Business context and reporting period
First Mid-Illinois Bancshares, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company is a bank holding company operating primarily in Illinois and Missouri. Results include First Bank & Trust from its May 1, 2018 acquisition date; accordingly, comparisons with 2017 are affected by the acquisition.
Financial and operating performance
- Second-quarter results: Net income was $10.0 million versus $8.2 million in Q2 2017; diluted EPS was $0.72 versus $0.66. Net interest income rose to $27.5 million from $24.0 million.
- First-half results: Net income was $18.4 million versus $14.5 million; diluted EPS was $1.38 versus $1.16. Net interest income increased 8.4% to $50.6 million. Net interest margin was 3.66%, up from 3.58% in the first half of 2017.
- Income and expenses: First-half noninterest income increased 2.5% to $15.8 million, including $0.9 million of net securities gains. Noninterest expense increased 5.4% to $39.2 million, primarily reflecting First Bank-related costs and higher salaries. The effective tax rate declined to 24.4% from 32.6%, mainly following the reduction in the federal corporate tax rate.
- Balance sheet at June 30: Total assets were $3.37 billion, up from $2.84 billion at year-end 2017. Net loans were $2.35 billion, deposits $2.67 billion, and stockholders’ equity $411.3 million. The increase in loans and deposits largely reflects the First Bank acquisition.
- Credit and allowance: The allowance for loan losses was $22.0 million, or 0.93% of loans. First-half provision expense was $2.9 million, down from $3.6 million; net charge-offs were $0.9 million versus $2.1 million. Nonperforming loans were $24.7 million (1.04% of loans), compared with $17.5 million at year-end 2017; allowance coverage of nonperforming loans was 89%.
- Cash flow and liquidity: For the first half, operating activities provided $18.0 million, investing activities used $52.5 million, and financing activities provided $31.2 million. Cash and cash equivalents declined $3.3 million to $85.6 million. Management said liquidity was sufficient; available sources included $35 million in overnight federal funds lines, approximately $195 million of additional FHLB borrowing capacity, and a $10 million undrawn revolving credit line.
- Debt and capital: FHLB borrowings were $95.7 million, repurchase agreements $141.7 million, other borrowings $9.4 million, and junior subordinated debentures $28.8 million. The company reported a 13.16% Tier 1 risk-based capital ratio and a 13.97% total risk-based capital ratio. First Mid Bank was reported as well-capitalized.
Material changes, outlook, and risks
- First Bank was acquired May 1 for approximately $71.6 million in cash and stock; the company recorded $27.4 million of goodwill and incurred $3.2 million in first-half pretax acquisition expenses. First Bank contributed $4.3 million of revenue and $0.9 million of net income from acquisition through June 30. The bank subsidiary merger was scheduled for August 10, 2018.
- A June public offering of 947,368 shares generated approximately $34 million in net proceeds. The company also agreed to acquire SCB Bancorp; the transaction, then anticipated for late 2018, remained subject to regulatory and shareholder approvals and other closing conditions.
- Management identified agriculture-related credit risk, including exposure to grain farming, and potential hotel and motel loan weakness if regional travel declined. It also cited interest-rate sensitivity: the company was liability-sensitive through the 12-month horizon, so rate increases could pressure net interest income. Prolonged low rates and competition could also weigh on asset yields and margin.
- Available-for-sale securities had $14.4 million of gross unrealized losses at June 30; the company said it did not consider these losses other-than-temporary but noted future impairment charges could be required. Accumulated other comprehensive loss widened to $9.3 million from $2.3 million at year-end.
- Off-balance-sheet commitments totaled $512 million, including $469.5 million of unused credit commitments and $42.5 million of standby letters of credit. The company reported a merger-related class action that was withdrawn with prejudice as to the plaintiff after supplemental disclosures; a potential attorneys’ fees request remained contemplated. Management said ordinary-course claims were not expected to have a material adverse effect.
- No specific earnings or financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and that forward-looking outcomes are subject to economic, interest-rate, credit, regulatory, competitive, and acquisition-integration risks.
Important facts for investors to verify
- How much of earnings growth reflects First Bank’s partial-period contribution and purchase-accounting effects, versus ongoing organic performance; monitor integration costs and expected synergies.
- Whether nonperforming loans, past-due loans, and allowance coverage improve or deteriorate as acquired loans are integrated; assess agricultural and commercial real estate exposures.
- How deposit pricing, borrowing costs, and interest-rate movements affect net interest margin, given the disclosed liability-sensitive position.
- Whether the SCB transaction closes on expected terms and timing, including the planned special dividend and cash/stock election mix.
- Whether unrealized securities losses, capital ratios, and liquidity sources remain manageable as the company funds loan growth and merger activity.