First Mid-Illinois Bancshares, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three months ended March 31, 2015, compared with Q1 2014; balance-sheet figures are compared with December 31, 2014. The company operates as a single reporting segment, principally serving central and southwestern Illinois.
Key financial metrics
- Revenue and earnings: Net interest income was $12.6 million, up 0.5% year over year. Total other income was $4.8 million, up 7.1%. Pretax income rose to $6.34 million from $5.75 million; net income increased to $4.04 million from $3.61 million. Net income available to common shareholders was $3.49 million versus $2.50 million.
- Per-share results and returns: Diluted EPS was $0.48, compared with $0.43. Annualized return on average assets was 1.00% (0.91% in Q1 2014); return on average common equity was 9.99% (9.96%).
- Margins: Net interest margin declined to 3.34% from 3.41%, principally reflecting lower yields on loans and investments. Net interest spread was 3.30%, versus 3.37%.
- Credit costs: Loan-loss provision was $265,000, down from $323,000. Net recoveries were $159,000, versus $31,000. The allowance was $14.1 million, or 1.34% of loans.
- Cash flow: Operating activities provided $7.1 million; investing activities used $11.0 million; financing activities provided $8.1 million. Cash and cash equivalents increased $4.2 million to $56.0 million.
- Balance sheet and liquidity: Assets were $1.624 billion, up from $1.607 billion at year-end. Net loans were $1.039 billion, down $7.6 million, largely due to seasonal agricultural loan paydowns. Deposits were $1.279 billion, up $7.0 million. Securities totaled $454.3 million, including $405.5 million available-for-sale. Management said liquidity was sufficient; disclosed sources included $35 million of overnight federal-funds lines, approximately $75.3 million of additional FHLB borrowing capacity, and $13 million available on a $15 million revolving line.
- Debt and capital: Total liabilities were $1.453 billion. Repurchase agreements were $116.6 million; FHLB advances, $25.0 million; other borrowings, $2.0 million; and junior subordinated debentures, $20.6 million. The company reported a 14.50% Tier 1 risk-based capital ratio and a 15.69% total risk-based capital ratio; the bank was categorized as well-capitalized.
Material changes versus comparable periods
- Net income increased $432,000 year over year, supported by higher other income, lower loan-loss provision, and lower operating expenses; higher income taxes partly offset these benefits.
- Other income growth included higher insurance commissions, service charges, mortgage banking revenue, and ATM/debit-card revenue. Mortgage banking revenue rose to $167,000 from $98,000.
- Other expense declined 1.4% to $10.8 million, mainly from lower occupancy and equipment costs. Investment securities increased $22.8 million from year-end, largely from purchases of U.S. government agency securities.
- Nonperforming loans were $4.66 million, versus $4.54 million at year-end and $5.5 million in Q1 2014. Loans past due 30 days or more were 0.37% of loans, compared with 0.27% at year-end.
- Available-for-sale securities generated $2.9 million of after-tax other comprehensive income in Q1, contributing to the increase in stockholders’ equity to $170.8 million from $164.9 million at year-end.
Outlook, commentary, risks, and unusual items
- Branch acquisition: In January, the bank agreed to acquire certain assets and assume certain liabilities of 12 Old National Bank branches in southern Illinois. December 31, 2014 book balances were approximately $160 million of loans and $502 million of deposits. Closing was expected in Q3 2015, subject to regulatory approval, financing, and customary conditions.
- Interest-rate exposure: The company was liability-sensitive on a cumulative basis through the 12-month horizon; management warned that rate increases could adversely affect net interest income. Continued low rates and loan competition could further pressure asset yields and margin. Management reported no material change in market risk since year-end.
- Credit concentrations: Agriculture is a significant regional exposure: $166.3 million of loans were to agriculture-related businesses, including $140.8 million in other grain farming. Management noted that sustained low commodity prices, drought, lower crop yields, or reduced government support could increase problem loans and losses. Hotel/motel lending totaled $58.0 million; performance could be affected by weaker regional travel.
- Trust-preferred security: One investment had a $3.255 million book value and $2.166 million fair value, with a $1.089 million unrealized loss and $1.111 million of previously recorded credit impairment. It was Level 3 valued, in payment-in-kind status, and on nonaccrual. Management did not record additional impairment in Q1, but warned that further downgrades, deferrals, or defaults could cause future impairment and materially affect earnings.
- Commitments and contingencies: Unused commitments and lines of credit totaled $236.4 million, with $3.5 million of standby letters of credit. The company said it did not anticipate losses on these instruments. No legal proceedings were reported. No specific earnings or financial guidance was provided.
- The company repurchased 42,518 shares for approximately $836,000 during the quarter. The Rights Agreement was terminated January 21, 2015, causing the associated rights to expire.
Important facts for investors to verify
- Progress, financing, regulatory approvals, and final economics of the 12-branch acquisition, including how assumed deposits and acquired loans affect funding and capital.
- Whether margin pressure persists and how the bank’s liability-sensitive position performs under changing interest rates.
- Credit trends in agricultural, commercial real estate, and hotel/motel portfolios; monitor past-due loans, nonperformers, recoveries, and allowance adequacy.
- Changes in the trust-preferred security’s payment status, valuation assumptions, expected cash flows, and potential additional impairment.
- Whether deposit growth, available borrowing capacity, and capital ratios remain sufficient as commitments are drawn and acquisition needs develop.