First Mid-Illinois Bancshares, Inc. — Q3 2017 Form 10-Q
Business context and period. The company is a bank holding company operating primarily in Illinois and Missouri. This unaudited report covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. Results include the First Clover Leaf acquisition, completed in September 2016, which makes year-over-year comparisons less directly comparable.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $22.9 million | $17.6 million | $69.6 million | $49.7 million |
| Provision for loan losses | $1.5 million | $1.1 million | $5.1 million | $1.9 million |
| Other income | $7.7 million | $6.9 million | $23.1 million | $20.0 million |
| Other expense | $17.9 million | $15.3 million | $55.1 million | $44.6 million |
| Net income | $7.6 million | $5.3 million | $22.1 million | $15.0 million |
| Diluted EPS | $0.61 | $0.51 | $1.76 | $1.50 |
- Nine-month net interest margin was 3.55%, up from 3.27%. Management attributed the improvement mainly to acquired earning assets, higher investment yields, and accretion income from First Clover Leaf.
- Nine-month return on average assets was 1.04% versus 0.92%; return on average common equity was 9.96% versus 9.34%.
- Nine-month effective tax rate was 32.3%, compared with 34.9%.
Financial position, liquidity, and cash flow
- At September 30, total assets were $2.79 billion, down from $2.88 billion at year-end 2016. Net loans increased to $1.85 billion from $1.81 billion; gross loans rose 2.3% to $1.87 billion.
- Total deposits were $2.22 billion, down from $2.33 billion. Cash and cash equivalents declined to $69.6 million from $175.9 million. Management said liquidity remained sufficient and identified additional funding sources, including $109 million of potential FHLB advances supported by excess collateral and $10 million available under a revolving credit line.
- Borrowings included $116.4 million of repurchase agreements, $87.1 million of FHLB borrowings, $31.3 million of other borrowings, and $24.0 million of junior subordinated debentures. FHLB borrowings increased from $40.1 million at year-end; repurchase agreements declined from $185.8 million.
- Stockholders’ equity was $311.4 million, up from $280.7 million. The company reported a 12.41% Tier 1 risk-based capital ratio and a 13.26% total risk-based capital ratio; First Mid Bank met the reported well-capitalized thresholds.
- For the nine months, operating activities provided $32.8 million; investing activities used $17.9 million and financing activities used $121.1 million. Cash and cash equivalents fell by $106.3 million overall, reflecting deposit and repurchase-agreement declines and other financing flows.
Material changes and notable items
- Nine-month net income increased $7.0 million year over year. Higher net interest income contributed $19.9 million and higher other income contributed $3.1 million, partly offset by a $3.1 million increase in loan-loss provision and a $10.4 million increase in other expense.
- Acquisition-related scale was a major factor in higher interest income, earning assets, deposits, and operating costs. First Clover Leaf acquisition costs of approximately $3.3 million pretax had been recognized through the period, including $2.0 million in 2017.
- Bank-owned life insurance income increased by $971,000 year to date, including a $511,000 death benefit. Other income also included tax refunds related to First Clover Leaf. These items are not necessarily recurring.
- The company sold 95,310 shares under its at-the-market program during the first nine months for approximately $3.34 million gross proceeds; about $16.66 million remained available under the $20 million authorization at September 30. No shares were repurchased during the period.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Credit quality weakened on several measures: nonperforming loans were $19.8 million versus $18.2 million at year-end 2016 and $15.8 million a year earlier; loans past due 30 days or more were 0.77% versus 0.45% at year-end. Nine-month net charge-offs were $3.2 million versus $0.3 million, while allowance coverage of nonperforming loans was 94% versus 102% a year earlier.
- Credit exposures include $207.5 million in agriculture-related loans, including $166.4 million in other grain farming, and $120.3 million in motel and hotel loans. Management cited low commodity prices, drought or reduced crop yields, and weaker regional travel as potential sources of increased credit losses. Commercial real estate and business lending are also material portfolio exposures.
- The company was liability-sensitive through the one-year horizon in its static gap analysis; management said rising rates could adversely affect net interest income. It also noted continued pressure on asset yields from low rates and loan competition.
- The $2.7 million fair value of a long-dated pooled trust preferred security is based on Level 3 valuation inputs; further defaults, deferrals, or credit deterioration could result in impairment and future earnings impact. The filing reported no new OTTI charge in 2017.
- Off-balance-sheet commitments included $428.6 million of unused commitments and lines of credit and $11.4 million of standby letters of credit. The company said it did not anticipate losses on these instruments.
- A shareholder lawsuit challenging the First Clover Leaf merger was dismissed with prejudice in July 2017; the plaintiff did not appeal by the deadline. Other ordinary-course litigation was described as not individually material, though outcomes cannot be predicted.
Important facts for investors to verify
- Whether elevated nonperforming loans, charge-offs, and past-due balances continue, and whether the allowance remains adequate relative to portfolio risk.
- How deposit outflows, lower cash balances, and increased FHLB funding evolve, including the availability and cost of contingent liquidity.
- How much earnings growth reflects recurring operations versus acquisition effects, accretion, the insurance death benefit, tax refunds, and securities gains.
- Whether concentrated agriculture, lodging, commercial real estate, and other business exposures experience further deterioration.
- The assumptions supporting the Level 3 trust preferred security valuation and any implications for future impairment.
- The remaining issuance under the at-the-market program and its potential effect on share count and per-share results.