First Mid-Illinois Bancshares, Inc. — Q1 2012 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2012, compared with Q1 2011; balance-sheet comparisons are to December 31, 2011. The company operates as a single reporting segment, with most business in central Illinois.
Financial results and position
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $12.1 million | $11.7 million in Q1 2011 |
| Net interest margin | 3.43% | 3.41% in Q1 2011 |
| Provision for loan losses | $615,000 | $940,000 in Q1 2011 |
| Other income | $4.6 million | $4.0 million in Q1 2011 |
| Other expense | $10.6 million | $10.3 million in Q1 2011 |
| Net income | $3.39 million | $2.85 million in Q1 2011 |
| Net income available to common shareholders; diluted EPS | $2.45 million; $0.41 | $2.14 million; $0.35 in Q1 2011 |
| Assets | $1.534 billion | $1.501 billion at December 31, 2011 |
| Net loans | $828.7 million | $847.9 million at December 31, 2011 |
| Deposits | $1.234 billion | $1.171 billion at December 31, 2011 |
| Stockholders’ equity | $143.6 million | $141.0 million at December 31, 2011 |
| Cash and cash equivalents | $123.6 million | $73.1 million at December 31, 2011 |
Cash flow: Operating activities provided $5.2 million and investing activities provided $17.0 million; financing activities provided $28.3 million. Cash and cash equivalents increased $50.5 million during the quarter.
Margins and earnings: Net interest income rose 3.0%, primarily as growth in average loans and securities and lower funding costs more than offset lower yields on interest-earning assets. Net interest margin increased slightly. Other income growth reflected higher securities gains, mortgage banking revenue and the absence of Q1 2011 impairment charges; expense growth was driven in part by compensation and other operating costs.
Credit and capital: The allowance for loan losses was $11.3 million, or 1.34% of loans; the allowance equaled 146.8% of nonperforming loans. Annualized net charge-offs were 0.21% of average loans. The company reported Tier 1 risk-based capital of 13.85% and total risk-based capital of 14.99%; First Mid Bank was reported as well-capitalized under regulatory standards.
Debt and liquidity: Deposits were the primary funding source. Repurchase agreements were $109.0 million, FHLB borrowings $9.75 million, other borrowings $8.25 million, and junior subordinated debentures $20.62 million. The $20 million Northern Trust revolving line had no balance outstanding at quarter-end and was renewed for one year on April 21, 2012. Management stated liquidity was sufficient; reported additional FHLB borrowing capacity was approximately $76 million, subject to collateral.
Material changes versus comparable periods
- Net income increased $545,000 year over year. Higher net interest income, lower loan-loss provision and higher other income were partly offset by higher expenses and income taxes.
- Net loans declined 2.3% from year-end, primarily due to seasonal reductions in agricultural lending. Deposits rose about $62.9 million.
- Nonperforming loans were $7.7 million, up from $7.4 million at year-end but down from $11.7 million in March 2011. Repossessed assets fell to $3.3 million from $4.6 million at year-end and $6.0 million a year earlier.
- Common stock repurchases totaled 28,934 shares for approximately $617,000 during the quarter.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said results for the interim period are not necessarily indicative of full-year results and stated it did not expect reasonably anticipated interest-rate changes over the next 12 months to materially adversely affect net interest income.
- The company was liability-sensitive on a cumulative basis over the first 12 months in its static gap analysis; management noted that rate increases could adversely affect net interest income.
- Credit exposure is concentrated geographically in central Illinois and includes agricultural borrowers: $128.0 million of agriculture-related loans, including $108.8 million in other grain farming. Lower commodity prices, weaker yields or reduced government assistance could increase problem loans. The filing also identifies hotel/motel and commercial and residential building-lessor exposures.
- Four trust preferred securities had a combined fair value of $536,000 and unrealized losses of $4.913 million. They were in payment-in-kind status and valued using significant unobservable inputs. No Q1 2012 OTTI charge was recorded, but management warned that further downgrades, deferrals or defaults—particularly involving PreTSL XXVIII—could require future impairment and materially affect earnings.
- Series C preferred stock subscriptions of $8.25 million from remaining investors had not been issued pending regulatory approval. The company instead had short-term unsecured promissory notes for that amount bearing 8% interest, with default-related acceleration provisions.
- Off-balance-sheet unused commitments and lines of credit totaled $281.1 million, with standby letters of credit of $7.1 million. These commitments involve credit and liquidity risk; amounts may not be drawn in full.
- Legal proceedings: none reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the improvement in earnings is sustainable, particularly given the contribution from securities gains and the absence of current-quarter trust preferred impairment charges.
- Trends in nonperforming loans, agricultural and commercial real estate credit quality, charge-offs, and the adequacy of the loan-loss allowance.
- Valuation and expected cash flows of the trust preferred securities, including possible further impairment.
- Regulatory approval and final treatment of the $8.25 million Series C subscriptions and related promissory notes.
- Deposit stability, funding costs, liquidity capacity and the effect of interest-rate changes on net interest income.
- The filing reports no common dividends declared in Q1, while its cash flow statement reports $948,000 of common-stock dividends paid; investors may wish to confirm the nature and timing of those payments.