Business Context and Reporting Period
Company: First Mid-Illinois Bancshares, Inc. (First Mid)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: First Mid operates primarily through its subsidiary, First Mid-Illinois Bank & Trust, N.A., providing banking services in east central Illinois. The company also owns Mid-Illinois Data Services, Inc., and First Mid-Illinois Insurance Services, Inc. (which began operations in Q2 1998). The company is heavily exposed to the agricultural sector, which comprised 14.5% of its loan portfolio as of September 30, 1998.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1997 |
|---|---|---|---|
| Total Assets | $537,242 | $537,242 | $532,978 |
| Total Deposits | $444,698 | $444,698 | $457,598 |
| Net Loans | $344,036 | $344,036 | $355,587 |
| Net Interest Income | $4,671 | $14,117 | $13,919 |
| Net Income | $1,263 | $3,794 | $3,689 |
| Diluted EPS | $0.56 | $1.68 | $1.70 |
| Return on Average Assets (Annualized) | - | 0.96% | 0.90% |
| Return on Average Equity (Annualized) | - | 10.50% | 11.08% |
| Net Interest Margin (TE) | - | 3.97% | 3.96% |
| Cash and Cash Equivalents | $28,855 | $28,855 | $26,661 |
Material Changes vs. Prior Period
- Net Income: Increased 6.6% to $1.263 million for the quarter and 2.9% to $3.794 million for the nine-month period compared to 1997.
- Earnings Per Share: Diluted EPS increased to $0.56 for the quarter but decreased to $1.68 for the nine-month period (down from $1.70 in 1997) due to share count changes and dilution effects.
- Net Interest Income: Increased slightly by $198,000 (1.4%) for the nine months, driven by higher volumes of earning assets and lower volumes of interest-bearing liabilities, partially offset by rate changes.
- Other Income: Increased significantly by $690,000 (17.7%) for the nine months. This was primarily driven by a $535,000 increase in mortgage banking income due to higher loan origination volumes in a low-interest-rate environment.
- Other Expenses: Increased by $1,051,000 (9.0%) for the nine months. Key drivers included a $516,000 increase in salaries and benefits, $93,000 in occupancy/equipment costs (technology upgrades), and $171,000 in losses on the sale of other real estate owned.
- Loan Portfolio: Total loans decreased by $11.3 million to $346.9 million, largely due to the sale of $38.8 million in fixed-rate mortgages to the secondary market.
- Nonperforming Loans: Increased significantly to $3.441 million (from $1.685 million at year-end 1997), driven by two commercial loans moving to nonaccrual status totaling approximately $2.1 million.
Guidance, Outlook, Risks, and Unusual Items
- Year 2000 Compliance: The company is actively managing Year 2000 remediation. As of September 30, 1998, approximately 75% of renovation, 60% of testing, and 65% of implementation for mission-critical applications were complete. External costs are estimated at $100,000, with internal staff costs being significant but not quantified. Completion is targeted for December 31, 1998.
- Interest Rate Sensitivity: The company is liability-sensitive on a cumulative basis through the twelve-month horizon. Future increases in interest rates could unfavorably impact the net interest margin.
- Mortgage Banking Outlook: Management anticipates that if the yield curve returns to historical norms, the volume of loan originations and associated revenue will diminish.
- Brokerage Revenues: Revenues decreased 30.9% due to intense local competition. Management does not anticipate a return to 1997 levels.
- Legal Proceedings: A pending lawsuit against the U.S. Government regarding supervisory goodwill (Heartland Savings Bank) remains unresolved. The company filed a motion for summary judgment in August 1998.
- Capital Repurchase: In August 1998, the Board authorized a repurchase of up to 3% of common stock. As of September 30, 10,477 shares were repurchased for $403,000.
Investor Verification Checklist
- Asset Quality: Verify the trend in nonperforming loans, which doubled from year-end 1997 to Q3 1998, and the adequacy of the allowance for loan losses (82.4% of nonperforming loans).
- Year 2000 Costs: Confirm the total cost of Year 2000 remediation, including unquantified internal labor costs, and the timeline for completion of non-mission-critical applications.
- Mortgage Revenue Sustainability: Assess the sustainability of the 184% increase in mortgage banking income, which is tied to a flat yield curve and high refinancing activity.
- Deposit Stability: Review the $13 million decrease in total deposits, specifically the shift of funds from money market accounts to repurchase agreements and the reduction in public funds.
- Legal Exposure: Monitor the status of the lawsuit against the U.S. Government regarding supervisory goodwill and potential recovery amounts.