First Mid-Illinois Bancshares, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are primarily against December 31, 2015. The company is a bank holding company operating through banking, data services and insurance subsidiaries, with its banking business concentrated in central and southern Illinois.
Financial performance and position
- Earnings: Net income was $4.8 million, up from $4.0 million in Q1 2015. Net income available to common shareholders was $4.3 million versus $3.5 million. Diluted EPS was $0.49 versus $0.48; basic EPS was unchanged at $0.50. The effective tax rate was 35.5%, compared with 36.3%.
- Revenue and margin: Net interest income rose 27.6% to $16.1 million, largely reflecting a larger earning-asset base. Net interest margin declined to 3.27% from 3.34%, which management attributed mainly to excess acquisition-related cash earning lower yields. Other income increased 38.4% to $6.6 million. Total other expense rose 40.4% to $15.2 million.
- Returns: Annualized return on average assets was 0.91% versus 1.00%; return on average common equity was 9.35% versus 9.99%.
- Cash flow: Operating activities provided $4.9 million, compared with $7.1 million in Q1 2015. Investing activities used $36.6 million, including a $25.0 million investment in bank-owned life insurance and net investment-security purchases. Financing activities used $4.4 million. Cash and cash equivalents fell $36.1 million from year-end to $79.7 million.
- Balance sheet and liquidity: Total assets were $2.12 billion, little changed from year-end. Deposits were $1.74 billion, up $7.8 million; net loans were $1.26 billion, down $5.9 million, principally from seasonal agricultural-loan paydowns. Management said liquidity was sufficient; disclosed backup sources include $35 million of overnight federal-funds lines, approximately $120.5 million of additional FHLB borrowing capacity, and an undrawn $15 million revolving credit line.
- Debt and funding: Repurchase agreements were $116.7 million, down from $128.8 million at year-end; FHLB borrowings were $20.0 million and junior subordinated debentures were $20.6 million. Total liabilities were $1.91 billion.
- Credit and capital: The allowance for loan losses was $14.7 million, or 1.15% of loans. Nonperforming loans were $4.35 million (0.34% of loans), versus $4.01 million at year-end; loans 30 or more days past due were 0.62% of loans. The company reported total risk-based capital of 14.19% and Tier 1 risk-based capital of 13.18%; First Mid Bank met the regulatory definition of well-capitalized.
Material changes versus comparable periods
- Q1 2016 included the operations of the 12 Old National Bank branches acquired in August 2015 and Illiana Insurance, acquired in December 2015; comparisons with Q1 2015 therefore include a larger business base. The branch purchase added approximately $453 million of deposits and $156 million of loans at book value.
- Higher net interest income and other income were partly offset by higher expenses. Salaries and benefits rose to $7.8 million from $6.1 million, and occupancy and equipment expense increased to $2.9 million from $2.0 million. Management cited acquired operations, additional employees and locations, and higher intangible amortization.
- Other income increased by $1.8 million, led by insurance commissions, ATM/debit-card revenue and service charges. Insurance commissions benefited from Illiana and first-quarter timing and claims-experience factors.
- Q1 included a $653,000 expense for donating the former Monticello branch building. Stockholders’ equity increased $7.0 million from year-end, including $2.6 million of after-tax gains on available-for-sale securities.
Outlook, commentary and risks
- No specific earnings or financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management described current pressure on asset yields from prolonged low interest rates and loan competition. Its static gap analysis showed the company liability-sensitive cumulatively through 12 months, meaning rate increases could adversely affect net interest income; management also uses other models and reviews exposure through ALCO.
- Credit risks include agricultural exposure: $186.7 million of loans to agriculture-related borrowers, including $151.8 million in other grain farming. Management cited extended low commodity prices, drought, lower crop yields or reduced government assistance as potential sources of increased losses. The company also disclosed $63.6 million in hotel and motel loans and material commercial-property lessor exposures.
- The trust-preferred investment had a $1.415 million unrealized loss and a $1.698 million fair value. It remains on nonaccrual/PIK status; management recorded no additional other-than-temporary impairment in the quarter, but further defaults, deferrals or downgrades could lead to impairment and affect earnings.
- After quarter-end, the company agreed to acquire First Clover Leaf Financial Corp. The transaction consideration is an election of $12.87 cash or 0.495 First Mid shares per First Clover Leaf share, subject to adjustments and customary conditions. Closing was anticipated in the second half of 2016, subject to regulatory and shareholder approvals.
- The company notified Series C preferred holders that it would proceed with mandatory conversion on May 16, 2016. The filing states dividends cease to accrue after that date; conversion will issue common shares and settle eligible accrued, unpaid dividends and fractional-share amounts.
- Off-balance-sheet commitments and lines of credit totaled $333.3 million, with standby letters of credit of $4.8 million. Management did not anticipate losses, but actual draws could increase funding needs.
Important facts for investors to verify
- How much of the increase in earnings and fee income is sustainable versus attributable to acquired branches, Illiana, seasonal factors or other one-time items.
- Whether net interest margin stabilizes, particularly given excess cash, interest-rate sensitivity and competitive pressure on loan yields.
- Trends in delinquency, nonaccrual loans and agricultural credit quality, and whether the allowance remains appropriate as the portfolio changes.
- Progress, consideration mix, approvals, expected costs and integration plans for the First Clover Leaf merger.
- The timing and share-count effect of the Series C preferred conversion, and the resulting impact on common EPS and capital.
- Performance and valuation of the trust-preferred security, along with liquidity and funding needs if commitments are drawn or deposits change.