First Mid-Illinois Bancshares, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. Unless otherwise noted, figures are in millions of dollars. Results include First Clover Leaf, acquired in September 2016; comparisons with 2016 are therefore affected by the acquisition. The company reported as a single operating segment.
Financial performance and position
| Metric | Q2 2017 / June 30, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $24.0 | $16.0 in Q2 2016 |
| Provision for loan losses | $1.8 | $0.7 in Q2 2016 |
| Other income | $8.0 | $6.5 in Q2 2016 |
| Other expense | $18.0 | $14.1 in Q2 2016 |
| Net income | $8.2; diluted EPS $0.66 | $4.9 and $0.50 diluted EPS in Q2 2016 |
| Total assets | $2,825.3 | $2,884.5 at Dec. 31, 2016 |
| Deposits | $2,289.4 | $2,329.9 at Dec. 31, 2016 |
| Loans, net of allowance | $1,805.5 | $1,808.1 at Dec. 31, 2016 |
| Stockholders’ equity | $300.9 | $280.7 at Dec. 31, 2016 |
- First half results: Net income was $14.5 million versus $9.7 million in 2016; diluted EPS was $1.16 versus $0.99. Net interest income rose 45.8% to $46.7 million. Net interest margin was 3.58%, up from 3.27%.
- Margins and returns: Annualized first-half return on average assets was 1.02% (0.92% in 2016); return on average common equity was 9.96% (9.76%). Average equity to average assets was 10.22%.
- Cash flow: First-half operating cash flow was $24.5 million; investing activities used $38.8 million and financing activities used $87.7 million. Cash and cash equivalents fell $102.0 million to $73.9 million, mainly reflecting deposit and repurchase-agreement outflows and investment-security purchases.
- Borrowings: Repurchase agreements were $142.4 million, FHLB borrowings $45.1 million, other borrowings $12.2 million, and junior subordinated debentures $24.0 million. The company reported total liabilities of $2,524.4 million.
- Capital: Company Tier 1 and total risk-based capital ratios were 11.98% and 12.81%. First Mid Bank’s ratios were 11.98% and 12.82%; the bank was above the regulatory “well-capitalized” thresholds.
Material changes and credit quality
- First-half net interest income increased by $14.7 million, primarily reflecting higher average earning assets, including loans and securities, following the First Clover Leaf acquisition, as well as acquisition-related loan accretion and improved investment yields.
- First-half noninterest income rose $2.4 million to $15.5 million. Growth included insurance commissions, service charges, electronic services and bank-owned life insurance income. Other income also benefited from First Clover Leaf-related income and tax refunds tied to its 2016 overpayment.
- First-half noninterest expense increased $7.8 million to $37.2 million. The increase reflected acquired locations and employees, integration costs, and approximately $2.0 million of 2017 acquisition costs. Full-time-equivalent employees increased to 590 from 520.
- Credit costs rose: first-half provision was $3.6 million versus $0.8 million, and net charge-offs were $2.1 million versus $0.3 million. The allowance for loan losses was $18.2 million, or 1.00% of loans, compared with $16.8 million at year-end 2016.
- Nonperforming loans were $17.1 million (0.94% of loans), down from $18.2 million at year-end 2016 but above $4.6 million at June 30, 2016. Repossessed assets increased to $4.4 million from $2.0 million at year-end. Nonperforming loans plus repossessed assets totaled $21.6 million.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said liquidity was sufficient for operating needs, borrower requirements, depositors and creditors.
- Management identified exposure to interest-rate changes: the company was cumulatively liability-sensitive through the 12-month horizon, so rate increases could adversely affect net interest income. It also cited pressure on asset yields from low rates and loan competition.
- Credit risks include regional agriculture exposure ($203.3 million of agriculture-related loans, including $164.7 million in other grain farming), hotel and motel loans ($120.5 million), and commercial and residential property lessors. Low commodity prices, drought, weaker crop yields, reduced travel or deterioration in property markets could increase problem loans and losses.
- The $457 million of commitments and standby letters of credit creates potential off-balance-sheet credit and liquidity exposure; management said it did not anticipate losses on these instruments. Available liquidity sources included $35 million in overnight federal-funds lines, approximately $157.2 million of additional FHLB borrowing capacity, and an undrawn $10 million revolving credit facility.
- The company held a trust-preferred security with a $2.4 million fair value and $0.6 million unrealized loss; it was valued using Level 3 inputs and remained on nonaccrual. Further defaults or deferrals could lead to additional impairment and affect earnings.
- A shareholder lawsuit challenging the First Clover Leaf merger was dismissed with prejudice on July 12, 2017; the plaintiff could appeal before August 11, 2017. The filing also notes that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- How much of earnings growth reflects durable operating improvement versus acquisition effects, loan accretion, tax refunds and other nonrecurring items.
- Whether elevated charge-offs, nonperforming loans and repossessed assets stabilize, and whether the loan-loss allowance remains adequate.
- Performance and concentration risks in agricultural, hotel/motel and real-estate-related lending, along with the assumptions used in credit-loss estimates.
- Liquidity and funding trends, including deposit flows, cash balances, repurchase agreements and capacity to access contingent funding.
- Interest-rate sensitivity, capital ratios, integration costs and any developments in the dismissed merger litigation or trust-preferred investment.