First Mid-Illinois Bancshares, Inc. — Q2 2014 Form 10-Q
Business context and period. The company is a one-segment banking and financial-services holding company operating primarily in central Illinois. This unaudited report covers the three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless otherwise noted. Common shares began trading on Nasdaq under FMBH on May 12, 2014.
Financial performance and condition
| Metric | Q2 2014 | Six months 2014 |
|---|---|---|
| Net interest income | $12.8 million | $25.4 million, up 3.3% |
| Provision for loan losses | $128,000 | $451,000, versus $732,000 |
| Other income | $5.0 million | $9.5 million, up 2.2% |
| Other expense | $11.2 million | $22.2 million, up 3.0% |
| Net income | $4.0 million, versus $3.7 million | $7.6 million, versus $7.2 million |
| Net income available to common shareholders | $2.9 million | $5.4 million |
| Basic / diluted EPS | $0.49 / $0.48 | $0.92 / $0.91 |
| Common dividend declared per share | $0.26 | $0.26 |
- Six-month net interest margin was 3.43%, versus 3.34%; management attributed the improvement to shifting assets toward higher-yielding loans and lower deposit costs. Q2 net yield on interest-earning assets was 3.44%, versus 3.35%.
- At June 30, assets were $1.583 billion, down from $1.605 billion at year-end 2013. Net loans were $1.008 billion, up $38.6 million; available-for-sale securities were $439.2 million, down $49.5 million; cash and cash equivalents were $57.5 million, down $7.6 million.
- Deposits were $1.291 billion, up $3.3 million from year-end. Total liabilities were $1.424 billion and stockholders’ equity was $158.6 million, up $9.2 million from year-end.
- Interest-bearing borrowings included $95.2 million of repurchase agreements, $10.0 million of FHLB advances and $20.6 million of junior subordinated debentures. Repurchase agreements declined $24.0 million and FHLB advances declined $10.0 million from year-end.
- Six-month operating cash flow was $8.2 million; investing activities provided $18.6 million and financing activities used $34.4 million. Cash and cash equivalents decreased $7.6 million.
- Company regulatory capital ratios at June 30 included Tier 1 risk-based capital of 14.58% and total risk-based capital of 15.81%. The bank was reported as well-capitalized.
Material changes versus prior periods
- Six-month net income rose 6.2%; diluted EPS increased from $0.84 to $0.91. Q2 net income rose from $3.7 million to $4.0 million.
- Average loans grew 10.4% year over year for the first half, while average securities declined 15.5%. Commercial and industrial lending drove much of the loan growth; agricultural operating loans declined.
- Credit indicators improved: nonperforming loans were $4.8 million (0.47% of loans) at June 30, versus $6.5 million at year-end; the allowance was $13.7 million, or 1.34% of loans. Six-month net charge-offs were $19,000, versus $377,000.
- Mortgage banking revenue fell to $256,000 from $591,000 for the first half as refinancing and purchase activity slowed. Other income overall increased, supported by service charges, trust, insurance, brokerage and electronic transaction revenue.
- Other expense increased $644,000 for the first half, partly reflecting compensation, occupancy and Nasdaq listing and filing costs. Common dividends declared rose to $0.26 per share from $0.21.
- Available-for-sale securities’ fair value increased during the first half, contributing $5.1 million of after-tax other comprehensive income. Accumulated other comprehensive loss narrowed to $3.3 million from $8.4 million at year-end.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said liquidity was sufficient and capital remained strong. It cautioned that prolonged low rates and loan competition could pressure asset yields and net interest margin.
- Interest-rate sensitivity analysis showed the company was liability-sensitive cumulatively through 12 months; rising rates could adversely affect net interest income. Management also identified general economic, regulatory, competition, deposit-flow and credit-quality uncertainties.
- Credit exposure is concentrated in central Illinois, including agriculture: $165.2 million of agriculture-related loans, of which $136.6 million was to other grain farming. Management warned that low commodity prices, drought, weaker yields or reduced government support could increase problem loans. Other disclosed exposures include hotels and motels, and commercial and residential property lessors.
- The remaining trust-preferred security had a $3.45 million book value and $369,000 fair value, with $3.08 million of unrealized losses and a C credit rating. It remained on nonaccrual and in payment-in-kind status; the company recorded no additional OTTI in the first half of 2014, but further credit deterioration could affect earnings.
- Unused commitments and lines of credit were $237.7 million and standby letters of credit were $5.5 million. The company said it did not anticipate losses from these commitments. Available liquidity included $35 million of overnight federal funds lines, approximately $94.3 million of additional FHLB borrowing capacity subject to collateral, and a $15 million undrawn revolving credit line.
- Series B preferred stock may be redeemable or mandatorily convertible after November 16, 2014, subject to stated terms and regulatory approvals. Its assumed conversion materially affects diluted EPS; verify the timing and potential common-share dilution.
- Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. The filing reported no legal proceedings.
Investor verification checklist
- Reconcile the filing’s differing nonperforming-loan references: detailed tables report $4.832 million at June 30, while one MD&A passage cites $5.5 million for June 30, 2014.
- Review loan growth, credit grades, nonaccruals, restructurings, allowance adequacy and the concentration of lending in agriculture and commercial real estate.
- Assess securities valuation and credit risk, especially the Level 3 trust-preferred holding, its nonaccrual/PIK status and potential future impairment.
- Track deposit mix and costs, loan yields, securities runoff, interest-rate sensitivity and the effect of lower mortgage banking activity on revenue.
- Confirm preferred-stock conversion or redemption developments and their effects on common-share count, diluted EPS and dividends.
- Monitor capital and liquidity against regulatory requirements, upcoming obligations and the company’s off-balance-sheet commitments.