First Mid-Illinois Bancshares, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013 unless noted. The company is a bank holding company operating primarily in central Illinois. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial results and key metrics
- Third-quarter earnings: Net income was $3.92 million, compared with $3.91 million a year earlier. Net income available to common shareholders was $2.81 million versus $2.81 million; basic EPS was $0.48 versus $0.47 and diluted EPS was $0.47 versus $0.47.
- Nine-month earnings: Net income was $11.55 million, up from $11.10 million. Diluted EPS was $1.38 versus $1.31. Return on average assets was 0.97% and return on average common equity was 10.76%.
- Net interest: Third-quarter net interest income was $13.00 million, up from $12.62 million. Nine-month net interest income was $38.36 million, up 3.2%; net interest margin increased to 3.43% from 3.37%.
- Noninterest items and expenses: Nine-month noninterest income declined to $13.87 million from $14.96 million, largely reflecting lower securities gains and mortgage banking revenue. Noninterest expense rose 2.0% to $33.26 million. The nine-month provision for loan losses fell to $0.50 million from $1.71 million.
- Balance sheet: Total assets were $1.593 billion, down from $1.605 billion. Net loans rose to $1.026 billion from $969.0 million; deposits were $1.299 billion versus $1.288 billion. Cash and cash equivalents were $57.6 million, down from $65.1 million.
- Credit quality: Nonperforming loans were $4.82 million, down from $6.47 million at year-end and $7.0 million at September 2013. The allowance for loan losses was $13.71 million, or 1.32% of loans, and 284.4% of nonperforming loans. Nine-month net charge-offs were $39,000.
- Cash flow and funding: For the first nine months, operating activities provided $10.46 million and investing activities provided $11.22 million; financing activities used $29.22 million. Cash declined $7.53 million. Repurchase agreements were $88.1 million, FHLB borrowings $15.0 million, and junior subordinated debentures $20.6 million. The $15 million revolving credit line was undrawn.
- Capital: At September 30, the company’s Tier 1 risk-based capital ratio was 14.54% and total risk-based capital ratio was 15.75%. Management reported regulatory capital above required levels and described the capital position as strong.
Material changes and unusual items
- Loan growth was led by commercial and industrial lending; commercial real estate lending also increased. Investment securities declined as maturities and sales helped fund loan growth and repay borrowings.
- Third-quarter other income was lower year over year, chiefly because the prior-year quarter included a $1.4 million gain from selling two trust preferred securities. Nine-month securities gains were $0.71 million versus $2.29 million.
- During the quarter, the company transferred $53.6 million fair value of government securities from available-for-sale to held-to-maturity, citing reduced price volatility and intent and ability to hold them to maturity.
- On September 23, the board approved mandatory conversion of all 4,926 Series B preferred shares, with conversion set for November 17, 2014. The filing estimated approximately 1.14 million common shares would be issued. The company also reported that on October 28 it retired 1.5 million treasury shares; this subsequent transaction reduced treasury stock and retained earnings.
- The common stock began trading on Nasdaq under ticker FMBH in May 2014.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management reported a cumulative liability-sensitive position through the 12-month repricing horizon; rising rates could pressure near-term net interest income. It also noted continuing pressure on asset yields from historically low rates and loan competition.
- Credit risk is concentrated in the company’s central Illinois markets. Agriculture-related loans totaled $169.8 million, including $143.5 million to other grain farming. Management cited low commodity prices, drought, reduced crop yields, or lower government support as potential sources of higher agricultural losses. Hotel and motel loans were $56.1 million.
- The remaining trust preferred security had a $3.45 million book value and $462,000 fair value, with a $2.99 million unrealized loss. It was in payment-in-kind status and on nonaccrual; management said further issuer defaults or deferrals could result in additional impairment and materially affect earnings.
- Off-balance-sheet commitments totaled approximately $235 million, including $229.2 million of unused commitments and lines and $5.8 million of standby letters of credit. The company said it did not anticipate losses from these instruments.
- Management stated that liquidity was sufficient and identified additional borrowing sources, including $35 million of overnight federal funds lines, approximately $88.8 million of additional FHLB capacity subject to collateral, and the undrawn $15 million credit line. No legal proceedings were reported; management reported disclosure controls were effective and no material change in internal control.
Important facts for investors to verify
- Whether loan growth, especially commercial and industrial and real-estate lending, is accompanied by stable credit quality and adequate reserves.
- Developments in agricultural borrowers and the trust preferred security, including payment status, expected cash flows, and any additional impairment.
- Whether margin performance holds up under interest-rate changes and continued competition for loans and deposits.
- The effects of the November 2014 Series B preferred conversion, including share issuance, dilution, and future preferred dividends.
- Liquidity and funding needs relative to deposit trends, loan commitments, and scheduled borrowings.