Business Context and Reporting Period
Company: First Mid-Illinois Bancshares, Inc. (First Mid)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: First Mid is a financial holding company operating primarily through its wholly-owned subsidiary, First Mid-Illinois Bank & Trust, N.A. The company operates in three lines of business: community banking (approx. 90% of revenue), wealth management, and insurance brokerage. It serves east central Illinois with 26 locations across 19 communities. The company is an accelerated filer and is not a shell company.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Income | $8.21 million | $10.52 million |
| Net Income Available to Common | $6.39 million | $10.52 million |
| Diluted EPS | $1.04 | $1.67 |
| Total Assets | $1,095.2 million | $1,049.7 million |
| Total Loans (Net) | $691.1 million | $733.8 million |
| Total Deposits | $840.4 million | $806.4 million |
| Net Interest Margin | 3.40% | 3.73% |
| Return on Average Assets | 0.74% | 1.03% |
| Return on Average Common Equity | 9.56% | 12.87% |
| Allowance for Loan Losses | $9.46 million (1.35% of loans) | $7.59 million (1.02% of loans) |
| Nonperforming Loans | $12.72 million (1.82% of loans) | $7.29 million (0.98% of loans) |
| Total Capital Ratio | 15.76% | 11.99% |
| Tier 1 Capital Ratio | 14.57% | 11.02% |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 22% to $8.21 million. This was primarily driven by a $1.81 million other-than-temporary impairment (OTTI) charge on trust preferred securities and a significant increase in FDIC insurance assessment expenses ($1.94 million in 2009 vs. $0.16 million in 2008).
- Net Interest Margin Compression: The net interest margin declined to 3.40% from 3.73% in 2008. This resulted from a greater decrease in interest-earning asset rates compared to borrowing and deposit rates, alongside a strategic increase in liquidity holdings.
- Asset Quality Deterioration: Nonperforming loans increased 74% to $12.72 million, driven by commercial real estate loans affected by economic conditions, vacancies, and declining property values. Net charge-offs were $1.72 million.
- Capital Strengthening: Despite lower earnings, regulatory capital ratios improved significantly due to the issuance of $24.6 million in Series B Preferred Stock and retained earnings.
- Loan Portfolio Contraction: Total loans decreased 5.6% to $700.8 million due to reduced loan demand in a sluggish economy.
Guidance, Outlook, and Risks
Management Commentary: Management maintains a strong capital position, exceeding "well-capitalized" standards. The company continues to focus on organic growth and small acquisitions while maintaining strict credit underwriting. Liquidity is deemed sufficient to meet obligations.
Key Risks and Contingencies:
- Credit Risk: Significant exposure to commercial real estate ($226.4 million) and agriculture ($116.5 million). Continued economic deterioration could lead to further loan losses.
- Investment Portfolio: The company holds trust preferred securities with significant unrealized losses ($4.6 million). Future downgrades or defaults could trigger additional OTTI charges.
- Regulatory Costs: The company prepaid $4.86 million in FDIC assessments in December 2009 to cover estimated assessments through 2012, which will be amortized as expense over the next three years.
- Interest Rate Risk: The company is liability-sensitive in the short term; rising interest rates could adversely affect net interest income.
Investor Verification Checklist
- FDIC Assessment Impact: Verify the amortization schedule and future expense impact of the $4.86 million prepaid FDIC assessment.
- Trust Preferred Securities: Review the specific details of the four FTN trust preferred securities and the assumptions used for the $1.81 million OTTI charge to assess risk of future write-downs.
- Commercial Real Estate Exposure: Analyze the concentration of nonperforming loans in the commercial real estate sector ($6.06 million of the $12.72 million total) and the adequacy of the specific allowance allocated to this category.
- Preferred Stock Dilution: Review the conversion terms of the Series B Preferred Stock ($21.94 conversion price) and its impact on future earnings per share if converted.
- Covenant Compliance: Note that the company received a waiver for a return on assets covenant (0.74% actual vs. 0.75% required) on its revolving credit facility with Northern Trust Company.