First Mid-Illinois Bancshares, Inc. — Q1 2014 Form 10-Q
Business context and period: Regional banking holding company operating primarily in central Illinois, with banking, trust, brokerage and insurance activities. This unaudited filing covers the three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Amounts are in U.S. dollars.
Financial performance and position
- Earnings: Net income was $3.607 million, up 2.2% from $3.528 million in Q1 2013. Net income available to common shareholders was $2.503 million, or $0.43 per diluted share, versus $2.424 million, or $0.41 per share. Preferred dividends were $1.104 million.
- Interest income and margins: Net interest income rose 2.8% to $12.547 million; provision for loan losses declined to $323,000 from $480,000. Net interest margin increased to 3.41% from 3.33%. Annualized return on average assets was 0.91%, and return on average common equity was 9.96%.
- Noninterest income and expenses: Other income declined 1.5% to $4.481 million, including lower securities gains ($191,000 versus $353,000) and mortgage banking revenue ($98,000 versus $286,000). Other expense rose 3.3% to $10.960 million, mainly due to salary and occupancy costs. Effective tax rate was 37.2%, compared with 37.7%.
- Assets and loans: Total assets were $1.583 billion, down from $1.605 billion at year-end. Net loans increased $7.7 million to $976.7 million. Commercial and industrial lending grew, partly offset by seasonal agricultural loan paydowns. Available-for-sale securities declined $40.9 million to $447.9 million.
- Credit quality: Nonperforming loans were $5.5 million (0.55% of loans), down from $6.5 million at year-end and $8.3 million a year earlier. Allowance for loan losses was $13.6 million, or 1.37% of loans and 248% of nonperforming loans. The quarter produced $31,000 of net recoveries, compared with $272,000 of net charge-offs in Q1 2013.
- Deposits, debt and liquidity: Deposits totaled $1.306 billion, up $18.2 million from year-end. Repurchase-agreement balances fell $37.9 million to $81.3 million; FHLB borrowings fell $10 million to $10 million. Other borrowings were $1 million and junior subordinated debentures were $20.6 million. Management said liquidity was sufficient; available sources included $35 million of overnight federal funds lines, about $95.2 million of additional FHLB borrowing capacity supported by excess collateral, and $14 million available on the company’s $15 million revolving line.
- Cash flow: Operating activities provided $50,000, versus $8.0 million in Q1 2013. Investing activities provided $36.7 million, primarily reflecting securities sales and maturities; financing activities used $29.3 million, including lower repurchase-agreement and FHLB balances. Cash and cash equivalents increased $7.5 million to $72.6 million.
- Capital and equity: Stockholders’ equity was $153.9 million, up $4.5 million from year-end, including a $2.4 million after-tax increase from available-for-sale securities. Company Tier 1 risk-based capital ratio was 14.24% and total capital ratio was 15.46%; the bank remained above “well-capitalized” thresholds. The company repurchased 41,105 shares for approximately $902,000.
Material changes, outlook and risks
- Compared with Q1 2013, earnings improved modestly as higher average loan balances, lower deposit costs and a lower loan-loss provision more than offset increased expenses and reduced securities and mortgage banking income. Mortgage loan sales fell to $6.7 million from $19.3 million, reflecting slower refinancing and purchase activity.
- No specific earnings or operating guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. It reported no material change in market risk from year-end.
- Interest-rate sensitivity analysis showed the company was cumulatively liability-sensitive through 12 months; management noted that future rate increases could adversely affect net interest income. Continued low rates and competition for loans could also pressure asset yields and margins.
- Credit exposures include agriculture, especially grain farming, as well as hotels and commercial and residential property lessors. Prolonged low commodity prices, drought, reduced crop yields or government assistance, and reduced regional travel could increase problem loans and losses.
- The remaining pooled trust preferred security had a $3.652 million book value and $241,000 fair value, with a $3.411 million unrealized loss and $1.111 million of prior impairment recognized in earnings. It was in payment-in-kind status and on nonaccrual; further defaults, deferrals or credit deterioration could result in additional impairment.
- Off-balance-sheet commitments included $252.3 million of unused commitments and lines of credit and $4.1 million of standby letters of credit. The company said it did not anticipate losses, but actual draws would create funding and credit exposure. The filing reported no legal proceedings.
- Basel III capital requirements were scheduled to phase in beginning in 2015, with the capital conservation buffer phased in through 2019. Management stated the company and bank met then-applicable requirements.
Key facts for investors to verify
- Whether loan growth, especially commercial and industrial growth, is sustainable and whether seasonal agricultural paydowns or sector concentrations change credit risk.
- Trends in nonperforming loans, criticized loans, allowance coverage and recoveries, including the adequacy of reserves under changing regional and agricultural conditions.
- Whether net interest margin holds up given the liability-sensitive position, competitive loan pricing and interest-rate movements.
- Valuation, expected cash flows and impairment risk for the trust preferred security, including the duration of its payment-in-kind status.
- Funding and liquidity if customers draw on the $256.4 million of disclosed commitments and letters of credit, or if deposits and repurchase balances shift.
- The effect of ongoing share repurchases, preferred stock dividends and upcoming regulatory capital requirements on capital and shareholder returns.