Business context and reporting period
First Mid-Illinois Bancshares, Inc. is an Illinois-focused financial holding company operating community banking, wealth management, insurance brokerage and data-processing businesses. Community banking generated about 91% of revenue and profits. This Form 10-K covers the fiscal year ended December 31, 2014; comparisons are to 2013 unless noted.
Financial and operating performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income | $51.5 million | $49.9 million | Up 3.1% |
| Provision for loan losses | $0.6 million | $2.2 million | Down $1.6 million |
| Other income | $18.4 million | $19.3 million | Down 5.0% |
| Other expense | $44.5 million | $43.5 million | Up 2.3% |
| Net income | $15.5 million | $14.7 million | Up 5.0% |
| Diluted EPS | $1.85 | $1.73 | Up 6.9% |
| Net interest margin | 3.43% | 3.38% | Up 5 basis points |
| Return on average assets | 0.97% | 0.94% | Up 3 basis points |
| Return on average common equity | 10.34% | 10.11% | Up 23 basis points |
Balance sheet at year-end: Assets were $1.607 billion, broadly unchanged from $1.605 billion; net loans were $1.047 billion, up from $969 million; deposits were $1.272 billion, down from $1.288 billion; and stockholders’ equity was $164.9 million, up from $149.4 million. The loan portfolio was 70.3% real-estate-secured, including $379.6 million in commercial real estate loans.
Credit quality: Nonperforming loans fell to $4.5 million (0.43% of loans) from $6.5 million (0.66%). Net charge-offs declined to $196,000 from $720,000. The allowance for loan losses was $13.7 million, or 1.29% of loans, and 301.4% of nonperforming loans.
Cash flow, funding and capital: Operating activities provided $17.8 million; investing activities used $10.0 million and financing activities used $21.1 million. Cash and cash equivalents fell $13.4 million to $51.7 million. Total deposits and borrowings included $162.5 million of repurchase agreements, FHLB advances and junior subordinated debentures. Consolidated capital ratios were 15.60% total risk-based, 14.42% Tier 1 risk-based and 10.52% leverage; First Mid Bank was categorized as well-capitalized. The bank had approximately $37.9 million available for dividends to the parent, subject to regulatory limits.
Material changes and unusual items
- Net income improvement reflected loan growth, lower funding costs and reduced loan-loss provision. Average loans grew 10.6%; year-end loans increased 8.1%.
- Other income declined mainly because securities gains fell to $715,000 from $2.3 million and mortgage banking revenue fell to $596,000 from $935,000. The 2013 comparison included a $1.4 million gain on sales of trust-preferred securities.
- During 2014 the company mandatorily converted all Series B preferred stock into approximately 1.139 million common shares. Preferred dividends fell to $4.2 million from $4.4 million, but the conversion materially increased the diluted weighted-average share count; diluted EPS rose to $1.85 from $1.73.
- The company transferred $53.6 million of securities from available-for-sale to held-to-maturity to reduce price volatility. Available-for-sale unrealized losses improved, contributing to $7.5 million of other comprehensive income after a $12.9 million loss in 2013.
- One trust-preferred security remained materially impaired in market value: $3.3 million amortized cost versus $364,000 fair value, with $2.9 million unrealized loss. It remained on non-accrual, with partial payment-in-kind interest; management recorded no additional impairment in 2014.
- The common dividend declared was $0.55 per share, versus $0.46 in 2013. The company repurchased 82,681 shares for $1.8 million during the year.
Outlook, commentary and risks
Management emphasized continued organic growth and selective acquisitions, while stating it would not compromise credit quality or prudent asset-liability management to grow. No specific earnings or financial guidance was provided. Management said liquidity was sufficient for expected needs. The filing warns that low rates, competition and the company’s liability-sensitive position through the one-year horizon could pressure net interest income; modeled interest-rate shocks projected lower net interest income under both rising and falling rate scenarios.
Key risks include regional economic weakness; concentrations in Illinois real estate and agriculture (including $155.1 million of loans to other grain farming); commodity-price or weather stress; credit losses and collateral values; funding and liquidity pressures; securities impairment; cybersecurity and operational disruptions; regulatory changes; and preferred-stock claims senior to common shareholders. The company reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions. No legal proceedings or unresolved SEC staff comments were reported.
Subsequent events: In January 2015, First Mid Bank agreed, subject to regulatory approval and other conditions, to acquire 12 Southern Illinois branches from Old National Bank. At December 31, 2014, the branches had approximately $502 million of deposits and $160 million of loans; closing was expected in the third quarter of 2015. The bank also closed its Bloomington and Pocahontas locations in January 2015, and the company terminated its shareholder Rights Agreement.
Most important facts for investors to verify
- Whether loan growth, especially commercial and agricultural exposure, is sustainable without weakening underwriting or credit quality.
- Current performance of the $3.3 million-cost trust-preferred investment, including its non-accrual status, PIK assumptions and potential for further impairment.
- Deposit trends, public-fund concentration, cash levels and borrowing capacity as the bank funds loan growth and planned branch acquisition.
- How preferred-stock dividends and conversion-related dilution affect common earnings, dividends and per-share value; Series C preferred stock remains outstanding.
- Regulatory approval, financing, integration costs and expected returns for the Old National branch acquisition.
- Interest-rate exposure and whether actual results track management’s modeled scenarios and risk limits.