Business Context and Reporting Period
Company: First Mid-Illinois Bancshares, Inc. (First Mid)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Overview: First Mid is a bank holding company operating primarily in central and southwestern Illinois. The reporting period was significantly impacted by the acquisition of 10 branches from First Bank on September 10, 2010, which added approximately $336 million in deposits and $135 million in loans to the balance sheet.
Key Financial Metrics
| Metric | Q3 2010 (Three Months) | YTD 2010 (Nine Months) | YTD 2009 (Nine Months) |
|---|---|---|---|
| Net Interest Income | $9.78 million | $28.58 million | $26.00 million |
| Net Income | $2.01 million | $6.34 million | $6.33 million |
| Net Income Available to Common | $1.46 million | $4.66 million | $5.04 million |
| Diluted EPS (Common) | $0.24 | $0.76 | $0.82 |
| Total Assets | $1.47 billion | $1.47 billion | $1.10 billion (Dec 31, 2009) |
| Total Deposits | $1.20 billion | $1.20 billion | $840 million (Dec 31, 2009) |
| Net Interest Margin | 3.60% (YTD) | 3.60% (YTD) | 3.30% (YTD) |
| Return on Average Assets | 0.75% (YTD) | 0.75% (YTD) | 0.76% (YTD) |
| Return on Average Common Equity | 6.92% (YTD) | 6.92% (YTD) | 8.09% (YTD) |
Material Changes vs. Prior Period
- Balance Sheet Expansion: Total assets increased by approximately $371 million from December 31, 2009, primarily driven by the First Bank branch acquisition. Net loans increased by $95 million, and deposits increased by $363 million.
- Net Income Stability: Net income for the nine months ended September 30, 2010, remained flat compared to the prior year ($6.34 million vs. $6.33 million), despite a 10% increase in net interest income. This was offset by higher non-interest expenses and other-than-temporary impairment (OTTI) charges.
- Expense Growth: Total other expenses increased by $1.09 million (4.4%) year-over-year, largely due to acquisition-related costs and increased salaries from 76 new full-time equivalent employees.
- Asset Quality: Nonperforming loans decreased to $11.6 million (1.45% of total loans) from $12.7 million at year-end 2009. However, repossessed assets (Other Real Estate Owned) increased to $5.3 million from $2.9 million.
- Investment Portfolio: Available-for-sale securities increased by $57 million. The company recorded OTTI charges of $1.40 million for the nine-month period, primarily related to trust preferred securities.
Guidance, Outlook, and Risks
- Acquisition Integration: Management expects the acquisition to expand the service area to 25 Illinois communities. Pro forma results suggest the acquisition would have increased net income available to common stockholders for the nine-month period to $5.58 million.
- Regulatory Environment: The company highlighted the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, noting uncertainty regarding future profitability and compliance costs. Specifically, the act affects trust preferred securities capital treatment for larger institutions, though First Mid is currently grandfathered.
- Interest Rate Sensitivity: As of September 30, 2010, the company was liability-sensitive within the 12-month horizon. Management believes future increases in interest rates could adversely affect net interest income, though they do not anticipate a material adverse effect in the next 12 months.
- Credit Risk: The loan portfolio is heavily concentrated in agriculture (12.44% of risk-based capital) and commercial real estate. Management noted that low commodity prices or reduced travel could impact these sectors.
- Capital Position: The company remains "well-capitalized" under regulatory standards. Tier 1 capital to risk-weighted assets was 11.82% and total capital to risk-weighted assets was 13.02% as of September 30, 2010.
Investor Verification Checklist
- Acquisition Synergies: Verify the timeline and cost savings associated with integrating the 10 acquired First Bank branches.
- Trust Preferred Securities: Review the valuation and potential for further OTTI charges on the $6.6 million book value of trust preferred securities, which currently have a fair value of $1.8 million.
- Nonperforming Assets: Monitor the trend of Other Real Estate Owned (OREO), which nearly doubled year-over-year, and the associated expense impact.
- Deposit Mix: Assess the stability of the $336 million in acquired deposits and the cost of funds relative to the company's historical averages.
- Regulatory Capital: Confirm continued compliance with capital ratios as the company integrates the acquisition and faces potential regulatory changes under Dodd-Frank.