Business context and reporting period
First Mid-Illinois Bancshares, Inc. is a financial holding company operating primarily through its Illinois-based community bank, with wealth management, insurance brokerage and data-processing activities. Community banking generated approximately 97% of company revenue and profits. This Form 10-K covers the fiscal year ended December 31, 2017; financial amounts below are in U.S. dollars.
Financial performance and position
- Earnings: Net income was $26.7 million, up 22.2% from $21.8 million in 2016. Diluted EPS increased to $2.13 from $2.05. Return on average assets was 0.94%; return on average common equity was 8.92%.
- Revenue and margins: Net interest income rose 30.7% to $93.1 million, and noninterest income rose to $30.3 million from $26.9 million. Net interest margin improved to 3.57% from 3.28%, primarily reflecting asset growth and acquired-loan accretion from First Clover Leaf. Noninterest expense increased 20.7% to $74.2 million.
- Credit costs: Provision for loan losses increased to $7.5 million from $2.8 million; net charge-offs rose to $4.2 million from $0.6 million. Nonperforming loans were $17.5 million, or 0.90% of loans, versus $18.2 million, or 1.00%, in 2016. The allowance was $20.0 million, 1.03% of loans, compared with $16.8 million, 0.92%.
- Balance sheet: Total assets were $2.84 billion, down from $2.88 billion. Net loans increased to $1.92 billion from $1.81 billion; total deposits declined to $2.27 billion from $2.33 billion. Commercial real estate represented 35.2% of loans, and total real-estate-secured loans were 65.6%.
- Cash flow and liquidity: Operating activities provided $46.2 million; investing activities used $56.0 million and financing activities used $77.2 million. Cash and cash equivalents fell $87.0 million to $88.9 million. Management said liquidity was sufficient and reported $129.7 million of additional FHLB borrowing capacity, $35 million in overnight federal-funds lines and an undrawn $10 million parent-company revolver.
- Debt and capital: Year-end borrowings, including repurchase agreements, FHLB advances, other borrowings and subordinated debentures, totaled $249.7 million. Consolidated total risk-based capital was 12.70%, Tier 1 leverage was 9.91%; the bank was also above well-capitalized thresholds. Common dividends declared were $0.66 per share, versus $0.62 in 2016.
Material changes versus 2016
- Growth in average earning assets, including First Clover Leaf balances for a full year, drove higher net interest income; average loans rose 26.3% and average deposits rose 20.7%. Despite higher average deposits, period-end deposits declined, primarily due to lower money-market and interest-bearing balances.
- Credit costs increased substantially, including higher commercial and agricultural charge-offs. Nonaccrual loans rose to $16.7 million from $12.1 million, although total nonperforming loans declined slightly, partly as restructured loans decreased.
- Operating costs reflected a full year of First Clover Leaf operations and approximately $2.0 million of merger-related costs. Salaries and benefits rose $7.4 million.
- The 2017 effective tax rate was 36.0%. The Tax Cuts and Jobs Act prompted approximately $1.4 million of one-time expense to remeasure deferred tax balances; Illinois’s corporate tax rate also increased during the year.
Outlook, risks and unusual items
- Pending acquisition: The company agreed to acquire First BancTrust Corporation for $5.00 cash and 0.800 First Mid shares per eligible First BancTrust share, subject to adjustments and customary conditions. Completion was anticipated in mid-2018, subject to regulatory and First BancTrust shareholder approvals. First BancTrust reported September 30, 2017 assets of $465.6 million, loans of $368.2 million and deposits of $377.8 million.
- A purported First BancTrust stockholder filed a class action seeking, among other relief, to enjoin the merger. First Mid said it considered the allegations without merit and intended to defend the case.
- Interest-rate exposure remains material: management’s static gap analysis showed liability sensitivity through the one-year horizon. Modeling estimated net interest income would decline 3.1% under a 200-basis-point rate increase and 14.4% under a 200-basis-point decrease. The modeled 200-basis-point decline in economic value of equity slightly exceeded company policy limits.
- Credit risks include concentration in Illinois, commercial real estate, agriculture and other industries; management highlighted sensitivity to crop prices, real-estate values and hotel demand. Cybersecurity, funding access, competition, regulation and acquisition integration are also identified risks.
- The company held a Level 3 trust-preferred security valued at $2.5 million, with a $0.3 million unrealized loss and $1.1 million of cumulative credit impairment previously recorded. It reported receiving contractual interest in 2017, but disclosed that the security’s subordinate tranche remained in payment-in-kind status and could face additional impairment.
- No quantitative earnings guidance was provided. The filing describes strategic goals but does not provide a clear numerical forecast.
Most important facts for investors to verify
- Whether First BancTrust closed on the anticipated terms and how the lawsuit, integration costs and expected synergies affected results.
- Whether rising charge-offs, nonaccrual commercial and industrial loans, and the allowance remain manageable as acquired loans renew.
- Whether deposit trends and available borrowing capacity support loan growth and liquidity needs.
- How net interest margin and economic value of equity respond to interest-rate changes, particularly given the disclosed policy-limit exception under a 200-basis-point rate decrease.
- Whether the trust-preferred security’s cash flows, payment status or valuation assumptions change and trigger further impairment.
- How recurring earnings compare with reported results after the one-time tax remeasurement, merger expenses, acquisition accretion and other unusual income items.