First Mid-Illinois Bancshares, Inc. — Q3 2013 Form 10-Q
Business context and period. The company is a one-segment financial services holding company operating primarily in central Illinois. This unaudited report covers the three and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. Unless otherwise noted, amounts are in millions of dollars.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $12.62 | $12.61 | $37.17 | $36.92 |
| Provision for loan losses | $0.98 | $0.72 | $1.71 | $1.75 |
| Other income | $5.70 | $4.52 | $14.96 | $13.60 |
| Other expense | $11.08 | $10.56 | $32.61 | $31.96 |
| Net income | $3.91 | $3.65 | $11.10 | $10.52 |
| Net income available to common shareholders | $2.81 | $2.54 | $7.79 | $7.37 |
| Diluted EPS | $0.47 | $0.42 | $1.31 | $1.22 |
- Profitability: Nine-month net income rose 5.6%; diluted EPS increased from $1.22 to $1.31. Annualized return on average assets was 0.94% versus 0.91%, and return on average common equity was 10.12% versus 9.62%.
- Margins and revenue: Nine-month net interest margin declined to 3.37% from 3.44%, as yields on earning assets fell more than funding costs. Lower deposit interest expense partly offset lower loan and securities income. Nine-month noninterest income increased 10.1%, led by securities gains.
- Balance sheet and liquidity: Total assets were $1.546 billion, down from $1.578 billion at year-end 2012. Net loans increased to $929.0 million from $899.1 million; deposits declined to $1.264 billion from $1.274 billion. Cash and cash equivalents fell to $32.0 million from $82.7 million.
- Cash flow: For the first nine months, operating activities provided $14.7 million, investing activities used $35.1 million, and financing activities used $30.3 million. Cash and cash equivalents declined $50.7 million.
- Credit quality: Nonperforming loans were $7.0 million, or 0.74% of loans, versus $7.6 million, or 0.83%, at year-end. Loans past due 30 days or more were 0.28% of loans. The allowance was $13.0 million, 1.38% of loans and 185.1% of nonperforming loans. Nine-month net charge-offs were $0.51 million versus $1.23 million.
- Capital and debt: Company Tier 1 and total risk-based capital ratios were 14.99% and 16.21%, respectively; the bank remained “well-capitalized.” Repurchase-agreement funding fell to $78.1 million from $113.5 million, while FHLB borrowings rose to $20.0 million from $5.0 million. Junior subordinated debentures were $20.6 million.
Material changes and unusual items
- Q3 securities gains were $1.46 million; $1.4 million resulted from the July sale of two trust preferred securities above their aggregate book value. Total nine-month securities gains were $2.29 million, versus $0.93 million a year earlier.
- Mortgage banking revenue declined: Q3 revenue was $0.24 million versus $0.48 million, reflecting lower loan-sale volume as refinance and purchase activity slowed.
- Stockholders’ equity declined $6.1 million to $150.6 million, primarily reflecting an $11.5 million after-tax decline in accumulated other comprehensive income, including unrealized available-for-sale securities losses; net income partly offset the decline.
- The remaining trust preferred security had a $3.652 million book value and $0.174 million fair value, including $3.478 million of unrealized losses. It was nonaccrual and in payment-in-kind status; management warned future downgrades, deferrals or defaults could cause impairment and materially affect earnings.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said prolonged low rates and competition were pressuring asset yields and could further reduce interest income and margin. Static gap analysis showed the company liability-sensitive cumulatively through 12 months, so rising rates could adversely affect net interest income.
- Credit exposures include $162.3 million in agriculture-related loans, including $135.6 million in other grain farming, as well as hotel/motel lending and commercial real estate. Extended low commodity prices, drought or lower crop yields could weaken agricultural borrowers; reduced regional travel could affect hotel borrowers.
- Liquidity sources include $35 million of overnight federal-funds lines, approximately $86.6 million of additional FHLB borrowing capacity subject to collateral, and a $15 million undrawn revolving credit line. Management stated liquidity was sufficient. Outstanding commitments and lines of credit were $218.2 million, with $4.0 million of standby letters of credit.
- New Basel III capital rules were scheduled to phase in from 2015 through 2019. Management reported no material change in market risk since December 31, 2012. No legal proceedings were reported, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether earnings growth is sustainable without the one-time trust preferred securities sale gain, given margin pressure and lower mortgage banking revenue.
- The remaining trust preferred security’s cash-flow assumptions, nonaccrual status, valuation and potential for additional impairment.
- Credit trends in agriculture, commercial real estate and hotel/motel exposures, including allowance adequacy and future charge-offs.
- Deposit and cash trends, the use and cost of FHLB advances and other borrowings, and availability of contingent liquidity sources.
- The impact of unrealized securities losses and applicable capital rules on equity, regulatory ratios, dividends and share repurchases.