Business Context and Reporting Period
Company: First Mid-Illinois Bancshares, Inc. (First Mid)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Overview: First Mid operates as a one-segment financial holding company headquartered in Mattoon, Illinois. The company operates primarily through its subsidiary, First Mid-Illinois Bank & Trust, N.A. The reporting period covers the third quarter and the first nine months of 2009, a time characterized by the company's efforts to maintain liquidity and capital strength amidst a recessionary economic environment.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 2009) | Value (in thousands) |
|---|---|
| Total Assets | $1,099,681 |
| Total Deposits | $847,861 |
| Net Loans (Net of Allowance) | $683,489 |
| Net Interest Income | $25,999 |
| Net Income | $6,328 |
| Net Income Available to Common Stockholders | $5,038 |
| Diluted EPS (Common) | $0.82 |
| Cash and Cash Equivalents | $106,182 |
| Stockholders' Equity | $110,928 |
Key Ratios (Nine Months Ended Sept 30, 2009):
- Return on Average Assets: 0.76%
- Return on Average Equity: 8.09%
- Net Interest Margin: 3.30%
- Allowance for Loan Losses to Loans Outstanding: 1.30%
- Tier 1 Capital to Risk-Weighted Assets: 14.61%
Material Changes vs. Prior Period
Profitability: Net income decreased by $2.1 million (25%) to $6.3 million for the nine months ended September 30, 2009, compared to $8.4 million in the same period of 2008. Diluted earnings per common share declined from $1.33 to $0.82.
Revenue: Net interest income decreased slightly by $529,000 (2%) to $26.0 million, driven by a decline in the net interest margin from 3.70% to 3.30%. This margin compression resulted from maintaining higher levels of low-yielding liquid assets (cash and federal funds) to ensure liquidity. Non-interest income decreased by $1.2 million (10.4%) to $10.5 million, primarily due to a $1.2 million other-than-temporary impairment (OTTI) charge on trust preferred securities, partially offset by a $1.0 million gain on the sale of the merchant banking portfolio.
Expenses: Non-interest expense increased by $1.2 million (5.2%) to $24.9 million. The primary driver was a significant increase in FDIC insurance assessments ($1.6 million in 2009 vs. $77,000 in 2008) due to regulatory changes and special assessments. Salaries and benefits decreased slightly due to a reduction in full-time equivalent employees.
Balance Sheet: Total assets increased by $50 million to $1.1 billion. This was driven by an $81.4 million increase in available-for-sale securities (investments in U.S. Treasuries and agency securities) offset by a $50 million decrease in net loans due to reduced loan demand and tighter underwriting standards. Total deposits increased by $41.5 million to $848 million.
Capital: Stockholders' equity increased by $28.2 million (34%) to $110.9 million. This increase was primarily due to the issuance of $22.6 million in Series B 9% Non-Cumulative Perpetual Convertible Preferred Stock in February 2009.
Outlook, Risks, and Management Commentary
Capital Position: Management reports a strong capital position, with regulatory capital ratios well above the "well-capitalized" standards. The Tier 1 capital ratio improved to 14.61% from 11.02% at the end of 2008, bolstered by the preferred stock issuance.
Liquidity: The company has significantly increased its liquidity position, with cash and cash equivalents rising to $106.2 million. Management maintains various sources of liquidity, including $25 million in overnight federal fund lines, excess collateral at the Federal Home Loan Bank supporting approximately $63.9 million in additional advances, and a $20 million revolving credit facility with The Northern Trust Company (currently unutilized).
Credit Quality: Nonperforming loans increased to $11.4 million (from $6.9 million in 2008), primarily due to five commercial borrowers becoming delinquent due to recessionary pressures. The allowance for loan losses was increased to $9.0 million (1.30% of loans) to account for probable losses. Net charge-offs were $757,000 for the nine-month period, down from $1.5 million in the prior year.
Investment Portfolio Risks: The company recorded OTTI charges of $1.2 million on trust preferred securities. Management notes that while the decline in fair value for certain securities is significant, they do not intend to sell them and believe the remaining unrealized losses are temporary. However, they acknowledge the risk of future OTTI charges if market conditions deteriorate further.
FDIC Assessments: The company is evaluating the impact of a proposed FDIC Deposit Insurance Fund restoration plan requiring prepayment of assessments for 2010-2012, which could affect future liquidity and earnings.
Investor Verification Checklist
- Preferred Stock Terms: Verify the conversion price ($21.94) and dividend obligations ($9% non-cumulative) of the newly issued Series B Preferred Stock and its impact on future earnings per share.
- FDIC Assessment Impact: Confirm the final cost and timing of the FDIC special assessments and the proposed prepayment plan for 2010-2012.
- Nonperforming Loan Concentration: Review the specific details of the five commercial borrowers that drove the increase in nonperforming loans to assess potential future charge-offs.
- Trust Preferred Securities: Monitor the fair value and credit quality of the remaining trust preferred securities to evaluate the risk of additional OTTI charges.
- Loan Demand Trends: Assess the sustainability of the loan portfolio decline and the company's ability to deploy capital into higher-yielding assets as the economy recovers.