First Mid-Illinois Bancshares, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The company is a bank holding company with banking, insurance, trust and data-services subsidiaries, operating primarily in central Illinois. This unaudited filing covers the quarter and six months ended June 30, 2011; the comparable income and cash-flow periods are 2010. The prior-year comparison reflects the September 2010 acquisition of 10 Illinois bank branches, which expanded the company’s scale and operating costs.
Financial performance and position
- Q2 earnings: Net interest income was $11.9 million, up from $9.4 million; other income was $4.1 million, up from $3.0 million. Net income rose to $2.6 million from $1.8 million. Net income available to common shareholders was $1.6 million, or $0.26 per diluted share, versus $1.2 million, or $0.20.
- First-half earnings: Net interest income was $23.6 million versus $18.8 million; net income was $5.4 million versus $4.3 million. Common earnings were $3.7 million, or $0.61 per diluted share, compared with $3.2 million, or $0.52. Common dividends remained $0.19 per share.
- Margins and returns: Net interest margin was 3.40% for the first half, down from 3.67%. Management attributed margin pressure to acquired earning assets carrying lower spreads. Annualized return on average assets was 0.72% versus 0.79%; return on average common equity was 7.90% versus 7.23%.
- Expenses and credit costs: First-half other expense increased 29.1% to $21.3 million, primarily reflecting acquired-branch operating costs and higher other-real-estate-owned expenses. The loan-loss provision was $1.9 million versus $1.8 million.
- Balance sheet at June 30: Assets were $1.514 billion, up from $1.468 billion at year-end 2010. Deposits were $1.217 billion, up from $1.213 billion. Net loans were $788.5 million, down from $794.1 million, largely due to seasonal agricultural-loan paydowns. Cash and cash equivalents were $208.3 million, compared with $231.5 million at year-end.
- Cash flow, first half: The cash-flow statement reports $10.1 million provided by operating activities, $67.2 million used in investing activities and $34.0 million provided by financing activities. Cash and cash equivalents decreased $23.1 million to $208.3 million.
- Debt and liquidity: Repurchase agreements totaled $111.3 million, FHLB advances $19.8 million and junior subordinated debentures $20.6 million. The company reported a $20 million unused revolving credit line, $35 million in overnight federal-funds lines and capacity for approximately $69.1 million of additional FHLB advances, subject to collateral and other conditions. Management said liquidity was sufficient for operations and customer needs.
- Capital: Stockholders’ equity increased to $137.7 million from $112.3 million, supported in part by $19.25 million of Series C preferred stock issued in the first half. Company Tier 1 risk-based capital was 13.92%; First Mid Bank’s was 11.75%. The bank reported capital ratios above well-capitalized thresholds.
- Credit quality: Nonperforming loans were $10.6 million, or 1.34% of loans, versus $10.4 million at year-end and $11.6 million a year earlier. Repossessed assets were $4.7 million versus $6.2 million at year-end. The allowance for loan losses was $10.7 million, or 1.34% of loans; first-half net charge-offs were $1.55 million versus $1.24 million.
Material changes versus comparable periods
- First-half net income increased $1.1 million year over year. Higher net interest income and other income were partly offset by $4.8 million of additional operating expense and higher income taxes.
- Net interest income grew as average earning assets expanded following the 2010 branch acquisition, but the net interest margin declined. Deposit costs fell, while acquired assets contributed at lower spreads.
- Other income benefited from higher trust and ATM/debit-card revenue and lower securities impairment charges. First-half securities impairment charges were $246,000 versus $978,000 in 2010.
- Available-for-sale securities increased to $418.5 million from $342.8 million at year-end, primarily through purchases of government agency and mortgage-backed securities. Their unrealized gains contributed to higher other comprehensive income and equity.
- First-half salaries and benefits rose $2.4 million and occupancy/equipment expense rose $1.4 million, principally reflecting the larger branch network and staffing.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results. It stated that reasonably expected interest-rate changes over the next 12 months were not believed likely to materially harm net interest income.
- The company is liability-sensitive through the one-year horizon under its static gap analysis; future rate increases could adversely affect net interest income. Management also monitors interest-rate exposure using other models.
- Four pooled trust-preferred securities had a $5.4 million unrealized loss and a $921,000 fair value at June 30; $61,000 of credit-related impairment was recorded in Q2. Management warned that further downgrades, payment deferrals or defaults could cause additional impairment and materially affect future earnings. These securities are valued using significant unobservable inputs.
- Credit risks include geographic and industry concentration: $113.9 million of loans to agriculture-related businesses, including $103.1 million in other grain farming, and $48.9 million to hotels and motels. Management cited potential effects of low commodity prices, poor crop yields, reduced government support, and weaker regional travel. Commercial real estate and related property lending are also material portfolio exposures.
- Series C preferred stock carries an 8% non-cumulative dividend and is convertible into common stock at a $20.29 conversion price. Remaining subscribed shares were subject to regulatory approval. The Series C issuance also adjusted the Series B conversion price to $21.71. Conversion could dilute common shareholders.
- Other notable items include $19.25 million of Series C proceeds, $1.38 million of common-stock repurchases in the first half, and gains on securities sales of $377,000. The company reported no material change in market risk since year-end and said disclosure controls were effective. Pending litigation was described as routine and not expected to materially affect consolidated financial condition.
Important facts for investors to verify
- Reconcile cash-flow disclosures: the cash-flow statement reports $10.1 million of operating cash provided, while the MD&A text states $13.8 million.
- Confirm the allowance-to-nonperforming-loans coverage measure: the filing gives 100.5% in one table and 91.9% in narrative text.
- Track credit performance and reserve adequacy, particularly commercial real estate, agriculture and hotel/motel exposures, alongside charge-offs and repossessed-asset valuations.
- Review the assumptions and subsequent performance of the Level 3 trust-preferred securities, including whether additional impairment is recognized.
- Assess whether acquired-branch revenue and growth can offset the higher operating-cost base and lower net interest margin.
- Monitor regulatory approvals and the potential dilution, dividend burden and conversion terms of Series B and Series C preferred stock.