First Mid-Illinois Bancshares, Inc. — Q2 2013 Form 10-Q
Business context and period. The filing covers the unaudited quarter and six months ended June 30, 2013. The company is a bank holding company operating principally in central Illinois. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $12.341 | $12.258 | $24.545 | $24.311 |
| Provision for loan losses | $0.252 | $0.416 | $0.732 | $1.031 |
| Other income | $4.714 | $4.497 | $9.264 | $9.077 |
| Other expense | $10.918 | $10.782 | $21.530 | $21.399 |
| Net income | $3.665 | $3.479 | $7.193 | $6.869 |
| Net income available to common shareholders | $2.560 | $2.374 | $4.984 | $4.825 |
| Diluted EPS | $0.43 | $0.39 | $0.84 | $0.80 |
- First-half net interest margin was 3.34%, down from 3.43% a year earlier; management attributed the decline chiefly to yields on earning assets falling more than rates on interest-bearing liabilities.
- At June 30, total assets were $1,555.1 million, versus $1,578.0 million at year-end 2012. Net loans were $901.6 million, up $2.5 million; available-for-sale securities were $533.8 million, up $25.5 million.
- Total deposits were $1,271.1 million, compared with $1,274.1 million at year-end. Borrowings included $94.7 million in repurchase agreements, $12.5 million in FHLB advances and $20.6 million in junior subordinated debentures.
- Cash and cash equivalents were $31.9 million, down $50.8 million from year-end. For the first half, operating cash flow was $10.3 million, investing cash flow was negative $42.9 million and financing cash flow was negative $18.2 million.
- Stockholders’ equity was $148.9 million, down from $156.7 million at year-end. A $11.1 million after-tax decline in available-for-sale securities’ accumulated other comprehensive income was a major factor; net income partly offset it.
- First-half return on average assets was 0.91%; return on average common equity was 9.45%. The company reported Tier 1 risk-based capital of 15.03% and total risk-based capital of 16.21% at June 30, and stated that capital ratios remained above applicable well-capitalized thresholds.
Changes versus comparable periods
- First-half net income increased $0.3 million, or about 4.7%, and diluted EPS rose from $0.80 to $0.84. Q2 net income increased $0.2 million from the prior-year quarter.
- First-half net interest income rose $0.2 million as average loans and securities grew, while lower asset yields pressured revenue. Interest expense fell substantially, partly reflecting lower deposit costs and the absence of prior-year other debt expense.
- First-half provision expense declined $0.3 million; net charge-offs fell to $0.4 million from $0.7 million. Nonperforming loans were $6.8 million, down from $7.6 million at year-end; loans 30 or more days past due were 0.36% of loans.
- First-half noninterest income increased 2.1%, with growth in trust, brokerage and ATM/debit card revenue partly offset by lower insurance commissions. Noninterest expense increased 0.6%.
- Net interest margin pressure and unrealized securities losses weighed on performance and equity, while credit-quality measures generally improved versus year-end.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management described liquidity as sufficient. Available sources included $35 million of overnight federal funds lines, capacity for approximately $93.6 million of additional FHLB advances subject to collateral, and an unused $15 million revolving credit facility.
- The company was cumulatively liability-sensitive over the 12-month repricing horizon; management said further low rates and competition could continue to pressure asset yields and net interest margin.
- Credit is concentrated in central Illinois and includes agricultural exposure: $147.1 million in loans to agriculture-related borrowers, including $123.6 million in other grain farming. Management cited low commodity prices, drought, reduced crop yields and lower government assistance as potential sources of loan losses. Hotel/motel and commercial real estate lending are additional exposures.
- Three trust preferred securities had $3.955 million of unrealized losses at June 30; the securities were Level 3 valued and their cash interest was not accruing. The company reported no new OTTI in the first half, but said future deterioration could affect earnings. On July 22, 2013, it sold two of these securities; proceeds exceeded their combined book value by approximately $1.4 million, expected to be recorded as a Q3 securities gain.
- In June, the FDIC returned approximately $1.2 million, the remaining prepaid deposit-insurance assessment. The company also repurchased 67,645 shares for approximately $1.6 million in the first half; $3.027 million remained authorized under its repurchase programs at June 30.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no legal proceedings disclosed in the filing.
Important facts for investors to verify
- Whether margin pressure persists as earning-asset yields and funding costs reprice.
- Performance of agricultural, commercial real estate and hotel/motel borrowers, and whether nonperforming loans and charge-offs continue to improve.
- Realized proceeds and accounting for the July trust preferred securities sale, and any further impairment or valuation changes in the remaining holding.
- Liquidity and funding trends, including deposit flows, repurchase agreement balances and use of available borrowing facilities.
- Effects of securities valuation changes on accumulated other comprehensive income, equity and regulatory capital.