First Mid-Illinois Bancshares, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. The company is a financial holding company operating primarily through community banking, with wealth management and insurance businesses; community banking generated approximately 97% of revenue and profits.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total assets, year-end | $2.885 billion | $2.114 billion |
| Net interest income | $71.2 million | $55.8 million |
| Net interest margin | 3.28% | 3.27% |
| Net income | $21.8 million | $16.5 million |
| Net income available to common shareholders | $21.0 million | $14.3 million |
| Diluted earnings per share | $2.05 | $1.81 |
| Return on average assets | 0.94% | 0.91% |
| Return on average common equity | 9.30% | 8.97% |
| Deposits, year-end | $2.330 billion | $1.733 billion |
| Net loans, year-end | $1.808 billion | $1.266 billion |
- Interest income was $75.5 million and interest expense $4.3 million. Noninterest income rose to $26.9 million from $20.5 million, while noninterest expense increased to $61.5 million from $49.2 million. The filing does not provide a single overall profit-margin figure.
- Operating cash flow was $27.4 million; investing activities used $78.1 million and financing activities provided $110.8 million. Cash and cash equivalents increased $60.1 million to $175.9 million.
- Year-end borrowings totaled $267.8 million, including $185.8 million in customer repurchase agreements, $40.1 million in FHLB advances, $23.9 million in junior subordinated debentures, and $18.1 million in other borrowings. Deposits were the principal funding source.
- Consolidated regulatory capital ratios were 12.79% total risk-based, 11.99% Tier 1 risk-based, 10.86% common equity Tier 1, and 9.19% leverage. The banks were reported as well-capitalized.
Material changes and unusual items
- The September 8, 2016 acquisition of First Clover Leaf Financial materially expanded the company. Consideration was approximately $88.5 million—$22.5 million cash and $65.9 million in stock. Acquired assets had fair value of $668.9 million, including $438.3 million of loans; approximately $536.7 million of deposits were assumed. First Clover Leaf results are included only from September 9 through year-end.
- Management attributed higher earnings primarily to asset growth from acquisitions and strong legacy-market lending, alongside increased insurance, electronic transaction, and deposit-service revenues. The acquisition added $2.5 million of net income for the post-close period and contributed $0.9 million of net purchase-accounting accretion, net of intangible amortization. Acquisition expenses were $1.34 million before tax.
- Credit measures weakened: nonperforming loans rose to $18.2 million, or 1.00% of loans, from $4.0 million, or 0.31%. The 2016 provision for loan losses was $2.8 million versus $1.3 million; net charge-offs were $0.65 million. The allowance was $16.8 million, or 0.92% of loans, compared with 1.14% a year earlier. The company noted acquired loans were recorded at fair value, affecting the allowance ratio.
- Fourth-quarter 2016 net income was $6.8 million and diluted EPS was $0.55, versus $4.7 million and $0.48 in fourth-quarter 2015.
- The Series C preferred stock converted into approximately 1.36 million common shares in May 2016, eliminating the associated preferred dividends. Common dividends declared were $0.62 per share for the year, including a special dividend. No shares were repurchased in 2016.
Outlook, risks, and contingencies
- The filing gives no specific earnings, revenue, or margin guidance. Management described ongoing strategic initiatives under its Achieve 2020 plan, focused on growth, customer service, employees, operations, shareholder value, and enterprise risk management. It expected First Clover Leaf Bank to merge into First Mid Bank in the first quarter of 2017.
- Interest-rate sensitivity remains important. Management reported cumulative liability sensitivity through the first twelve months; its model indicated that a 100-basis-point increase in rates could reduce net interest income by $1.0 million (1.7%), while a 100-basis-point decrease could reduce it by $2.9 million (5.1%). A 200-basis-point decline was slightly outside the company’s stated EVE policy guideline.
- Credit exposures include commercial real estate, agriculture, hotels and motels, and regional Illinois borrowers. Agricultural loans totaled approximately $213 million, including $171.3 million in other grain farming. Management cited low commodity prices, drought, weaker real-estate values, and reduced travel as potential sources of higher losses.
- Other disclosed risks include funding and deposit liquidity, cybersecurity and third-party service disruptions, securities valuation and impairment, goodwill impairment, regulatory changes, and integration of acquisitions. One trust-preferred security had a $1.65 million fair value and $1.40 million unrealized loss; further defaults or deferrals could cause additional impairment.
- A purported shareholder class action challenges the First Clover Leaf merger, alleging fiduciary-duty and disclosure issues and seeking rescission, damages, and costs. The company and individual defendants moved to dismiss and stated they intend to defend the case; management assessed ordinary-course claims and lawsuits as not expected to have a material adverse effect.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The acquired First Clover Leaf operations were excluded from management’s and the auditor’s internal-control assessment scope.
Important facts for investors to verify
- How First Clover Leaf integration, planned cost savings, and the bank merger progressed after year-end; reported pro forma figures exclude anticipated synergies.
- Whether the sharp increase in nonperforming loans and troubled debt restructurings—$10.9 million at year-end—stabilized, and whether acquired-loan fair-value marks adequately reflect expected credit losses.
- Deposit stability and funding costs, including reliance on repurchase agreements, public-entity deposits, and collateral-backed borrowing capacity.
- Actual net interest income performance as rates change, compared with the filing’s modeled scenarios and assumptions.
- Developments in the merger-related lawsuit, the trust-preferred security’s cash flows and valuation, and any changes in goodwill or deferred-tax-asset recoverability.