Business Context and Reporting Period
Company: First Mid-Illinois Bancshares, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: A financial holding company operating primarily through its subsidiary, First Mid-Illinois Bank & Trust, N.A. The company operates in three lines of business: community banking (approx. 89% of revenue), wealth management, and insurance brokerage. Operations are concentrated in east central Illinois.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Income | $10.52 million | $10.16 million |
| Diluted EPS | $1.67 | $1.57 |
| Total Assets | $1,049.7 million | $1,016.3 million |
| Total Deposits | $806.4 million | $770.6 million |
| Net Loans | $733.8 million | $740.1 million |
| Net Interest Income | $35.72 million | $31.50 million |
| Net Interest Margin | 3.73% | 3.43% |
| Return on Average Assets | 1.03% | 1.03% |
| Return on Average Equity | 12.87% | 13.06% |
| Provision for Loan Losses | $3.56 million | $0.86 million |
| Nonperforming Loans | $7.29 million (0.98% of total loans) | $7.48 million (1.00% of total loans) |
| Allowance for Loan Losses | $7.59 million (1.02% of total loans) | $6.12 million (0.82% of total loans) |
| Stockholders' Equity | $82.78 million | $80.45 million |
Material Changes vs. Prior Period
- Profitability: Net income increased 3.6% to $10.52 million, driven by a 13.4% increase in net interest income and higher non-interest income. Diluted EPS rose to $1.67, aided by share repurchases.
- Interest Rates: Net interest margin expanded to 3.73% from 3.43% as deposit and borrowing rates fell faster than asset yields.
- Asset Quality: The provision for loan losses increased significantly to $3.56 million (from $0.86 million) to build reserves against economic uncertainty. Net charge-offs rose to $2.09 million. Nonperforming loans decreased slightly due to transfers to Other Real Estate Owned (OREO).
- Balance Sheet: Total assets grew 3.3% to $1.05 billion, primarily due to increased interest-bearing deposits. Net loans declined 0.9% due to a reduction in commercial operating loans.
- Capital: The company maintained "well-capitalized" status with a Tier 1 risk-based capital ratio of 11.02% and a leverage ratio of 8.41%.
Outlook, Risks, and Unusual Items
- Capital Raise: On February 11, 2009, the company issued $22.6 million of Series B 9% Non-Cumulative Perpetual Convertible Preferred Stock to strengthen capital.
- FDIC Programs: The company opted into the FDIC's Temporary Liquidity Guarantee Program (TLGP) for transaction accounts and senior unsecured debt. It did not participate in the TARP Capital Purchase Program.
- Unusual Items: Other income included approximately $291,000 in life insurance proceeds from a former executive. Other expenses included a $132,000 write-down of a property in DeLand, Illinois.
- Risk Factors: Management highlights exposure to difficult economic conditions, specifically the impact on the agricultural sector (16.2% of loans) and commercial real estate. There is a risk of further credit deterioration and potential other-than-temporary impairment (OTTI) charges on the investment portfolio, particularly trust preferred securities.
- Interest Rate Sensitivity: The company is liability-sensitive in the short term; rising rates could negatively impact net interest income, while falling rates could have a positive effect.
Investor Verification Checklist
- Allowance Adequacy: Verify if the 1.02% allowance for loan losses is sufficient given the increased provision and economic headwinds in the agricultural and commercial real estate sectors.
- Investment Portfolio: Review the status of trust preferred securities and mortgage-backed securities for potential other-than-temporary impairment (OTTI) charges in future periods.
- Capital Ratios: Confirm the impact of the February 2009 preferred stock issuance on regulatory capital ratios and dividend capacity.
- Nonperforming Assets: Monitor the $2.4 million balance of Other Real Estate Owned (OREO) and the timeline for liquidation.
- Deposit Stability: Assess the reliance on brokered CDs ($15 million) and public entity deposits ($21.9 million) for funding stability.