First Mid-Illinois Bancshares, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited and consolidated. The company operates as a single reporting segment, principally serving central Illinois.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $12.258 million | $11.879 million | $24.311 million | $23.584 million |
| Provision for loan losses | $416,000 | $916,000 | $1.031 million | $1.856 million |
| Other income | $4.497 million | $4.059 million | $9.077 million | $8.064 million |
| Other expense | $10.782 million | $11.011 million | $21.399 million | $21.303 million |
| Net income | $3.479 million | $2.578 million | $6.869 million | $5.423 million |
| Net income available to common shareholders | $2.374 million | $1.567 million | $4.825 million | $3.705 million |
| Diluted EPS available to common shareholders | $0.39 | $0.26 | $0.80 | $0.61 |
- Six-month net interest margin was 3.43%, versus 3.40% in 2011. Net interest income rose 3.1%, supported by growth in average loans and securities and lower funding costs, partly offset by lower yields on earning assets.
- Six-month other income rose 12.6%, mainly reflecting higher securities gains and mortgage banking revenue and no securities impairment charge, compared with $246,000 of impairment charges in the first half of 2011. Securities gains were $823,000 versus $377,000.
- Six-month other expense increased $96,000. Higher salaries and benefits were partly offset by lower other-real-estate-owned costs, FDIC assessments and intangible amortization.
- Annualized return on average assets was 0.90%, versus 0.72%; return on average common equity was 9.46%, versus 7.90%. The six-month effective tax rate rose to 37.3% from 36.1%.
Financial position, cash flow and liquidity
- At June 30, 2012, total assets were $1.542 billion, up from $1.501 billion at year-end 2011. Cash and cash equivalents were $103.3 million; available-for-sale securities were $510.0 million.
- Total deposits increased to $1.234 billion from $1.171 billion. Net loans declined to $833.0 million from $847.9 million, primarily due to seasonal agricultural loan decreases. Stockholders’ equity rose to $153.9 million from $141.0 million.
- Six-month cash flows were $9.1 million provided by operations, $13.6 million used in investing and $34.7 million provided by financing. Cash and cash equivalents increased $30.2 million to $103.3 million.
- Period-end funding included $118.0 million of repurchase agreements, $9.75 million of FHLB advances and $20.62 million of junior subordinated debentures. The company had no balance on its $20 million revolving credit facility. It reported $35 million in federal funds lines and collateral supporting approximately $92.8 million of additional FHLB advances.
- Regulatory capital remained above required levels. Company Tier 1 and total risk-based capital ratios were 14.88% and 16.04%; First Mid Bank’s were 12.73% and 13.90%. The bank qualified as well-capitalized.
Asset quality, risks and notable items
- Nonperforming loans were $6.9 million, compared with $7.4 million at December 31, 2011 and $10.6 million a year earlier. Nonperforming loans plus repossessed assets were $9.7 million, down from $12.0 million at year-end. The allowance was $11.455 million, or 1.35% of loans and 165.6% of nonperforming loans.
- Six-month net charge-offs were $696,000, versus $1.554 million in 2011; provision expense fell to $1.031 million from $1.856 million. Troubled debt restructurings increased to $2.83 million from $1.834 million at year-end.
- Credit exposures include $117.4 million in other grain farming, $46.1 million in hotel and motel loans, and material lending to property lessors. Management said second-quarter drought conditions were expected to reduce 2012 crop yields and that it was assessing effects on agricultural borrowers. Prolonged low commodity prices, drought or reduced crop yields could increase agricultural credit losses; reduced travel could affect hotel borrowers.
- Trust-preferred securities had a fair value of $648,000 against $5.372 million in book value, with $4.731 million in unrealized losses. The securities were on nonaccrual and in payment-in-kind status; management warned that future downgrades, deferrals or defaults could cause further impairment. On July 3, 2012, one holding was redeemed, with proceeds sufficient to repay its $123,000 book value, reverse $127,000 of recorded impairment and recover about $11,500 of previously unrecorded interest.
- On June 28, 2012, the company issued the final $8.25 million of subscribed Series C preferred stock after Federal Reserve non-objection; the related short-term notes were cancelled. Preferred dividends reduce earnings available to common shareholders.
- Outstanding off-balance-sheet commitments were reported at $306.4 million, including $300.0 million of unused commitments and lines of credit and $6.3 million of standby letters of credit. Management said these are subject to credit risk and do not necessarily represent future cash requirements.
- Management reported no material change in market risk since year-end and stated that reasonably expected rate changes were not expected to materially adversely affect net interest income. The filing provides no earnings guidance. Management cautioned interim results are not necessarily indicative of full-year results.
- Proposed Basel III rules were under consideration; final requirements and their effects were uncertain. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. No legal proceedings were reported.
Material changes versus comparable periods
- Six-month net income increased $1.446 million and diluted EPS rose from $0.61 to $0.80. Lower loan-loss provisions and higher other income contributed to the improvement.
- Assets and deposits grew from year-end, while net loans declined. Average earning assets increased year over year, and the net interest margin improved modestly.
- Credit quality measures improved year over year: nonperforming loans, repossessed assets and net charge-offs were lower. However, TDR balances were higher than at year-end.
- Noninterest income growth included more securities gains and mortgage banking activity; these sources may vary between periods.
Important facts for investors to verify
- Whether drought and crop-yield impacts change agricultural borrower performance, credit classifications, provisions or charge-offs.
- The collectability and valuation of trust-preferred holdings, including the remaining securities’ cash flows and any further impairment risk.
- Trends in TDRs, nonaccrual loans, repossessed assets and allowance adequacy relative to the bank’s concentrated regional and industry exposures.
- The sustainability of earnings growth given securities gains, mortgage banking activity, funding costs and lower loan yields.
- The effect of Basel III rulemaking and preferred-stock terms on capital, common-shareholder earnings and potential dilution.
- The size and potential funding impact of the $306.4 million in off-balance-sheet commitments.