First Mid-Illinois Bancshares, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; the period includes First Bank & Trust from its May 1 acquisition date. Management cautions interim results are not necessarily indicative of full-year results.
Financial performance
- Third quarter: Net interest income was $30.1 million, up from $22.9 million a year earlier. Net income rose to $8.2 million from $7.6 million, while diluted EPS declined to $0.54 from $0.61, reflecting a larger share count. Income before taxes was $11.0 million versus $11.1 million.
- Nine months: Net interest income was $80.7 million, up 16.0% from $69.6 million. Net income increased to $26.7 million from $22.1 million; diluted EPS was $1.90 versus $1.76. Net interest margin rose to 3.73% from 3.55%.
- Nine-month noninterest income increased 2.8% to $23.8 million. Noninterest expense increased 15.6% to $63.7 million, principally reflecting acquisition-related costs and higher salaries and benefits. First Bank acquisition expenses were $6.9 million pre-tax for the nine months, including $3.5 million in Q3.
- The effective tax rate for the nine months fell to 24.6% from 32.3%, primarily due to the federal corporate tax rate reduction, partly offset by the higher Illinois tax rate.
- Cash flow: For the nine months, operating activities provided $26.4 million; investing activities used $65.0 million; financing activities provided $14.1 million. Cash and cash equivalents declined $24.4 million to $64.5 million.
Financial position, capital and liquidity
- At September 30, total assets were $3.36 billion, compared with $2.84 billion at year-end 2017. Net loans were $2.38 billion, up $456.9 million; approximately $364.9 million of that increase came from First Bank. Deposits totaled $2.65 billion, up from $2.27 billion.
- Stockholders’ equity was $416.8 million, versus $308.0 million at year-end. The June public offering generated approximately $34.0 million in net proceeds; First Bank consideration also included $61.4 million in Company stock. Accumulated other comprehensive loss widened to $12.2 million, largely reflecting unrealized securities losses.
- Borrowings reported across repurchase agreements, federal funds, FHLB advances, other debt and subordinated debentures totaled approximately $278.1 million, compared with $249.7 million at year-end. FHLB advances were $120.7 million; repurchase agreements were $98.9 million.
- Management said liquidity was sufficient. Sources included $65 million of overnight federal funds lines, FHLB capacity supported by excess collateral of approximately $408.9 million, and an undrawn $10 million revolving line. First Mid Bank met the regulatory standards to be considered well-capitalized.
- Company Tier 1 risk-based capital was 13.73% and total risk-based capital was 14.62%. First Mid Bank’s corresponding ratios were 12.03% and 12.92%.
Changes, outlook and risks
- First Bank acquisition: Closed May 1, 2018; the bank subsidiaries combined on August 10. Acquired assets had a fair value of $501.3 million, including $363.3 million of loans; assumed deposits were $385.6 million. The Company recorded $26.5 million of goodwill. Management cited expected cost efficiencies and revenue opportunities, but pro forma results exclude anticipated savings and enhancements.
- Pending SCB acquisition: The Company expected to complete the SCB Bancorp transaction in November 2018, subject to customary conditions and approvals. The agreement provided for shareholder consideration in cash or Company shares, subject to proration, and an approximately $25 million special dividend by SCB before closing.
- Credit quality: Nonperforming loans were $27.9 million (1.16% of loans), up from $17.5 million at year-end 2017. Loans past due 30 days or more were 1.17% of loans, versus 0.56% at year-end. The allowance for loan losses was $23.8 million, or 0.99% of loans and 85% of nonperforming loans. Nine-month net charge-offs declined to $1.6 million from $3.2 million.
- Management highlighted agricultural exposure: $312.6 million in loans to agriculture-related borrowers, including $236.8 million in other grain farming. Prolonged low commodity prices, drought, lower yields or reduced government assistance could increase problem loans. Other noted exposures included hotels and motels, property lessors and gambling-related businesses.
- Interest-rate sensitivity analysis showed a liability-sensitive cumulative position through one year; management warned that rate increases could adversely affect net interest income. It also cited pressure on asset yields from low rates and competition.
- The filing gives no specific earnings or margin guidance. Management described liquidity as sufficient and capital as strong. It identified implementation of the expected-credit-loss standard (CECL) as ongoing; the effect was still under evaluation. A securities portfolio decline could also lead to future impairment charges if losses become other-than-temporary.
- A merger-related class action was withdrawn and the plaintiff’s claims dismissed with prejudice after supplemental disclosures; a potential application for plaintiffs’ attorneys’ fees and expenses remained contemplated. Management said ordinary-course claims were not expected to have a material adverse effect.
Key facts for investors to verify
- How much of loan, deposit and earnings growth is organic versus attributable to First Bank, and whether expected acquisition synergies are realized.
- Whether rising nonperforming and past-due loans, especially in agriculture and commercial real estate, lead to higher provisions or charge-offs.
- Funding costs, deposit pricing and the effect of interest-rate movements on net interest margin, given the liability-sensitive near-term position.
- SCB transaction completion, final consideration mix, integration costs and the effect of its special dividend.
- The adequacy of the loan-loss allowance and the eventual impact of CECL on reserves and retained earnings.