First Mid-Illinois Bancshares, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The company is a bank holding company with banking, insurance, trust and data-services subsidiaries; it reports as one segment. Financial statements are unaudited.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $12.6 million | $12.1 million | $36.9 million | $35.7 million |
| Provision for loan losses | $0.7 million | $0.7 million | $1.8 million | $2.6 million |
| Other income | $4.5 million | $3.7 million | $13.6 million | $11.8 million |
| Other expense | $10.6 million | $10.9 million | $32.0 million | $32.2 million |
| Net income | $3.6 million | $2.7 million | $10.5 million | $8.1 million |
| Net income available to common shareholders | $2.5 million | $1.8 million | $7.4 million | $5.5 million |
| Diluted EPS | $0.42 | $0.29 | $1.22 | $0.90 |
- Nine-month net interest margin was 3.44%, versus 3.42%; net interest income rose 3.3%, supported by larger loan and investment balances, while asset yields remained under pressure.
- At September 30, total assets were $1.55 billion, loans net of allowance were $886.3 million, deposits were $1.24 billion, and stockholders’ equity was $157.7 million. Since year-end 2011, assets increased $47.8 million, net loans $38.4 million and deposits $69.9 million.
- The allowance for loan losses was $11.6 million, or 1.30% of loans. Nine-month net charge-offs were $1.2 million (0.19% annualized of average loans), down from $2.5 million (0.42%) in 2011.
- Nonperforming loans were $7.8 million, 0.87% of loans, versus $7.4 million at year-end 2011 and $9.8 million a year earlier. Other real estate owned fell to $1.1 million from $4.6 million at year-end.
- Nine-month cash flows: $14.7 million provided by operations, $77.0 million used in investing and $35.0 million provided by financing. Cash and cash equivalents declined $27.4 million to $45.7 million.
- Debt and funding included $111.9 million of repurchase agreements, $9.8 million of FHLB advances and $20.6 million of junior subordinated debentures. Other borrowings were nil at quarter-end. A $20 million revolving credit line was undrawn; management reported $35 million in overnight federal-funds lines and capacity for about $94.5 million of additional FHLB advances, subject to collateral and other conditions.
- Regulatory capital remained above required levels: company Tier 1 risk-based capital was 14.73% and total capital was 15.88%; the bank’s ratios were 12.81% and 13.97%, respectively. The bank qualified as well-capitalized.
Changes versus comparable periods
- Nine-month net income increased $2.4 million; diluted EPS rose from $0.90 to $1.22. For Q3, net income increased $1.0 million and diluted EPS rose from $0.29 to $0.42.
- Lower deposit and borrowing costs more than offset reduced loan yields: nine-month interest income declined $0.5 million while interest expense declined $1.7 million.
- Other income rose $1.8 million year to date, including higher mortgage banking revenue and securities gains, and a $0.7 million year-over-year improvement in impairment recoveries/losses on securities.
- Provision expense decreased $0.8 million year to date. Nonperforming loans were below the prior-year level, though above year-end 2011; repossessed assets were substantially lower than both comparison dates.
- The company issued the final $8.25 million of Series C preferred stock in June 2012, completing the $27.5 million subscribed issuance. It also repurchased 69,754 common shares for approximately $1.6 million during the first nine months.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management said liquidity was sufficient and capital remained strong.
- Management cautioned that prolonged low interest rates and competition for loans could further pressure asset yields and net interest margin. Static gap analysis showed cumulative liability sensitivity through 12 months, indicating rate increases could adversely affect net interest income.
- Agricultural exposure is material: $146.7 million of loans were to agriculture-related borrowers, including $125.8 million to other grain farming. Management said 2012 drought-related yield reductions were not expected to materially affect the allowance, citing crop insurance, but identified prolonged low commodity prices, drought, reduced yields or lower government assistance as risks.
- Other notable concentrations include $46.2 million in hotel and motel loans, $92.8 million to lessors of non-residential buildings and $60.5 million to lessors of residential buildings. Commercial real estate and commercial lending remain exposed to local economic and borrower conditions.
- Troubled debt restructurings increased to $3.5 million from $1.8 million at year-end 2011; related specific reserves were $0.5 million. Nonaccrual loans were $7.1 million. Management’s loan-loss estimate depends on collateral values, expected cash flows and economic assumptions.
- Three trust-preferred securities had a $4.5 million unrealized loss against $0.45 million fair value and were valued using significant Level 3 inputs. They were in payment-in-kind status; management warned future downgrades, deferrals or defaults—especially in PreTSL XXVIII—could result in additional impairment and materially affect earnings.
- Off-balance-sheet commitments totaled approximately $248 million, including $243.9 million of unused commitments and lines and $4.2 million of standby letters of credit. Actual funding needs may differ because some commitments may expire unused.
- Proposed Basel III capital rules were under consideration; final requirements and effects were uncertain. Management reported no material market-risk change since year-end 2011, no legal proceedings, and effective disclosure controls.
Key facts for investors to verify
- Whether credit quality, TDR balances and agricultural borrower performance changed after September 30, particularly following the 2012 drought.
- Whether trust-preferred securities cash flows, Level 3 assumptions or impairment estimates changed, and the potential earnings impact of further deterioration.
- Whether loan and deposit growth can sustain net interest income amid rate sensitivity and continued pressure on asset yields.
- How much of the $248 million in commitments may be drawn, and whether available liquidity and collateral remain adequate under stress.
- The terms, dividend burden and potential dilution from Series B and Series C convertible preferred stock, including future conversion or redemption conditions.