First Mid-Illinois Bancshares, Inc. — FY2011 Form 10-K
Reporting period: Year ended December 31, 2011; comparisons are principally with FY2010. The company is an Illinois-focused financial holding company whose principal business is community banking, supplemented by wealth management, insurance brokerage and data processing. Community banking generated approximately 90% of revenue and profit. The 2010 acquisition of ten Illinois branches materially affects year-over-year comparisons.
Financial performance and condition
| Metric | FY2011 / year-end 2011 | FY2010 / year-end 2010 |
|---|---|---|
| Net interest income | $48.3 million | $40.1 million |
| Net interest margin | 3.45% | 3.51% |
| Non-interest income | $15.8 million | $13.8 million |
| Non-interest expense | $43.1 million | $36.9 million |
| Net income | $11.4 million | $8.8 million |
| Net income available to common shareholders | $7.8 million | $6.5 million |
| Diluted EPS | $1.29 | $1.07 |
| Total assets | $1.501 billion | $1.468 billion |
| Net loans | $847.9 million | $794.1 million |
| Total deposits | $1.171 billion | $1.213 billion |
| Stockholders’ equity | $141.0 million | $112.3 million |
- Net interest income rose 20.3%, mainly from a larger earning-asset base and lower deposit funding costs. The margin narrowed as acquisition-related deposits initially exceeded acquired loans, leaving additional funds in lower-yielding liquid assets.
- Net income increased 29.8%. Growth was partly offset by higher operating costs, including full-year branch-acquisition expenses, and higher other-real-estate-owned costs. The Illinois corporate tax-rate increase contributed to the effective tax rate rising to 36.5% from 34.0%.
- Loan-loss provision was $3.1 million, down from $3.7 million. Net charge-offs were $2.4 million. Nonperforming loans declined to $7.4 million, or 0.87% of loans, from $10.4 million; other real estate owned fell to $4.6 million from $6.1 million. The allowance was $11.1 million, or 1.29% of loans and 149.5% of nonperforming loans.
- Commercial and residential real estate represented approximately 72% of loans. Commercial real estate loans were $321.0 million; agriculture-related lending was $135.8 million, including $120.1 million in grain farming.
- Cash and cash equivalents fell to $73.1 million from $231.5 million. Operating cash flow was $19.0 million, investing activities used $191.4 million, and financing activities provided $14.1 million. Management attributed the cash decline principally to deploying acquisition-related liquidity into loans and securities.
- Borrowings totaled $181.0 million, including $132.4 million of repurchase agreements, $19.8 million of FHLB advances, $20.6 million of junior subordinated debentures and $8.25 million of short-term notes. Regulatory capital remained above well-capitalized thresholds: consolidated total risk-based capital was 14.48%, Tier 1 risk-based capital 13.37%, and leverage 8.99%; First Mid Bank’s corresponding ratios were 12.83%, 11.71% and 7.85%.
- Liquidity sources included $35 million of overnight federal-funds lines, a $20 million undrawn parent-company credit line and collateral capacity for approximately $75.8 million of additional FHLB advances. Management stated liquidity was sufficient to meet operating and customer needs.
Material changes and notable items
- Deposits declined $42.0 million during 2011, principally as money-market balances and higher-rate certificates matured and were not replaced. Loans grew 6.9%, led by real estate and commercial and industrial lending.
- Non-interest income increased 14.2%, supported by ATM/debit-card fees, trust revenue and lower securities impairment charges. Non-interest expense increased 16.6%, largely reflecting acquisition-related staffing and occupancy costs.
- The company issued $19.15 million of Series C 8% preferred stock in 2011. An additional $8.25 million subscribed by investors awaiting regulatory approval was converted into short-term unsecured notes bearing 8%; the notes were renewed in January 2012 for 60 days. Preferred dividends reduce income attributable to common shareholders and preferred holders rank ahead of common shareholders.
- Four pooled trust-preferred securities were in payment-in-kind status and on non-accrual. Their year-end fair value was $719,000 against $5.625 million amortized cost, with $4.906 million of unrealized losses. The company recognized $886,000 of credit-related impairment in 2011; further impairment remains possible.
- Off-balance-sheet commitments, including lines of credit and letters of credit, totaled approximately $228.6 million, versus $169.3 million in 2010. These commitments are not necessarily expected to be fully drawn.
- A putative class action alleging unfair overdraft fees was dismissed by agreement on February 17, 2012. Management characterized other litigation as routine and not expected to materially affect results.
Outlook, risks and contingencies
- The filing provides no numerical earnings or revenue guidance. Management described continued organic growth and acquisitions as strategic priorities, while stating it would not compromise credit standards or prudent asset-liability management to pursue growth.
- Key risks include economic weakness in the company’s Illinois markets, real-estate collateral declines, credit concentrations in agriculture, commercial real estate and hospitality, and uncertainty in borrower cash flows and loan-loss estimates.
- Interest-rate and liquidity risks remain significant. The company reported liability sensitivity over the first year in its static gap analysis and warned that sustained unfavorable rate conditions could compress margins. Management’s modeled scenarios are assumptions-based and do not include potential mitigating actions.
- Trust-preferred valuations rely on significant unobservable inputs; defaults, deferrals or weaker cash-flow assumptions could cause additional impairment. Management reported no goodwill impairment in its 2011 assessment.
- The company and bank were reported well-capitalized. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether deposit attrition continues and whether loan growth can offset funding changes without further margin compression.
- Credit performance, collateral values and reserve adequacy, especially for commercial real estate, grain farming, hotels and restructured loans.
- Cash-flow and valuation assumptions for the four trust-preferred securities, including potential further impairment.
- Regulatory approval and final settlement of the $8.25 million Series C subscription notes, and the resulting preferred-dividend and common-share dilution effects.
- The sustainability of 2011 earnings growth after acquisition-related effects, higher expenses and the increased state tax rate.