First Mid-Illinois Bancshares, Inc. — 2018 Form 10-K Summary
Business context and reporting period
The filing reports the fiscal year ended December 31, 2018, with comparisons to 2017 and 2016. First Mid is a financial holding company operating community banking, wealth management, insurance brokerage and related services, primarily in Illinois. Community banking contributed approximately 90% of total revenue.
2018 included two significant acquisitions: First BancTrust closed May 1, and SCB Bancorp (Soy Capital) closed November 15. The bank subsidiaries were expected to be consolidated into First Mid Bank on April 6, 2019. Comparisons with 2017 are therefore materially affected by acquired operations and acquisition accounting.
Financial performance and condition
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Net interest income | $111.7 million | $93.1 million | Up 20.1% |
| Net interest margin | 3.71% | 3.57% | Improved 14 basis points |
| Other income | $35.4 million | $30.3 million | Up $5.1 million |
| Provision for loan losses | $8.7 million | $7.5 million | Up $1.2 million |
| Other expense | $90.0 million | $74.2 million | Up $15.8 million; acquisitions were a major factor |
| Income before taxes | $48.5 million | $41.7 million | Up $6.8 million |
| Net income | $36.6 million | $26.7 million | Up 37.2% |
| Diluted EPS | $2.52 | $2.13 | Up 18.3% |
| Return on average assets | 1.13% | 0.94% | Improved |
| Return on average common equity | 9.59% | 8.92% | Improved |
For the fourth quarter, net income was $9.9 million and diluted EPS was $0.62, compared with $4.6 million and $0.37 in fourth-quarter 2017. Fourth-quarter net interest income was $31.0 million versus $23.5 million.
At year-end, total assets were $3.84 billion, net loans were $2.62 billion, deposits were $2.99 billion and stockholders’ equity was $475.9 million. Loans grew 36.4% and deposits grew 31.4%, primarily reflecting the acquisitions. Commercial real estate was $906.9 million, or 34.2% of gross loans; loans secured by real estate overall were 66.0% of gross loans.
Cash and cash equivalents were $141.4 million. 2018 operating cash flow was $42.2 million, investing activities used $11.0 million, and financing activities provided $21.3 million; cash and cash equivalents increased $52.5 million. Borrowings totaled $348.8 million, comprising $192.3 million of repurchase agreements, $119.7 million of FHLB advances, $29.0 million of subordinated debentures and $7.7 million of other borrowings.
Consolidated regulatory capital ratios were 13.63% total risk-based capital, 12.76% Tier 1 risk-based capital, 11.81% common equity Tier 1 and 11.15% leverage. The company reported these ratios above applicable well-capitalized thresholds. Common dividends declared were $0.70 per share, compared with $0.66 in 2017.
Material changes versus the prior comparable period
- Acquisitions drove much of the balance-sheet expansion and contributed to higher interest income, fee revenue, staffing and operating costs. First Bank added 112 employees and Soy Capital added 149; year-end FTEs rose to 818 from 592.
- Interest income increased to $124.6 million from $99.6 million, while interest expense rose to $12.8 million from $6.5 million. Management attributed stronger net interest income and margin to acquired earning assets, higher asset yields and acquisition-related accretion.
- Noninterest income increased, including trust revenue of $5.8 million, up 54.5%, and insurance commissions of $5.6 million, up 44.4%. A $511,000 life-insurance death benefit recognized in 2017 did not recur; 2017 also included tax refunds that reduced the comparison base for other income.
- The effective tax rate fell to 24.5% from 36.0%, primarily following the federal corporate tax rate reduction from 35% to 21%. 2017 included approximately $1.4 million of one-time tax expense from remeasuring deferred tax balances.
- Equity rose 54.5% to $475.9 million, supported by retained earnings, a $34.0 million net public offering and shares issued for acquisitions. Available-for-sale securities produced a $4.2 million after-tax other comprehensive loss in 2018.
Outlook, management commentary, risks and unusual items
No numerical earnings or growth guidance is provided. Management said liquidity was sufficient to meet operating needs and customer requirements. Available sources included $65 million of overnight federal funds lines, approximately $454.4 million of additional FHLB borrowing capacity subject to collateral, Federal Reserve borrowing capacity subject to collateral, and a $10 million undrawn revolving credit line.
Management identified interest-rate, liquidity, credit, operational, cyber-security, economic, regulatory and acquisition-integration risks. The year-end static gap analysis showed cumulative liability sensitivity through 12 months; management cautioned that a sustained unfavorable rate environment could compress margin. Its modeled 2018 net interest income declined $4.0 million under a 200-basis-point rate increase and $11.3 million under a 200-basis-point decrease. These are scenario estimates, not forecasts.
Credit exposures warrant attention. The company has significant agricultural lending and noted risks from weak commodity prices, drought and reduced crop yields. It also identified hotel/motel, commercial-property lessor and gambling-industry concentrations. The allowance for loan losses was $26.2 million, 0.99% of loans; net charge-offs were $2.5 million, or 0.11% of average loans.
The filing contains inconsistent nonperforming-loan figures: the overview states $39.8 million and 1.51% of loans, while the detailed nonperforming-loan table reports $29.7 million and 1.12%. Management attributes increased problem loans in part to acquired First Bank loans. This discrepancy should be reconciled before relying on the credit-quality measures.
Acquisition costs and purchase accounting were significant. The MD&A cites approximately $5 million of First Bank acquisition and merger expenses, while the acquisition note reports approximately $7.3 million of First Bank acquisition costs; Soy Capital acquisition costs were approximately $907,000. Goodwill was recorded for both transactions, including $26.5 million for First Bank and $18.6 million for Soy Capital; the filing states this goodwill is not tax deductible. Soy Capital’s bank merger into First Mid Bank was planned for April 2019, with anticipated cost efficiencies, but no quantified savings guidance was given.
A purported shareholder class-action suit related to the First Bank merger disclosures was withdrawn by the plaintiff after supplemental disclosures; counsel’s fee claim was resolved through a confidential settlement in January 2019. Management stated ordinary-course litigation was not expected to have a material adverse effect. Auditors issued unqualified opinions on the financial statements and internal controls; acquired First BancTrust and SCB operations were excluded from management’s and the auditor’s internal-control assessment.
The company stated it was evaluating the future CECL credit-loss standard and had not yet determined its impact. It expected adoption of the new lease standard in 2019 to recognize approximately $14.1 million each in right-of-use assets and lease liabilities, without a material income-statement impact.
Most important facts for investors to verify
- Reconcile the filing’s $39.8 million versus $29.7 million nonperforming-loan disclosures, including the treatment of acquired loans and Soy Capital TDRs.
- Assess whether acquired loan quality, allowance coverage and concentrated exposures—especially agriculture and commercial real estate—remain within risk tolerance.
- Separate organic earnings and margin trends from acquired contributions, purchase-accounting accretion, acquisition expenses and expected integration savings.
- Review funding costs, deposit retention, FHLB advances and rate sensitivity as the balance sheet expands and market rates change.
- Track integration of Soy Capital, the planned bank merger, final purchase-accounting adjustments and any realized cost savings or revenue benefits.
- Confirm the effects of CECL adoption, lease accounting and any material changes in goodwill, securities values or credit-loss estimates.