six months: $9.47 million in 2014 |
| Total other expense | $11.23 million for Q2; $22.03 million year to date | Q2: $11.21 million; six months: $22.17 million in 2014 |
| Total assets | $1.634 billion | $1.607 billion at December 31, 2014 |
| Loans, net of allowance | $1.043 billion | $1.047 billion at December 31, 2014 |
| Total deposits | $1.266 billion | $1.272 billion at December 31, 2014 |
| Stockholders’ equity | $197.9 million | $164.9 million at December 31, 2014 |
For the first six months, return on average assets was 1.01% versus 0.96% in 2014; return on average common equity was 9.89% versus 10.84%. Loan growth on average supported higher net interest income, while lower loan and investment yields weighed on margin. The effective tax rate was 36.2%, down from 37.4%, primarily following a reduction in the company’s state tax rate.
Six-month cash flows were $7.1 million provided by operating activities, $31.8 million used in investing activities and $19.3 million provided by financing activities. Cash and cash equivalents decreased $5.4 million, to $46.3 million. The MD&A later says cash increased $5.4 million from year-end, which conflicts with the cash flow statement and balance sheet.
At June 30, total liabilities were $1.436 billion. Funding included $117.5 million of overnight repurchase agreements, $25.0 million of FHLB advances and $20.6 million of junior subordinated debentures. The company reported $35 million of overnight federal-funds lines, approximately $80.1 million of additional FHLB borrowing capacity subject to collateral, and a $15 million undrawn revolving credit facility. Management described liquidity as sufficient.
Material changes and notable items
- Capital raise: The company issued 1,392,859 common shares at $21 per share in a June offering, for approximately $29.25 million gross proceeds. Proceeds were intended to support the planned branch acquisition and general corporate purposes. Regulatory capital ratios increased; the company reported Tier 1 risk-based capital of 17.13% and total risk-based capital of 18.31%.
- Planned branch acquisition: First Mid Bank agreed to acquire certain assets and assume liabilities of 12 Old National Bank branches in southern Illinois. At December 31, 2014, the associated book loan and deposit balances were approximately $160 million and $502 million. Closing was expected in Q3 2015, subject to regulatory approval, financing and customary conditions.
- Credit quality: Nonperforming loans were $3.1 million, down from $4.5 million at year-end 2014 and $4.8 million a year earlier. The allowance was $13.9 million, or 1.32% of loans. Six-month net charge-offs rose to $159,000 from $19,000, including a $251,000 consumer-loan charge-off.
- Revenue mix: Six-month securities gains fell to $230,000 from $734,000. Mortgage banking revenue rose to $377,000 from $256,000, and insurance commissions rose to $1.11 million from $999,000. Service charges declined modestly.
- Securities and equity: Available-for-sale securities were $421.9 million; held-to-maturity securities were $44.0 million at amortized cost. Six-month other comprehensive loss was $19,000, while Q2 other comprehensive loss was $2.90 million, largely reflecting available-for-sale securities valuation changes.
Outlook, risks and unusual items
- The filing provides no formal earnings or financial guidance. Management noted pressure on asset yields from prolonged low interest rates and loan competition; its rate-sensitivity analysis showed the company liability-sensitive cumulatively over the next 12 months, so rising rates could adversely affect net interest income.
- Agriculture is a key geographic and credit exposure: loans to agriculture-related borrowers totaled $172.0 million, including $144.7 million in other grain farming. Prolonged low commodity prices, drought, lower crop yields or reduced government support could increase problem loans. The filing also identifies hotel/motel and real-estate-lessor exposures.
- The company held one pooled trust-preferred security with a $2.14 million fair value and a $1.06 million unrealized loss. It was in payment-in-kind status, with cash interest not being received; management projected roughly two more quarters in that status. Further defaults, deferrals or downgrades could cause additional impairment and affect earnings.
- Management identified integration, asset-quality, employee/customer-retention and execution risks associated with the pending branch purchase. The company also had $269 million of outstanding commitments and letters of credit, which create potential credit, interest-rate and liquidity exposure; management said it did not anticipate losses.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No legal proceedings were reported.
Important facts for investors to verify
- Whether the 12-branch acquisition closed as expected, the final purchase terms and financing, and actual acquired loan and deposit balances.
- Whether acquired assets, integration costs or deposit retention materially differ from management’s expectations.
- The company’s credit trends, particularly agriculture-related exposures, consumer charge-offs, nonperforming loans and allowance adequacy.
- Developments in the trust-preferred security’s payment-in-kind status, expected cash flows and impairment assessment.
- The cash-flow discrepancy: the statements show cash decreased $5.4 million, while one MD&A statement says it increased by that amount.
- Capital and liquidity after the acquisition, including actual use of offering proceeds and the availability of borrowing capacity.