Business Context and Reporting Period
Company: First Mid-Illinois Bancshares, Inc. (First Mid)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Overview: First Mid operates as a one-segment entity providing banking and financial services in central and southwestern Illinois. The company is an accelerated filer and is not a shell company. As of August 5, 2010, 6,098,992 common shares were outstanding.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Income | $4,330,000 | $4,184,000 |
| Net Income Available to Common Stockholders | $3,199,000 | $3,409,000 |
| Diluted EPS (Common) | $0.52 | $0.55 |
| Total Assets | $1,109,279,000 | $1,095,155,000 (Dec 31, 2009) |
| Total Deposits | $869,169,000 | $840,410,000 (Dec 31, 2009) |
| Net Loans | $663,920,000 | $691,139,000 (Dec 31, 2009) |
| Net Interest Income | $18,801,000 | $17,095,000 |
| Net Interest Margin | 3.67% | 3.32% |
| Provision for Loan Losses | $1,843,000 | $1,242,000 |
| Allowance for Loan Losses | $10,065,000 | $9,462,000 (Dec 31, 2009) |
| Stockholders' Equity | $115,387,000 | $111,221,000 (Dec 31, 2009) |
| Cash and Cash Equivalents | $102,907,000 | $90,411,000 (Dec 31, 2009) |
Material Changes vs. Prior Period
- Net Income: Increased by $146,000 (3.5%) for the six months ended June 30, 2010, compared to the same period in 2009. This was driven primarily by a $1.7 million increase in net interest income.
- Net Interest Income: Rose to $18.8 million from $17.1 million. The increase was due to a greater decline in rates on interest-bearing liabilities compared to assets, resulting in an improved net interest margin of 3.67% (up from 3.32%).
- Other Income: Decreased by $1.2 million (16.6%) to $6.1 million. The decline was primarily due to the absence of a $1 million gain from the sale of the merchant card servicing portfolio recorded in 2009 and increased other-than-temporary impairment (OTTI) charges on trust preferred securities.
- Other Expense: Decreased by $500,000 (2.9%) to $16.5 million, largely due to a special FDIC insurance assessment incurred in 2009 that did not recur in 2010.
- Loan Portfolio: Net loans decreased by $27 million (3.9%) from year-end 2009, primarily due to declines in real estate and agricultural operating loans.
- Investment Securities: Available-for-sale securities increased by $27.8 million due to purchases of government agency and mortgage-backed securities.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition Activity: On May 7, 2010, the company entered into an agreement to purchase 10 branches from First Bank, including approximately $147.5 million in loans and $335.2 million in deposits. Completion is expected in the third quarter of 2010.
- Investment Impairments: The company recorded OTTI charges of $978,000 for the six months ended June 30, 2010, related to trust preferred securities. Management noted that future downgrades or defaults in these securities could result in additional material OTTI charges.
- Credit Quality: Nonperforming loans totaled $11.6 million (1.73% of loans) at June 30, 2010, down from $12.7 million at year-end 2009. However, repossessed assets (Other Real Estate Owned) increased significantly to $7.5 million from $2.9 million at year-end 2009. Net charge-offs were $1.24 million for the six-month period.
- Regulatory Capital: The company remains "well-capitalized" under regulatory standards. Tier 1 capital to risk-weighted assets was 15.42%, and total capital to risk-weighted assets was 16.60%.
- Legislative Risk: The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed July 21, 2010, introduces uncertainty regarding future profitability, capital requirements, and operational practices, though the company is grandfathered regarding trust preferred securities for Tier 1 capital purposes.
- Interest Rate Sensitivity: The company was liability-sensitive through the twelve-month horizon as of June 30, 2010, indicating that future interest rate increases could adversely affect net interest income.
Investor Verification Checklist
- OTTI Exposure: Verify the status of the four trust preferred securities (PreTSL I, II, VI, XXVIII) with a combined unrealized loss of $4.18 million and the potential for future credit loss charges.
- Acquisition Integration: Monitor the closing and integration of the First Bank branch acquisition scheduled for Q3 2010.
- Asset Quality Trends: Track the growth in Other Real Estate Owned (OREO), which more than doubled year-over-year, and the associated expense impact.
- Deposit Composition: Review the shift in deposit mix, specifically the decline in higher-rate time deposits and the increase in interest-bearing transaction accounts.
- Regulatory Compliance: Confirm continued compliance with the Northern Trust credit agreement covenants, specifically the return on assets ratio which required a waiver at year-end 2009.