First Mid-Illinois Bancshares, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. The company is a bank holding company operating primarily in central Illinois. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net interest income | $12.20 | $12.05; up 1.3% |
| Net interest margin | 3.33% | 3.43% |
| Provision for loan losses | $0.48 | $0.62 |
| Noninterest income | $4.55 | $4.58 |
| Noninterest expense | $10.61 | $10.62 |
| Income before taxes | $5.66 | $5.40 |
| Net income | $3.53 | $3.39 |
| Preferred dividends | $1.10 | $0.94 |
| Net income available to common shareholders | $2.42 | $2.45 |
| Basic and diluted EPS | $0.41 | $0.41 |
Annualized return on average assets was 0.89% (0.90% in Q1 2012); return on average common equity was 9.21% (9.87%).
Financial position, cash flow and capital
- At March 31, total assets were $1,577.7 million, essentially unchanged from year-end 2012. Net loans were $890.2 million, down $8.9 million; available-for-sale securities were $535.1 million, up $26.8 million.
- Deposits totaled $1,310.2 million, up $36.1 million from December 31. Repurchase-agreement funding fell $37.1 million to $76.4 million. FHLB borrowings were $5.0 million and junior subordinated debentures were $20.6 million.
- Cash and cash equivalents declined $15.5 million to $67.2 million. Q1 operating cash flow was positive $8.0 million; investing cash flow was negative $19.7 million and financing cash flow negative $3.9 million. Investing outflows included $99.1 million of securities purchases, partly offset by maturities and sales.
- Stockholders’ equity was $157.1 million, up $0.4 million from year-end. The decline in available-for-sale securities’ value reduced equity by $1.3 million after tax; treasury-share purchases reduced equity by about $1.2 million.
- Company Tier 1 risk-based capital was 14.89% and total risk-based capital was 16.06%. First Mid Bank’s ratios were 13.45% and 14.64%, respectively; the bank exceeded the filing’s “well-capitalized” thresholds.
- Management described liquidity as sufficient. Available sources included $35 million of overnight federal funds lines, about $98.4 million of additional FHLB borrowing capacity subject to collateral, and a revolving credit line with no balance. The line was renewed after quarter-end at a reduced maximum of $15 million.
Material changes and credit quality
- Net interest income edged higher as growth in average earning assets and lower funding costs offset lower yields on earning assets. Net interest margin nevertheless narrowed to 3.33% from 3.43%, reflecting asset yields declining more than liability costs.
- Net income rose $0.14 million, but income available to common shareholders fell $0.03 million as preferred dividends increased.
- Noninterest income was broadly stable: mortgage banking revenue increased to $0.29 million, while insurance commissions fell to $0.49 million, principally due to lower carrier contingency income. Total operating expense was nearly unchanged.
- Loans were down $8.1 million from year-end, primarily from seasonal agricultural paydowns and declines in commercial and industrial loans, partly offset by growth in commercial real estate. Deposits grew, with increases in interest-bearing transaction, savings and money-market accounts offsetting declines in noninterest-bearing and time deposits.
- Nonperforming loans were $8.26 million, or 0.91% of loans, versus $7.59 million and 0.83% at year-end 2012. Nonaccrual loans increased to $8.16 million. Loans past due 30 days or more were 0.57% of loans, down from 0.69% at year-end. Net charge-offs were $0.27 million, or an annualized 0.12% of average loans, compared with $0.44 million and 0.21% in Q1 2012.
- The allowance for loan losses was $12.0 million, 1.33% of loans and 145.1% of nonperforming loans. The Q1 provision was lower year over year, while management continued to incorporate economic and industry risks in its reserve assessment.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management reported continued pressure on asset yields from historically low interest rates and loan competition. Interest-rate gap analysis showed the company liability-sensitive cumulatively through 12 months; management said rate increases could adversely affect net interest income. A prolonged low-rate environment could also pressure margin and interest income.
- Credit exposure is concentrated in central Illinois, including agriculture: $138.3 million of loans to agriculture-related borrowers, of which $116.5 million was in other grain farming. Management cited low commodity prices, drought, reduced crop yields and reduced government assistance as potential loss drivers. It also identified exposure to hotels and motels ($45.6 million) and commercial and residential property lessors.
- Three pooled trust-preferred securities had $4.21 million of gross unrealized losses and a fair value of $0.58 million. They were carried as Level 3 assets, are on nonaccrual, and receive payment-in-kind treatment under deal structures. No Q1 2013 OTTI was recorded; the company warned further downgrades, deferrals or defaults—particularly involving PreTSL XXVIII—could cause additional impairment and materially affect future earnings.
- Available-for-sale securities produced a $1.31 million after-tax other comprehensive loss in Q1. The company also disclosed that changing fair values and valuation assumptions can affect reported equity and results.
- Off-balance-sheet credit commitments and lines were $233.5 million, with standby letters of credit of $3.2 million. These amounts are contractual exposures, not necessarily expected cash draws; management said it did not anticipate losses from these instruments.
- Basel III implementation details remained uncertain in the filing; management was monitoring proposed capital-rule changes. The filing reported no material change in market risk, no legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Track net interest margin, asset yields, funding costs and the effect of interest-rate changes on earnings.
- Monitor nonaccrual and restructured loans, charge-offs, reserve coverage, and agricultural and commercial-real-estate credit trends.
- Review the trust-preferred securities’ expected cash flows, Level 3 assumptions, payment-in-kind status and risk of additional impairment.
- Confirm liquidity capacity and the terms and covenants of the renewed $15 million revolving credit line, alongside deposit and repurchase-agreement trends.
- Assess the effect of preferred dividends and potential preferred-stock conversion or redemption terms on common shareholders’ earnings and dilution.