First Mid-Illinois Bancshares, Inc. (First Mid Bancshares) — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; comparisons are primarily with FY 2014. The company is an Illinois-focused financial holding company whose principal business is community banking, supplemented by wealth management, data processing and insurance brokerage. Banking generated approximately 91% of company revenue and profits.
Business context and material developments
- On August 14, 2015, First Mid acquired 12 Old National Bank branches in Southern Illinois, assuming approximately $454 million of deposits and acquiring approximately $152 million of loans at recorded fair value. The acquisition materially expanded the balance sheet and service area.
- The company raised approximately $29.3 million gross through a private placement of 1,392,859 common shares at $21 per share; proceeds supported the branch acquisition and general corporate purposes.
- First Mid Insurance acquired substantially all assets of Illiana Insurance Agency on December 1, 2015.
Financial performance and position
| Metric | FY 2015 / Dec. 31, 2015 | FY 2014 / Dec. 31, 2014 |
|---|---|---|
| Net interest income | $55.8 million | $51.5 million |
| Net income | $16.5 million | $15.5 million |
| Net income available to common shareholders | $14.3 million | $11.3 million |
| Diluted earnings per share | $1.81 | $1.85 |
| Net interest margin | 3.27% | 3.43% |
| Return on average assets / common equity | 0.91% / 8.97% | 0.97% / 10.34% |
| Total assets | $2.11 billion | $1.61 billion |
| Net loans | $1.27 billion | $1.05 billion |
| Total deposits | $1.73 billion | $1.27 billion |
| Stockholders’ equity | $205.0 million | $164.9 million |
- Net interest income rose 8.3%, supported by loan growth and low funding costs. The margin declined as acquisition-related cash increased lower-yielding balances and loan and investment yields fell.
- Other income rose to $20.5 million from $18.4 million, including higher ATM/debit-card, service-charge, brokerage and insurance revenue; securities gains declined to $452,000 from $715,000.
- Other expense increased to $49.2 million from $44.5 million, reflecting acquisition costs and branch operating expenses, additional employees, occupancy costs and amortization. The filing reports $1.4 million of costs to complete the ONB acquisition.
- Provision for loan losses was $1.318 million, versus $629,000. Net charge-offs increased to $424,000 from $196,000; nonperforming loans declined to $4.0 million from $4.5 million, or 0.31% of loans versus 0.43%.
- Cash and cash equivalents ended the year at $115.8 million, up $64.1 million. Cash provided by operating, investing and financing activities was $22.0 million, $10.4 million and $31.7 million, respectively. Investing cash flow included $276.7 million net cash received in the branch acquisition.
- Borrowings included $128.8 million of repurchase agreements, $20.0 million of FHLB advances and $20.6 million of junior subordinated debentures. Liquidity sources included $35 million of overnight federal-funds lines, approximately $123.5 million of additional FHLB borrowing capacity, Federal Reserve borrowing subject to collateral, and an undrawn $15 million parent-company credit line.
- Company regulatory capital ratios were 14.25% total risk-based, 13.23% Tier 1 risk-based, 9.92% common equity Tier 1 and 9.20% leverage. First Mid Bank was reported well-capitalized. The company said approximately $35.2 million was available for bank dividends to the parent, subject to regulatory limits.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management describes continued business-development efforts and a multi-year “Achieve 2020” strategy focused on growth, customers, employees, operations, shareholders and risk management; it says growth will not come at the expense of credit quality or prudent asset-liability management.
- Interest-rate risk is material: management reported a liability-sensitive cumulative gap through 12 months and warned that a prolonged low-rate environment and competitive pressure could compress asset yields and margins. Its modeled scenarios generally showed lower net interest income under both rate increases and decreases; a 200-basis-point decline was estimated to reduce net interest income by $5.4 million. The filing cautions that these are hypothetical estimates, not forecasts.
- Credit exposures include real estate-secured loans equal to 66.3% of loans and agriculture-related lending of approximately $198.6 million, including $161.5 million in other grain farming. Management identifies low commodity prices, drought, weaker crop yields, real estate declines and adverse conditions in hotel, commercial-property and other concentrated industries as risks.
- The remaining pooled trust-preferred security had a $1.9 million fair value, $1.2 million unrealized loss and CCC lowest credit rating. No additional impairment was recorded in 2015; further defaults, deferrals or downgrades could lead to impairment and earnings impact.
- Series C preferred dividends reduced income available to common shareholders. The preferred stock carries an 8% non-cumulative dividend and senior rights; common dividends and repurchases are restricted if preferred dividends are unpaid. The company may redeem or require conversion after May 13, 2016, subject to stated conditions and approvals.
- Other identified risks include cybersecurity and third-party system disruptions, acquisition integration and goodwill impairment, liquidity and counterparty risk, regulatory changes, and dilution from future equity issuance. Off-balance-sheet commitments and lines of credit totaled $291.5 million; standby letters of credit were $6.8 million. The company said it did not anticipate losses on these instruments.
- The filing reports no legal proceedings or unresolved SEC staff comments. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How the ONB branches perform after integration, including the pace of expense normalization, deposit retention and realization of any operating benefits; reported 2015 ONB-branch revenue was $3.27 million and earnings were a loss of $228,380.
- Whether net interest margin stabilizes as acquisition-related excess cash is deployed, and how actual results compare with the filing’s interest-rate sensitivity assumptions.
- Whether agricultural and commercial real estate concentrations, nonperforming assets and the allowance remain appropriate as economic and commodity conditions change.
- The valuation and future impairment risk of the trust-preferred security, and the effects of any change in its cash flows or credit assumptions.
- The impact of preferred-stock dividends, potential conversion or redemption, and common-share issuance on common earnings per share and capital.