First Mid-Illinois Bancshares, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unless stated otherwise, dollar amounts are in millions; comparative balance-sheet amounts are as of December 31, 2010. The interim statements are unaudited. The company reports as a single segment and cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $12.142 | $9.778 | $35.726 | $28.579 |
| Provision for loan losses | $0.728 | $0.884 | $2.584 | $2.727 |
| Other income | $3.700 | $3.652 | $11.764 | $9.763 |
| Other expense | $10.864 | $9.536 | $32.167 | $26.034 |
| Net income | $2.679 | $2.012 | $8.102 | $6.342 |
| Net income available to common shareholders | $1.760 | $1.458 | $5.465 | $4.657 |
| Diluted EPS | $0.29 | $0.24 | $0.90 | $0.76 |
- Growth and margins: Q3 net income rose 33%; nine-month net income rose 28%. Nine-month net interest income increased 25%, primarily reflecting growth in earning assets following the 2010 branch acquisition. Nine-month net interest margin declined to 3.42% from 3.60%; Q3 net yield on interest-earning assets was 3.46% versus 3.48%.
- Balance sheet at September 30: Assets were $1,503.953, up from $1,468.245 at year-end 2010. Net loans were $803.604 on the balance sheet; loans including loans held for sale increased about 1.4% to $815.491. Available-for-sale securities were $449.749, up $106.933 from year-end.
- Funding and debt: Deposits totaled $1,198.889, down $13.821 from year-end. Repurchase-agreement funding rose $22.338 to $116.395; FHLB borrowings were $19.750 and junior subordinated debentures were $20.620. The filing reports no balance on the $20 million revolving credit line.
- Capital: Stockholders’ equity was $140.992, up 25.6% from year-end, reflecting earnings, preferred-stock issuance, and securities valuation gains, partly offset by dividends and share repurchases. Company Tier 1 and total risk-based capital ratios were 13.82% and 14.91%; First Mid Bank’s ratios were 11.92% and 13.02%. The bank met the filing’s well-capitalized thresholds.
- Cash flow, nine months: Operating activities provided $15.061; investing activities used $115.340; financing activities provided $18.225. Cash and cash equivalents declined $82.054 to $149.439, largely alongside increased securities investment.
- Liquidity: Management said liquidity was sufficient. Disclosed sources include $35 million in overnight federal-funds lines, approximately $76 million of additional FHLB borrowing capacity subject to collateral, and the unused $20 million revolving line subject to covenants.
Material changes and credit quality
- Compared with the prior-year nine-month period, higher net interest income and other income more than offset a $6.133 increase in other expense and higher taxes. Other income growth included lower investment impairment charges and higher trust and ATM/debit revenues. Expenses rose primarily with operation of the acquired branches, including staffing, occupancy, and equipment costs.
- Net interest margin declined despite higher net interest income: acquired earning assets carried lower spreads, while lower market rates reduced asset yields. The nine-month effective tax rate increased to 36.4% from 33.8%, primarily due to an Illinois corporate tax-rate increase.
- Nonperforming loans were $9.804, down from $10.434 at year-end; repossessed assets were $4.874, down from $6.199. The allowance was $10.429, or 1.28% of loans and 106.4% of nonperforming loans. Nine-month net charge-offs rose to $2.548 from $1.259, despite a slightly lower provision.
- Loans past due 30 days or more were 1.08% of loans, versus 1.17% at year-end. Real estate represented approximately 74% of loans. Agriculture-related borrowers accounted for $125.2 million of exposure, including $113.2 million in other grain farming; hotel and motel loans were $48.5 million.
Outlook, risks, contingencies, and unusual items
- No numerical earnings or revenue guidance is provided. Management stated that it did not expect reasonably likely interest-rate changes over the next 12 months to materially adversely affect net interest income, while noting liability sensitivity through the one-year horizon.
- Four pooled trust preferred securities had a $0.703 fair value against $5.994 book value and $5.291 of unrealized losses. The company recorded a $0.338 Q3 credit impairment charge. Management warned that further downgrades, deferrals, or defaults—particularly in PreTSL XXVIII—could cause additional impairment and materially affect future earnings. These securities use significant unobservable valuation inputs.
- Credit risks include the company’s central Illinois and agriculture concentration, possible pressure from lower commodity prices, reduced crop yields or government assistance, and exposure to hotels and commercial real estate. Management also identifies economic conditions, interest rates, deposit flows, competition, regulation, and portfolio valuation as risks.
- On October 20, 2011, a putative class-action lawsuit alleged unfair assessment and collection of overdraft fees and sought restitution and unspecified damages. The company said it intends to defend itself vigorously; the filing does not quantify potential exposure.
- During the first nine months, the company issued $19.25 million of Series C preferred stock, repurchased $2.015 million of common stock, and paid $3.156 million in preferred dividends. A new executive long-term incentive plan was approved in September. The filing states that goodwill was not impaired at September 30.
Important facts for investors to verify
- Track net interest margin and whether earning-asset yields and funding costs continue to compress.
- Monitor credit migration, net charge-offs, the allowance, commercial real estate exposures, and agriculture-related concentrations.
- Review future credit performance and valuation assumptions for the trust preferred portfolio and any additional impairment charges.
- Confirm preferred-stock issuance terms and outstanding subscriptions, and assess the impact of preferred dividends and potential conversion on common shareholders.
- Follow developments in the overdraft-fee lawsuit and determine whether the company later estimates a loss or records a contingency.
- Assess deposit trends, repurchase-agreement funding, available contingent liquidity, and compliance with borrowing covenants.