Business Context and Reporting Period
Company: First Mid-Illinois Bancshares, Inc. (and subsidiaries)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Overview: The Company is a financial holding company headquartered in Mattoon, Illinois, operating primarily through its subsidiary, First Mid-Illinois Bank & Trust, N.A. The reporting period covers the third quarter and the first nine months of 2002. The Company operates in east central Illinois with a significant concentration in agricultural lending.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2002) | Value (in thousands) |
|---|---|
| Net Income | $5,914 |
| Diluted Earnings Per Share | $1.73 |
| Total Assets | $769,594 |
| Total Loans | $500,242 |
| Total Deposits | $610,828 |
| Net Interest Income | $20,001 |
| Other Income | $7,675 |
| Total Other Expense | $18,069 |
| Cash and Cash Equivalents | $78,029 |
| Stockholders' Equity | $71,442 |
Performance Ratios (Nine Months 2002):
- Return on Average Assets: 1.11%
- Return on Average Equity: 11.62%
- Net Interest Spread: 3.80%
- Allowance for Loan Losses to Loans: 0.78%
Material Changes vs. Prior Period
Profitability: Net income for the nine months ended September 30, 2002, increased by $1,142,000 (24%) to $5,914,000 compared to $4,772,000 in the same period of 2001. Diluted EPS rose from $1.41 to $1.73.
Revenue Drivers:
- Net Interest Income: Increased by $2,568,000 (14.7%) to $20,001,000, driven by a 7.8% growth in average earning assets and an improved net interest spread (3.80% vs. 3.39%).
- Other Income: Increased by $1,383,000 (22%) to $7,675,000. Significant contributors included a $738,000 increase in insurance commissions due to the acquisition of Checkley (an insurance agency) in January 2002, and a $300,000 increase in service charges from a new overdraft program ("Payment Privilege").
Expense Trends: Total other expenses increased by $1,738,000 (10.6%) to $18,069,000. This was primarily due to a $1,192,000 increase in salaries and benefits (driven by the Checkley acquisition and merit increases) and a $752,000 increase in other operating expenses (including a $250,000 write-off of a venture capital investment and $275,000 in consulting fees for the new overdraft program). Amortization of goodwill decreased by $305,000 due to the adoption of SFAS 142.
Balance Sheet: Total assets grew 9.0% to $769.6 million. Loans increased 5.7% to $500.2 million, while deposits grew 9.2% to $610.8 million.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook: Management expects net interest income to benefit from future interest rate increases as the Company is currently asset-sensitive on a cumulative basis through the twelve-month horizon. The Company continues to focus on retail core deposits and real estate lending.
Unusual Items:
- Accounting Change: Adoption of SFAS 142 (Goodwill and Other Intangible Assets) on January 1, 2002, resulted in a net income increase of $309,000 for the nine-month period by ceasing amortization of $4 million in goodwill.
- Investment Write-off: A $250,000 charge was taken in the second quarter for a venture capital fund investment deemed unrecoverable.
Risks and Contingencies:
- Concentration Risk: The Company has significant exposure to the agricultural industry ($89.2 million, or 17.8% of total loans). Adverse conditions in agriculture (low commodity prices, reduced yields) could increase loan losses.
- Interest Rate Risk: While currently asset-sensitive, the Company monitors static GAP analysis to manage exposure to rate fluctuations.
- Legal Proceedings: Routine litigation incidental to banking operations is ongoing, but management does not expect material adverse effects.
Investor Verification Checklist
- Loan Quality: Verify the trend in nonperforming loans ($3.72 million at Sep 30, 2002) and the adequacy of the allowance for loan losses ($3.899 million) given the high concentration in agriculture.
- Acquisition Integration: Assess the ongoing impact of the Checkley acquisition on non-interest income and expense structures.
- Capital Adequacy: Confirm regulatory capital ratios (Total Capital to Risk-Weighted Assets: 11.28% for the Company; 11.55% for the Bank) remain well above "well capitalized" thresholds.
- Liquidity Sources: Review the status of the $10 million revolving credit line with The Northern Trust Company (matured Nov 19, 2002, but subsequently increased to $15 million per subsequent events).
- Subsequent Events: Note the November 1, 2002, repurchase of 200,000 shares for $5.5 million and the increase in the revolving credit facility.