First Mid-Illinois Bancshares, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2016. First Mid-Illinois Bancshares is a bank holding company operating as one reportable segment. Results include First Clover Leaf Bank only from its September 8, 2016 acquisition date; therefore, its contribution to reported Q3 results covers a short period and comparisons are affected by acquisitions.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $17.6 million | $14.0 million | $49.7 million | $40.0 million |
| Provision for loan losses | $1.1 million | $0.5 million | $1.9 million | $0.9 million |
| Other income | $6.9 million | $5.0 million | $20.0 million | $14.3 million |
| Other expense | $15.3 million | $12.9 million | $44.6 million | $34.9 million |
| Net income | $5.3 million | $3.7 million | $15.0 million | $11.9 million |
| Diluted EPS available to common shareholders | $0.51 | $0.37 | $1.50 | $1.33 |
- Nine-month net interest margin was 3.27%, down from 3.30%; management attributed the decline primarily to lower yields on earning assets and investments. Return on average assets was 0.92%, unchanged, while return on average common equity rose to 9.34% from 8.86%.
- At September 30, total assets were $2.784 billion, net loans $1.787 billion, deposits $2.265 billion, and stockholders’ equity $287.3 million. Compared with December 31, 2015, assets increased $669.4 million and net loans $520.7 million, substantially reflecting First Clover Leaf.
- Nine-month operating cash flow was $15.2 million; investing activities used $11.3 million and financing activities provided $3.4 million. Cash and cash equivalents ended at $123.0 million, up $7.3 million from year-end.
- Borrowings included $127.4 million in repurchase agreements, $50.1 million of FHLB advances, $22.0 million of other borrowings, and $23.9 million of junior subordinated debentures. First Mid Bank and First Clover Leaf Bank were reported as well-capitalized; the company’s Tier 1 risk-based capital ratio was 12.03% and total risk-based capital ratio 12.79%.
Material changes versus comparable periods
- Nine-month net income increased $3.2 million year over year. Net interest income rose $9.7 million, while other income increased $5.7 million; these gains were partly offset by a $9.7 million increase in other expense and a $1.0 million increase in loan-loss provision.
- Growth in net interest income mainly reflected larger average earning assets following the Old National branch and First Clover Leaf acquisitions. Noninterest income growth included higher insurance commissions, service charges, ATM/debit revenue, brokerage commissions, and securities gains.
- Expenses rose with acquired operations, higher staffing and occupancy costs, increased intangible amortization, and $785,000 of First Clover Leaf acquisition costs. The company also recorded a $653,000 expense for donating its former Monticello branch building.
- First Clover Leaf consideration was approximately $88.5 million, comprising $22.5 million cash and $65.9 million in company stock. The acquisition added approximately $438 million of loans at fair value and $537 million of deposits, and generated $16.8 million of goodwill. The company reported $297,000 of Q3 pretax net purchase-accounting accretion, net of intangible amortization.
- The Series C preferred stock converted to common stock in May 2016; preferred dividends consequently ceased. Shares issued in the First Clover Leaf transaction also increased the common share base.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said prolonged low rates and intense loan competition were pressuring asset yields and could further reduce interest income and net interest margin. Static gap analysis showed liability sensitivity through the one-year horizon, meaning rising rates could adversely affect net interest income.
- Credit quality weakened on reported measures: nonperforming loans were $15.8 million, or 0.87% of loans, versus $4.0 million, or 0.31%, at year-end 2015. Nonaccrual loans were $9.6 million and troubled debt restructurings totaled $11.0 million. Management attributed much of the increase to acquired First Clover Leaf loans. The allowance was $16.2 million, equal to 0.89% of loans and 102% of nonperforming loans.
- Key lending exposures include agriculture (including $170.9 million to other grain farming), hotels and motels ($98.0 million), and commercial and residential property lessors. Management warned that sustained low commodity prices, drought, reduced crop yields or government support, and weaker regional travel could increase problem loans and losses.
- The investment portfolio included a trust-preferred security with $1.661 million fair value and $1.414 million unrealized loss, carried at Level 3 fair value. The company recorded no additional other-than-temporary impairment in 2016; future issuer defaults or payment deferrals could cause impairment and affect earnings.
- Available liquidity sources included $35 million in overnight federal funds lines and approximately $99.1 million and $80.5 million of additional FHLB borrowing capacity at First Mid Bank and First Clover Leaf Bank, respectively. The company also had a $10 million revolving facility with $7 million drawn. Outstanding commitments and lines of credit were $446.8 million; standby letters of credit were $8.6 million. These commitments are not necessarily expected to be fully drawn.
- A purported class action filed by a former First Clover Leaf shareholder challenges the merger process, consideration and disclosures. The company and individual defendants deny the allegations, moved to dismiss, and stated they intend to defend the case. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of reported earnings and loan growth reflects acquired operations and purchase-accounting accretion, and whether expected cost savings and revenue opportunities are realized.
- Whether elevated nonperforming loans, restructurings and repossessed assets stabilize or worsen, particularly in acquired portfolios and identified industry concentrations.
- Whether the allowance for loan losses remains adequate as the acquired portfolio seasons; the filing notes acquired loans were recorded at fair value and the seller’s allowance was not carried forward.
- How net interest margin responds to rate movements, competition and deposit repricing, and whether the liability-sensitive position changes.
- The final purchase-accounting adjustments, integration costs, merger-litigation developments, and any material change in capital or liquidity following the acquisition.