What Makes First Mid-Illinois Bancshares Inc (NASDAQ:FMBH) A Hard Investment?
As a small-cap finance stock with a market capitalisation of US$633.78m, the risk and profitability of First Mid-Illinois Bancshares Inc (NASDAQ:FMBH) are largely tied to the underlying economic growth of the region it operates in US. Given that banks operate by reinvesting deposits in the form of loans, negative economic growth may lower the level of saving deposits and demand for loans, directly affecting those banks’ levels of cash flows. After the GFC, a set of reforms called Basel III was imposed in order to strengthen regulation, supervision and risk management in the banking sector. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like First Mid-Illinois Bancshares to vulnerabilities. Since its financial standing can unexpectedly decline in the case of an adverse macro event such as political instability, it is important to understand how prudent the bank is at managing its risk levels. Sufficient liquidity and low levels of leverage could place the bank in a safe place in case of unexpected macro headwinds. Today we will be measuring First Mid-Illinois Bancshares’s financial risk position by looking at three leverage and liquidity metrics.
Check out our latest analysis for First Mid-Illinois Bancshares
Is FMBH’s Leverage Level Appropriate?
Banks with low leverage are exposed to lower risks around their ability to repay debt. A bank’s leverage can be thought of as the amount of assets it holds compared to its own shareholders’ funds. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. First Mid-Illinois Bancshares’s leverage level of 8.19x is significantly below the appropriate ceiling of 20x. With assets 8.19 times equity, the banks has maintained a prudent level of its own fund relative to borrowed fund which places it in a strong position to pay back its debt in times of adverse events. If the bank needs to firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.
How Should We Measure FMBH’s Liquidity?
Due to its illiquid nature, loans are an important asset class we should learn more about. Normally, they should not exceed 70% of total assets, which is consistent with First Mid-Illinois Bancshares’s state given its ratio of 69.81%. At this level of loan, the bank has preserved a sensible level between maintaining liquidity and generating interest income from the loan.
Does FMBH Have Liquidity Mismatch?
FMBH profits by lending out its customers’ deposits as loans and charge an interest on the principle. These loans tend to be fixed term which means they cannot be readily realized, however, customer deposits are liabilities which must be repaid on-demand and in short notice. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Relative to the prudent industry loan to deposit level of 90%, First Mid-Illinois Bancshares’s ratio of over 88.07%is appropriately lower, which places the bank in a relatively safe liquidity position given it has not excessively lent out its deposits and has maintained a suitable level for compliance.
Next Steps:
First Mid-Illinois Bancshares meets all of our liquidity and leverage criteria, exhibiting operational prudency. The operational risk side of a bank is an important fundamental often overlooked by investors. Its high liquidity and low leverage levels mean the bank is well-positioned to meet its financial obligations in the case of any adverse and unpredictable macro events. We’ve only touched on operational risks for FMBH in this article. But as a stock investment, there are other fundamentals you need to understand. Below, I’ve compiled three essential factors you should further examine:
Future Outlook: What are well-informed industry analysts predicting for FMBH’s future growth? Take a look at our free research report of analyst consensus for FMBH’s outlook.
Valuation: What is FMBH worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether FMBH is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
