Business Context and Reporting Period
Company: First Mid-Illinois Bancshares, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: The Company operates as a one-segment entity providing banking and financial services through its subsidiary, First Mid-Illinois Bank & Trust, N.A., and other subsidiaries. Operations are concentrated in central and southwestern Illinois.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Dec 31, 2009 |
|---|---|---|---|
| Total Assets | $1,087,524 | $1,068,596 (Avg) | $1,095,155 |
| Total Deposits | $851,981 | $863,580 (Avg) | $840,410 |
| Net Loans (Gross) | $685,826 | $722,355 (Avg) | $700,601 |
| Net Interest Income | $9,391 | $8,621 | - |
| Net Income | $2,548 | $2,185 | - |
| Diluted EPS (Common) | $0.32 | $0.31 | - |
| Net Interest Margin | 3.70% | 3.46% | - |
| Return on Average Assets | 0.93% | 0.82% | 0.74% (FY 2009) |
| Cash and Cash Equivalents | $114,188 | $119,790 | $99,755 |
Note: All dollar amounts in thousands except per share data.
Material Changes vs. Prior Period
- Profitability: Net income increased by $363,000 (16.6%) to $2.55 million compared to Q1 2009. This was driven primarily by a $770,000 increase in net interest income.
- Net Interest Income: Increased due to a greater decline in interest rates on liabilities compared to assets. Net interest margin improved to 3.70% from 3.46%.
- Other Income: Decreased by $598,000 (16.3%) to $3.07 million. The decline was largely due to the absence of a $1.0 million gain from the sale of the merchant banking portfolio recorded in Q1 2009, partially offset by reduced other-than-temporary impairment (OTTI) charges and net securities gains of $241,000.
- Other Expense: Decreased by $593,000 (7.1%) to $7.79 million. Key drivers included a $225,000 improvement in Other Real Estate Owned (OREO) expense (gains on sales in 2010 vs. losses in 2009) and a $318,000 reduction in FDIC insurance expense.
- Loan Portfolio: Total loans decreased by $14.8 million (2.1%) from year-end 2009, primarily due to declines in real estate and agricultural loans.
- Nonperforming Assets: Nonperforming loans increased significantly to $16.3 million (2.38% of loans) from $12.7 million at year-end 2009 and $7.7 million in Q1 2009. This increase was attributed to two specific borrowers with deteriorating cash flows.
Guidance, Outlook, Risks, and Unusual Items
- OTTI Charges: The Company recorded $623,000 in other-than-temporary impairment charges related to trust preferred securities. Management noted that future downgrades or defaults in these securities could result in additional material OTTI charges.
- Credit Quality Risks: Management highlighted risks associated with the agricultural sector (13.4% of portfolio) and commercial real estate (33.6% of portfolio), citing recessionary pressures, reduced occupancy rates, and grain price volatility. Net charge-offs increased to $693,000 (0.40% annualized) from $198,000 in the prior year.
- Interest Rate Sensitivity: Static GAP analysis indicates the Company is liability-sensitive within the 12-month horizon. Future increases in interest rates could adversely affect net interest income.
- Capital Position: The Company remains "well-capitalized" under regulatory standards. Tier 1 capital to risk-weighted assets was 15.41%, and total capital to risk-weighted assets was 16.59%.
- Liquidity: Liquidity is considered sufficient, supported by cash balances, available federal fund lines ($25 million), FHLB borrowing capacity ($60.9 million excess collateral), and a $20 million revolving credit facility with The Northern Trust Company.
Investor Verification Checklist
- Nonperforming Loan Concentration: Verify the specific details and collateral coverage of the two borrowers responsible for the majority of the increase in nonperforming loans.
- Trust Preferred Securities: Review the valuation assumptions and credit loss models used for the $7.2 million trust preferred securities portfolio, specifically the PreTSL XXVIII tranche which holds a significant unrealized loss.
- Allowance for Loan Losses (ALLL): Assess the adequacy of the ALLL ($9.53 million) given the rising nonperforming loan ratio and the 58.4% coverage ratio of ALLL to nonperforming loans.
- FDIC Assessments: Confirm the impact of the FDIC Deposit Insurance Fund restoration plan, which resulted in a prepaid expense asset of $4.27 million as of March 31, 2010.
- Interest Rate Risk: Evaluate the potential impact of rising interest rates on the liability-sensitive gap position identified in the static GAP analysis.