UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
-------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
----------------------------------------------
(Address of principal executive offices) (Zip Code)
(217) 351-6500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by "X" whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [ X ] NO [ ]
Indicate by "X" whether the registrant is an accelerated filer (as defined by
Rule 12b-2 of the Exchange Act).
YES [ X ] NO [ ]
Indicate the number of shares outstanding of the registrant's common stock, as
of August 1, 2003.
Main Street Trust, Inc. Common Stock 10,502,150
1
Table of Contents
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 28
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(Unaudited, in thousands, except share data)
June 30, December 31,
2003 2002
---------------------------
ASSETS
Cash and due from banks ........................................... $ 52,685 $ 59,744
Federal funds sold and interest bearing deposits .................. 24,216 43,002
--------------------------
Cash and cash equivalents ................................. 76,901 102,746
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value ............................... 265,976 240,616
Held-to-maturity, at cost (fair value of $106,563 and $70,489
at June 30, 2003 and December 31, 2002, respectively) ......... 104,711 68,563
Non-marketable equity securities ................................ 7,528 7,031
--------------------------
Total investments in debt and equity securities ........... 378,215 316,210
--------------------------
Loans, net of allowance for loan losses of $9,735 and $9,259
at June 30, 2003 and December 31, 2002, respectively ............ 625,257 664,142
Mortgage loans held for sale ...................................... 7,875 2,972
Premises and equipment ............................................ 17,824 18,349
Accrued interest receivable ....................................... 6,704 7,315
Other assets ...................................................... 13,706 10,994
--------------------------
Total assets .............................................. $ 1,126,482 $ 1,122,728
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing .......................................... 153,139 163,903
Interest bearing .............................................. 698,729 704,683
--------------------------
Total deposits ............................................ 851,868 868,586
--------------------------
Federal funds purchased, repurchase agreements and notes payable .. 95,707 80,651
Federal Home Loan Bank advances and other borrowings .............. 27,748 27,806
Accrued interest payable .......................................... 1,964 2,252
Other liabilities ................................................. 9,591 8,963
--------------------------
Total liabilities ......................................... 986,878 988,258
--------------------------
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized ..... -- --
Common stock, $0.01 per value; 15,000,000 shares authorized;
11,219,319 shares issued at June 30, 2003 and December 31, 2002 112 112
Paid in capital ................................................. 55,379 55,337
Retained earnings ............................................... 97,435 92,853
Accumulated other comprehensive income .......................... 3,875 3,776
--------------------------
156,801 152,078
Less: treasury stock, at cost, 734,501 and 755,047 shares
at June 30, 2003 and December 31, 2002, respectively ............ (17,197) (17,608)
--------------------------
Total shareholders' equity ................................ 139,604 134,470
--------------------------
Total liabilities and shareholders' equity ................ $ 1,126,482 $ 1,122,728
==========================
See accompanying notes to unaudited consolidated financial statements.
3
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Six Months Ended June 30, 2003 and 2002
(Unaudited, in thousands, except share data)
2003 2002
----------------------------
Interest income:
Loans and fees on loans ........................................ $ 21,402 $ 24,382
Investments in debt and equity securities
Taxable ...................................................... 5,772 6,455
Tax-exempt ................................................... 1,166 1,194
Federal funds sold and interest bearing deposits ............... 254 196
----------------------------
Total interest income .................................... 28,594 32,227
Interest expense:
Deposits ....................................................... 7,491 9,725
Federal funds purchased, repurchase agreements and notes payable 547 649
Federal Home Loan Bank advances and other borrowings ........... 764 993
----------------------------
Total interest expense ................................... 8,802 11,367
----------------------------
Net interest income ...................................... 19,792 20,860
Provision for loan losses ........................................ 660 660
----------------------------
Net interest income after provision for loan losses ...... 19,132 20,200
Non-interest income:
Remittance processing .......................................... 3,498 3,786
Trust and brokerage fees ....................................... 2,795 2,882
Service charges on deposit accounts ............................ 1,240 1,150
Securities transactions, net ................................... (43) 290
Gain on sales of mortgage loans, net ........................... 1,242 395
Other .......................................................... 1,038 1,016
----------------------------
Total non-interest income ................................ 9,770 9,519
Non-interest expense:
Salaries and employee benefits ................................. 9,243 9,851
Occupancy ...................................................... 1,206 1,161
Equipment ...................................................... 1,212 1,362
Data processing ................................................ 1,058 1,238
Office supplies ................................................ 628 634
Service charges from correspondent banks ....................... 465 483
Other .......................................................... 2,373 2,429
---------------------------
Total non-interest expense ............................... 16,185 17,158
Income before income taxes ............................... 12,717 12,561
Income taxes ..................................................... 4,287 4,108
----------------------------
Net income ............................................... $ 8,430 $ 8,453
============================
Per share data:
Basic earnings per share ....................................... $ 0.80 $ 0.77
Weighted average shares of common stock outstanding ............ 10,487,954 11,045,188
Diluted earnings per share ..................................... $ 0.80 $ 0.76
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 10,590,106 11,110,716
See accompanying notes to unaudited consolidated financial statements.
4
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Six Months Ended June 30, 2003 and 2002
(Unaudited, in thousands)
2003 2002
-----------------
Net income ............................................................ $ 8,430 $ 8,453
-----------------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period, net of tax of
$49 and $476 for June 30, 2003 and 2002, respectively ........... 73 399
Less: reclassification adjustment for (gains) losses included in
net income, net of tax of $17 and $(116), for June 30, 2003
and 2002, respectively .......................................... 26 (174)
-----------------
Other comprehensive income, net of tax .............................. 99 225
-----------------
Comprehensive income ................................................ $ 8,529 $ 8,678
=================
See accompanying notes to unaudited consolidated financial statements.
5
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended June 30, 2003 and 2002
(Unaudited, in thousands, except share data)
2003 2002
-------------------------
Interest income:
Loans and fees on loans ............................................ $ 10,348 $ 12,195
Investments in debt and equity securities
Taxable .......................................................... 2,949 3,130
Tax-exempt ....................................................... 579 594
Federal funds sold and interest bearing deposits ................... 152 101
-------------------------
Total interest income ........................................ 14,028 16,020
Interest expense:
Deposits ........................................................... 3,618 4,718
Federal funds purchased, repurchase agreements and notes payable ... 280 323
Federal Home Loan Bank advances and other borrowings ............... 384 499
-------------------------
Total interest expense ....................................... 4,282 5,540
-------------------------
Net interest income .......................................... 9,746 10,480
Provision for loan losses ............................................ 330 330
-------------------------
Net interest income after provision for loan losses .......... 9,416 10,150
Non-interest income:
Remittance processing .............................................. 1,732 1,837
Trust and brokerage fees ........................................... 1,333 1,429
Service charges on deposit accounts ................................ 660 596
Securities transactions, net ....................................... -- 220
Gain on sales of mortgage loans, net ............................... 698 176
Other .............................................................. 511 508
------------------------
Total non-interest income .................................... 4,934 4,766
Non-interest expense:
Salaries and employee benefits ..................................... 4,594 5,096
Occupancy .......................................................... 583 609
Equipment .......................................................... 563 674
Data processing .................................................... 529 675
Office supplies .................................................... 325 293
Service charges from correspondent banks ........................... 236 247
Other .............................................................. 1,291 1,367
------------------------
Total non-interest expense ................................... 8,121 8,961
Income before income taxes ................................... 6,229 5,955
Income taxes ......................................................... 2,097 1,912
-------------------------
Net income ................................................... $ 4,132 $ 4,043
=========================
Per share data:
Basic earnings per share ........................................... $ 0.39 $ 0.37
Weighted average shares of common stock outstanding ................ 10,496,736 11,028,764
Diluted earnings per share ......................................... $ 0.39 $ 0.36
Weighted average shares of common stock and dilutive potential
common shares outstanding ........................................ 10,605,680 11,107,133
See accompanying notes to unaudited consolidated financial statements
6
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended June 30, 2003 and 2002
(Unaudited, in thousands)
2003 2002
-----------------
Net income ............................................................ $ 4,132 $ 4,043
-----------------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period, net of tax of
$542 and $1,169 for June 30, 2003 and 2002, respectively ........ 813 1,708
Less: reclassification adjustment for (gains) losses included in
net income, net of tax of $0 and $(92) for June 30, 2003
and 2002, respectively .......................................... -- (128)
-----------------
Other comprehensive income, net of tax .............................. 813 1,580
-----------------
Comprehensive income ................................................ $ 4,945 $ 5,623
=================
See accompanying notes to unaudited consolidated financial statements.
7
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ending June 30, 2003 and 2002
(Unaudited, in thousands)
2003 2002
----------------------
Cash flows from operating activities:
Net income .......................................................... $ 8,430 $ 8,453
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ...................................................... 1,223 1,321
Amortization of bond discounts and premiums, net .................. 922 548
Provision for loan losses ......................................... 660 660
Securities transactions, net ...................................... 43 (290)
Gain on sales of mortgage loans, net .............................. (1,242) (395)
Federal Home Loan Bank stock dividend ............................. (181) (89)
Proceeds from sales of mortgage loans originated for sale ......... 115,484 45,411
Mortgage loans originated for sale ................................ (119,145) (38,372)
Other, net ........................................................ (2,302) (962)
----------------------
Net cash provided by operating activities ..................... 3,892 16,285
----------------------
Cash flows from investing activities:
Net decrease (increase) in loans .................................... 38,215 (8,499)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 7,436 1,791
Available-for-sale ................................................ 127,974 51,866
Proceeds from sales of investments:
Available-for-sale ................................................ 11,085 43,122
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (57,569) (575)
Available-for-sale ................................................ (175,284) (80,720)
Other equity securities ........................................... (580) (880)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 13,673 9,157
Available-for-sale ................................................ 10,526 3,730
Return of principal on other equity securities ...................... 115 31
Purchases of premises and equipment ................................. (698) (977)
----------------------
Net cash (used in) provided by investing activities ........... (25,107) 18,046
----------------------
Cash flows from financing activities:
Net decrease in deposits ............................................ (16,718) (22,667)
Net increase (decrease) in federal funds purchased,
repurchase agreements, and notes payable .......................... 15,056 (30,025)
Advances from Federal Home Loan Bank and other borrowings ........... -- 12,977
Payments on Federal Home Loan Bank and other borrowings ............. (58) (10,033)
Cash dividends paid ................................................. (3,145) (2,906)
Issuance of new shares of common stock, net ......................... -- 1,222
MSTI stock transactions, net ........................................ 235 (14,086)
----------------------
Net cash used in financing activities ......................... (4,630) (65,518)
----------------------
Net decrease in cash and cash equivalents ............................. (25,845) (31,187)
Cash and cash equivalents at beginning of year ........................ 102,746 95,379
----------------------
Cash and cash equivalents at end of period ............................ $ 76,901 $ 64,192
======================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 9,090 $ 11,972
Income taxes ...................................................... 5,430 4,741
Real estate acquired through or in lieu of foreclosure .............. 10 239
Dividends declared not paid ......................................... 2,097 1,366
See accompanying notes to unaudited consolidated financial statements.
8
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements for Main Street
Trust, Inc. have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all information and footnotes necessary for fair
presentation of financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction with the
audited consolidated financial statements and related notes as of and for the
year ended December 31, 2002, and schedules included in Main Street Trust,
Inc.'s Form 10-K filed on March 21, 2003.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. and its subsidiaries, as of June 30, 2003 and for the
three-month and six-month periods ended June 30, 2003 and 2002, include all
adjustments necessary for a fair presentation of the results of those periods.
All such adjustments are of a normal recurring nature.
Results of operations for the three-month and six-month periods ended June 30,
2003 are not necessarily indicative of the results which may be expected for the
year ended December 31, 2003.
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold and interest
bearing deposits. Generally, federal funds are sold for one-day periods.
Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform with the 2003 presentation. Such reclassifications have
no effect on previously reported net income or shareholders' equity.
Note 2. Company Information/Business Combination
Main Street Trust, Inc. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company was incorporated on August 12, 1999, and is
the parent company of BankIllinois, The First National Bank of Decatur and
FirsTech, Inc. The Company's two banking subsidiaries are referred to as "the
Banks".
On March 23, 2000, the Company acquired all of the outstanding stock of
BankIllinois, The First National Bank of Decatur, First Trust Bank of
Shelbyville and FirsTech, Inc. following the merger of BankIllinois Financial
Corporation and First Decatur Bancshares, Inc. into the Company. The merger,
which was accounted for as a pooling of interests, was completed on March 23,
2000. The Company subsequently merged the Company's former banking subsidiary,
First Trust Bank of Shelbyville, into BankIllinois effective June 19, 2002.
On June 14, 2001, the Company was certified by the Board of Governors of the
Federal Reserve System as a financial holding company. This designation allows
the Company to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. However, the
Company has no current plans to do so.
The Company completed a tender offer on June 7, 2002 with 711,832 shares,
representing approximately 6.3% of the total shares outstanding, repurchased at
a cost, including expenses, of $16.556 million.
Note 3. New Accounting Rules and Regulations
In April 2003, Statement on Financial Accounting Standards No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, was issued. This
Statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement is effective for contracts entered into or modified
after June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003. In addition, except as indicated in the
standard, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company does not anticipate this Statement having a
significant impact upon the operations of the Company or the Banks.
9
In May 2003, Statement of Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, was issued. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
This Statement requires an issuer to classify the following instruments as
liabilities (or assets in some circumstances):
o A financial instrument issued in the form of shares that is mandatorily
redeemable - that embodies an unconditional obligation requiring the issuer
to redeem it by transferring its assets at a specified or determinable date
(or dates) or upon an event that is certain to occur
o A financial instrument, other than an outstanding share, that, at
inception, embodies an obligation to repurchase the issuer's equity shares,
or is indexed to such an obligation, and that requires or may require the
issuer to settle the obligation by transferring assets (for example, a
forward purchase contract or written put option on the issuer's equity
shares that is to be physically settled or net cash settled)
o A financial instrument that embodies an unconditional obligation, or a
financial instrument other than an outstanding share that embodies a
conditional obligation, that the issuer must or may settle by issuing a
variable number of its equity shares, if, at inception, the monetary value
of the obligation is based solely or predominantly on any of the following:
o A fixed monetary amount known at inception, for example, a payable
settleable with a variable number of the issuer's equity shares
o Variations in something other than the fair value of the issuer's
equity shares, for example, a financial instrument indexed to the S&P
500 and settleable with a variable number of the issuer's equity
shares
o Variations inversely related to changes in the fair value of the
issuer's equity shares, for example, a written put option that could
be net share settled
The requirements of this Statement apply to issuers' classification and
measurement of freestanding financial instruments, including those that comprise
more than one option or forward contract.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption. Restatement
is not permitted.
The Company does not anticipate this statement having a significant impact upon
the operations of the Company or the Banks.
Note 4. Income per Share
Net income per common share has been computed as follows:
Six Month Ended Three Months Ended
------------------------------------------------------
June 30, June 30,
2003 2002 2003 2002
------------------------------------------------------
Net Income .............................. $ 8,430,000 $ 8,453,000 $ 4,132,000 $ 4,043,000
=====================================================
Shares:
Weighted average common shares
outstanding ......................... 10,487,954 11,045,188 10,496,736 11,028,764
Dilutive effect of outstanding options,
as determined by the application of
the treasury stock method ........... 102,152 65,528 108,944 78,369
-----------------------------------------------------
Weighted average common shares
outstanding, as adjusted .............. 10,590,106 11,110,716 10,605,680 11,107,133
=====================================================
Basic earnings per share ................ $ 0.80 $ 0.77 $ 0.39 $ 0.37
=====================================================
Diluted earnings per share .............. $ 0.80 $ 0.76 $ 0.39 $ 0.36
=====================================================
10
Note 5. Stock Option Plans
The Company has four stock-based compensation plans, which have been in
existence for all periods presented. As permitted under accounting principles
generally accepted in the United States of America, grants of options under the
plans are accounted for under the recognition and measurement principles of APB
Opinion No. 25 Accounting for Stock Issued to Employees, and related
interpretations. Because options granted under the plans had an exercise price
equal to market value of the underlying common stock on the grant date, no
stock-based employee compensation cost is included in determining net income.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------------------------
2003 2002 2003 2002
------------------------------------------------
Net income on common stock:
As reported .................................. $ 8,430 $ 8,453 $ 4,132 $ 4,043
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ........... (117) (209) (72) (39)
------------------------------------------------
Pro forma ................................. $ 8,313 $ 8,244 $ 4,060 $ 4,004
================================================
Basic earnings per share:
As reported .................................. $ 0.80 $ 0.77 $ 0.39 $ 0.37
Pro forma .................................... 0.79 0.75 0.39 0.36
Diluted earnings per share:
As reported .................................. $ 0.80 $ 0.76 $ 0.39 $ 0.36
Pro forma .................................... 0.78 0.74 0.38 0.36
The fair value of the stock options granted has been estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions. The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions.
In addition, such models require the use of subjective assumptions, including
expected stock price volatility. In management's opinion, such valuation models
may not necessarily provide the best single measure of option value.
Six Months Ended
June 30,
---------------------------
2003 2002
---------------------------
Number of options granted .............. 129,000 158,000
Risk-free interest rate ................ 3.64% 5.20%
Expected life, in years ................ 8.00 8.00
Expected volatility .................... 13.35% 10.34%
Expected dividend yield ................ 2.42% 2.80%
Note 6. Commitments and Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
Those financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Management
does not anticipate any significant losses as a result of these transactions.
The following table summarizes these financial instruments and commitments (in
thousands) at June 30, 2003 and December 31, 2002:
June 30, December 31,
2003 2002
-----------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments .................................... $210,086 $201,181
Standby letters of credit ...................... 10,368 11,563
11
The majority of commitments are agreements to extend credit to a customer as
long as there is no violation of any condition established in the contract.
Commitments, principally variable interest rates, generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. For commitments to extend credit, the Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
accounts receivables; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments at June 30,
2003 was $3.670 million to purchase other equity securities, compared to $1.750
million at December 31, 2002.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements and,
generally, have terms of one year or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Company may hold collateral, which include accounts
receivables, inventory, property and equipment, and income producing properties,
supporting those commitments, if deemed necessary. In the event the customer
does not perform in accordance with the terms of the agreement with the third
party, the Company would be required to fund the commitment. The maximum
potential amount of future payments the Company could be required to make is
represented by the contractual amount shown in the summary above. If the
commitment is funded, the Company would be entitled to seek recovery from the
customer. At June 30, 2003 and December 31, 2002, no amounts have been recorded
as liabilities for the Company's potential obligations under these guarantees.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets and Liabilities
Total assets increased $3.754 million, or 0.3%, to $1.126 billion at June 30,
2003 compared to $1.123 billion at December 31, 2002. Increases in all
categories of investment securities, mortgage loans held for sale and other
assets were partially offset by decreases in loans, federal funds sold and
interest bearing deposits, cash and due from banks, accrued interest receivable
and premises and equipment.
Cash and due from banks decreased $7.059 million, or 11.8%, to $52.685 million
at June 30, 2003 compared to $59.744 million at December 31, 2002, primarily due
to a smaller dollar amount of deposit items in process of collection at June 30,
2003 compared to December 31, 2002.
Federal funds sold and interest bearing deposits decreased $18.786 million, or
43.7%, to $24.216 million at June 30, 2003 compared to $43.002 million at
December 31, 2002. Federal funds sold and interest bearing deposits fluctuate
with loan demand, deposit volume and investment opportunities.
Total investments in debt and equity securities increased $62.005 million, or
19.6%, to $378.215 million at June 30, 2003 compared to $316.210 million at
December 31, 2002. There were increases in all categories of investment
securities as investments in securities available-for-sale increased $25.360
million, or 10.5%, investments in securities held-to-maturity increased $36.148
million, or 52.7%, and non-marketable equity securities increased $497,000, or
7.1%, at June 30, 2003 compared to December 31, 2002. Investments fluctuate with
loan demand, deposit volume and availability of funds.
Loans, net of allowance for loan losses, decreased $38.885 million, or 5.9%, to
$625.257 million at June 30, 2003 from $664.142 million at December 31, 2002.
There were decreases in all loan categories. Commercial, financial and
agricultural loans decreased $8.183 million, or 3.5%, as a result of the
slowdown of the economy and the Company's conservative underwriting standards,
in which it has been unwilling to sacrifice credit quality for growth. Real
estate loans decreased $17.682 million, or 5.1%. The decrease in real estate
loans included a decrease of $18.554 million in residential real estate caused
by long-term fixed rate loans being refinanced and subsequently sold on the
secondary market offset somewhat by an increase of $872,000 in commercial real
estate. Installment and consumer loans decreased $12.544 million, or 13.1%, due
to alternative funding sources available to consumers, such as special financing
offered by the auto manufacturers' captive financing companies.
12
Mortgage loans held for sale increased $4.903 million, or 165.0%, to $7.875
million at June 30, 2003 compared to $2.972 million at December 31, 2002.
Premises and equipment decreased $525,000, or 2.9%, to $17.824 million at June
30, 2003 from $18.349 million at December 31, 2002. The decrease included
depreciation expense of $1.223 million, offset somewhat by purchases of
$698,000.
Total liabilities decreased $1.380 million, or 0.1%, to $986.878 million at June
30, 2003 from $988.258 million at December 31, 2002. Decreases in total
deposits, Federal Home Loan Bank advances and other borrowings, and accrued
interest payable were somewhat offset by increases in federal funds purchased,
repurchase agreements and notes payable and other liabilities.
Total deposits decreased $16.718 million, or 1.9%, to $851.868 million at June
30, 2003 from $868.586 million at December 31, 2002. Decreases in deposits
included decreases of $10.764 million, or 6.6%, in non-interest bearing deposits
and $5.954 million, or 0.8%, in interest bearing deposits.
Federal funds purchased, repurchase agreements and notes payable increased
$15.056 million, or 18.7%, to $95.707 million at June 30, 2003 compared to
$80.651 million at December 31, 2002. Included in this change was an increase of
$15.906 million in repurchase agreements offset somewhat by a decrease of
$850,000 in federal funds purchased.
Federal Home Loan Bank advances and other borrowings decreased $58,000, or 0.2%,
to $27.748 million at June 30, 2003 compared to $27.806 million at December 31,
2002.
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for June 30, 2003 and December 31, 2002:
Carrying Value of Securities
(in thousands)
June 30, December 31,
2003 2002
-----------------------
Available-for-sale:
U.S. Treasury .................................. $ 2,025 $ 3,066
Federal agencies ............................... 211,283 185,469
Mortgage-backed securities ..................... 32,252 30,884
State and municipal ............................ 16,007 16,168
Corporate and other obligations ................ -- 1,008
Marketable equity securities ................... 4,409 4,021
---------------------
Total available-for-sale ................. $265,976 $240,616
=====================
Held-to-maturity:
Federal agencies ............................... $ 7,211 $ 1,750
Mortgage-backed securities ..................... 55,815 23,595
State and municipal ............................ 41,685 43,218
---------------------
Total held-to-maturity ................... $104,711 $ 68,563
=====================
Non-marketable equity securities:
FHLB and FRB stock1 ............................ $ 4,128 $ 3,963
Other equity investments ....................... 3,400 3,068
---------------------
Total .................................... $ 7,528 $ 7,031
=====================
Total investment securities .............. $378,215 $316,210
=====================
1 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively.
13
The following table shows the maturities and weighted-average yields of
investment securities at June 30, 2003. All securities are shown at their
contractual maturity.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
--------------------------------------------------------------------------------------------
June 30, 2003
--------------------------------------------------------------------------------------------
1 Year 1 to 5 5 to 10 Over 10
or Less Years Years Years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
--------------------------------------------------------------------------------------------
Securities available-for-sale
U.S. Treasury ................. $ 2,025 3.03% $ -- 0.00% $ -- -- $ -- -- $ 2,025 3.03%
Federal agencies .............. $ 64,220 3.91% $143,833 3.60% $ 3,230 4.10% $ -- -- $211,283 3.70%
Mortgage-backed
securities1 ................ $ 4,363 2.91% $ 16,562 5.48% $ 11,211 4.57% $ 116 6.68% $ 32,252 4.82%
State and municipal ........... $ 1,031 3.91% $ 8,720 4.65% $ 4,898 5.02% $ 1,358 5.10% $ 16,007 4.76%
Marketable equity
securities2 ................. $ -- -- $ -- -- $ -- -- $ -- -- $ 4,409 --
--------------------------------------------------------------------------------------------
Total ................... $ 71,639 $169,115 $ 19,339 $ 1,474 $265,976
--------------------------------------------------------------------------------------------
Average Yield ................... 3.83% 3.84% 4.61% 5.22% 3.90%
============================================================================================
Securities held-to-maturity
Federal agencies .............. $ -- -- $ 2,286 2.56% $ 4,925 4.53% $ -- -- $ 7,211 3.91%
Mortgage-backed
securities1 ................. $ 3,710 4.56% $ 8,176 4.95% $ 8,381 4.87% $ 35,548 4.92% $ 55,815 4.89%
State and municipal ........... $ 11,228 3.62% $ 27,404 3.99% $ 3,053 4.84% $ -- -- $ 41,685 3.95%
--------------------------------------------------------------------------------------------
Total ................... $ 14,938 $ 37,866 $ 16,359 $ 35,548 $104,711
============================================================================================
Average Yield .................. 3.85% 4.11% 4.76% 4.92% 4.45%
============================================================================================
Non-marketable equity securities2
FHLB and FRB stock ............ $ -- -- $ -- -- $ -- -- $ -- -- $ 4,128 --
Other equity investments ...... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,400 --
-------------------------------------------------------------------------------------------
Total .................. $ -- -- $ -- -- $ -- -- $ -- -- $ 7,528 --
===========================================================================================
1 Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties and certain securities require principal
repayments prior to maturity.
2 Due to the nature of these securities, they do not have a stated maturity
date or rate.
Loans
The following table presents the amounts and percentages of loans at June 30,
2003 and December 31, 2002 according to the categories of commercial, financial
and agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
-------------------------------------------
June 30, 2003 December 31, 2002
-------------------------------------------
Amount Percentage Amount Percentage
-------------------------------------------
Commercial, financial and
agricultural ....................... $225,862 35.57% $234,045 34.75%
Real estate .......................... 326,145 51.36% 343,827 51.06%
Installment and consumer1 ............ 82,985 13.07% 95,529 14.19%
-----------------------------------------
Total loans .................. $634,992 100.00% $673,401 100.00%
=========================================
1 Net of unearned discount
14
The balance of loans outstanding as of June 30, 2003 by maturity is shown in the
following table:
Maturity of Loans Outstanding
(dollars in thousands)
--------------------------------------------
June 30, 2003
--------------------------------------------
1 Year 1 to 5 Over 5
or Less Years Years Total
--------------------------------------------
Commercial, financial and agricultural $121,190 $ 83,623 $ 21,049 $225,862
Real estate .......................... 57,642 143,946 124,557 326,145
Installment and consumer1 ............ 29,971 45,070 7,944 82,985
--------------------------------------------
Total ........................ $208,803 $272,639 $153,550 $634,992
============================================
Percentage of total loans outstanding 32.88% 42.94% 24.18% 100.00%
============================================
1 Net of unearned discount
Capital
Total shareholders' equity increased $5.134 million from December 31, 2002 to
June 30, 2003. Treasury stock transactions were $235,000, primarily due to stock
option exercise transactions exceeding the purchase of shares of treasury stock.
The change in shareholders' equity is summarized as follows:
Shareholders' Equity (in thousands)
Shareholders' equity, December 31, 2002 .................... $ 134,470
Net income ................................................. 8,430
Treasury stock transactions, net ........................... 235
Stock appreciation rights .................................. 42
Cash dividends declared .................................... (3,672)
Other comprehensive income ................................. 99
---------
Shareholders' equity, June 30, 2003 ........................ $ 139,604
=========
On June 17, 2003, the Board of Directors of the Company declared a quarterly
cash dividend of $0.20 per share of the Company's common stock. The dividend of
$2.097 million was paid on July 18, 2003 to holders of record on July 7, 2003.
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and its
subsidiary banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of June 30,
2003, that the Company and its subsidiary banks exceeded all capital adequacy
requirements to which they are subject.
As of June 30, 2003, the most recent notifications from primary regulatory
agencies categorized all the Company's subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, banks must maintain minimum total capital to risk-weighted
assets, Tier I capital to risk weighted-assets, and Tier I capital to average
assets ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed any of the Company's
subsidiary banks' categories.
15
The Company's and the Banks' actual capital amounts and ratios are presented in
the following table (in thousands):
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes: Action Provisions:
-------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------
As of June 30, 2003:
Total capital
(to risk-weighted assets)
Consolidated ................. $144,112 18.9% $ 61,064 8.0% N/A
BankIllinois ................. $ 74,672 16.0% $ 37,333 8.0% $ 46,666 10.0%
First National Bank of Decatur $ 48,105 17.4% $ 22,146 8.0% $ 27,683 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ................. $134,645 17.6% $ 30,532 4.0% N/A
BankIllinois ................. $ 68,742 14.7% $ 18,666 4.0% $ 28,000 6.0%
First National Bank of Decatur $ 44,640 16.1% $ 11,073 4.0% $ 16,610 6.0%
Tier I capital
(to average assets)
Consolidated ................. $134,645 12.0% $ 44,733 4.0% N/A
BankIllinois ................. $ 68,742 10.0% $ 27,371 4.0% $ 34,213 5.0%
First National Bank of Decatur $ 44,640 10.4% $ 17,145 4.0% $ 21,431 5.0%
Interest Rate Sensitivity:
The concept of interest rate sensitivity attempts to gauge exposure of the
Company's net interest income to adverse changes in market driven interest rates
by measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of the Company to meet the day-to-day demands
of deposit customers balanced by its investments of these deposits. The Company
must also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. The Company
monitors its interest rate sensitivity and liquidity through the use of static
gap reports which measure the difference between assets and liabilities maturing
or repricing within specified time periods as well as financial
forecasting/budgeting/reporting software packages.
The following table presents the Company's interest rate sensitivity at various
intervals at June 30, 2003:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(dollars in thousands)
-----------------------------------------------------------------------------
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1 year Total
-----------------------------------------------------------------------------
Interest earning assets:
Federal funds sold and
interest bearing deposits ............ $ 24,216 $ -- $ -- $ -- $ -- $ 24,216
Debt and equity securities 1 ........... 10,042 49,091 32,716 58,293 228,073 378,215
Loans 2 ................................ 210,490 35,738 31,381 54,836 310,422 642,867
-----------------------------------------------------------------------------
Total earning assets ............. $ 244,748 $ 84,829 $ 64,097 $ 113,129 $ 538,495 $1,045,298
-----------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits ...................... $ 39,650 $ 1,488 $ 2,232 $ 4,464 $ 169,608 $ 217,442
Money market savings
deposits ............................. 141,655 -- -- -- -- 141,655
Time deposits .......................... 23,389 39,345 83,432 83,738 109,728 339,632
Federal funds purchased,
repurchase agreements,
and notes payable .................... 94,910 485 81 231 -- 95,707
FHLB advances and
other borrowings ..................... 5,000 10,000 -- 115 12,633 27,748
-----------------------------------------------------------------------------
Total interest bearing liabilities $ 304,604 $ 51,318 $ 85,745 $ 88,548 $ 291,969 $ 822,184
-----------------------------------------------------------------------------
Net asset (liability) funding gap ........ (59,856) 33,511 (21,648) 24,581 246,526 223,114
-----------------------------------------------------------------------------
Repricing gap ............................ 0.80 1.65 0.75 1.28 1.84 1.27
Cumulative repricing gap ................. 0.80 0.93 0.89 0.96 1.27 1.27
=============================================================================
1 Debt and equity securities include securities available-for-sale,
securities held-to-maturity, and non-marketable equity securities.
2 Loans are gross and include mortgage loans held-for-sale.
16
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon industry-accepted
assumptions and Company analysis, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months for each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
------------------------------------------------------------------
Savings and interest-bearing
demand deposits ............ 0.45% 0.85% 1.25% 2.45% 95.00%
At June 30, 2003, the Company was liability-sensitive due to the levels of
savings and interest bearing demand deposits, short-term time deposits, and
short-term borrowings. As such, the effect of a decrease in the interest rate
for all interest earning assets and interest bearing liabilities of 100 basis
points would increase annualized net interest income by approximately $599,000
in the 1-30 days category and $263,000 in the 1-90 days category assuming no
management intervention. An increase in interest rates would have the opposite
effect for the same time periods. The Company's Asset and Liability Management
Policy states that the cumulative ratio of rate-sensitive assets ("RSA") to
rate-sensitive liabilities ("RSL") for the 12-month period should fall within
the range of 0.75-1.25. As of June 30, 2003, the Company's RSA/RSL was 0.96
which was within the established guidelines.
In addition to managing interest rate sensitivity and liquidity through the use
of gap reports, the Company has provided for emergency liquidity situations with
informal agreements with correspondent banks which permit the Company to borrow
federal funds on an unsecured basis. The Company has a $5 million unsecured line
of credit with a correspondent bank. Additionally, the Company can borrow
approximately $50.301 million from the Federal Home Loan Bank on a secured
basis.
The Company uses financial forecasting/budgeting/reporting software packages to
perform interest rate sensitivity analysis for all product categories. The
Company's primary focus of its analysis is on the effect of interest rate
increases and decreases on net interest income. Management believes that this
analysis reflects the potential effects on current earnings of interest rate
changes. Call criteria and prepayment assumptions are taken into consideration
for investments in debt and equity securities. All of the Company's financial
instruments are analyzed by a software database which includes each of the
different product categories which are tied to key rates such as prime, treasury
bills, or the federal funds rate. The relationships of each of the different
products to the key rate that the product is tied to is proportional. The
software reprices the products based on current offering rates. The Company
analyzes interest rate sensitivity by performing rate shocks of plus or minus
200 basis points in 100 basis point increments.
The following table shows projected results at June 30, 2003 and December 31,
2002 of the impact on net interest income from an immediate change in interest
rates. The results are shown as a percentage change in net interest income over
the next twelve months.
Basis Point Change
--------------------------------------
+200 +100 -100 -200
June 30, 2003 .................... 9.9% 5.0% (5.0%) (9.9%)
December 31, 2002 ................ 7.6% 3.8% (3.9%) (7.8%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to enhance earnings
potential while positioning the company to minimize the effect of a prolonged
shift in interest rates that would adversely affect future results of
operations.
17
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
Liquidity and Cash Flows
The Company was able to meet liquidity needs during the first six months of
2003. A review of consolidated statements of cash flows included in the
accompanying financial statements shows that the Company's cash and cash
equivalents decreased $25.845 million from December 31, 2002 to June 30, 2003.
This decrease came from cash used in investing and financing activities offset
somewhat by cash provided by operating activities.
There were differences in the sources and uses of cash during the first six
months of 2003 compared to the first six months of 2002. Cash was used in
investing activities during 2003 compared to cash provided by investing
activities during 2002. During the first six months of 2003, net cash used in
investing activities involving the Company's investment portfolio was $62.624
million compared to cash provided during the first six months of 2002 of $27.522
million. During the first six months of 2003, the Company's investment portfolio
grew versus the first six months of 2002 when the Company's investment portfolio
was reduced. The size of the Company's investment portfolio varies in response
to volume of loans and deposits as well as investment opportunities. Somewhat
offsetting this difference was cash provided by loans during the first six
months of 2003 due to a decrease in loans, compared to cash used by loans during
the same period of 2002 when loans increased. Less cash was used in financing
activities during the first six months of 2003 compared to the first six months
of 2002. This was mainly due to changes in net MSTI stock transactions, deposits
and federal funds purchased, repurchase agreements, and notes payable volumes.
Cash was provided from net MSTI stock transactions during the first six months
of 2003 compared to cash used during the same period of 2002 due to the
completion of the tender offer during the second quarter of 2002. There was a
larger decrease in deposits during the first six months of 2002 compared to the
same period of 2003. The decrease in 2002 included the maturity of a large
short-term time deposit. Also, during the first six months of 2003, cash was
provided by an increase in federal funds purchased, repurchase agreements, and
notes payable compared to a decrease during the same period of 2002. Less cash
was provided by operating activities during the first six months of 2003
compared to the same period of 2002, primarily from net loans originated for
sale. Proceeds from sales were higher than originated loans during the first six
months of 2002, whereas during the first six months of 2003 loan originations
exceeded proceeds from sales.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosures of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. The Company believes that it has one
critical accounting policy, allowance for loan losses, that is subject to
estimates and judgements used in the preparation of its consolidated financial
statements.
Provision and Allowance for Loan Losses
The provision for loan losses is based on management's evaluation of the loan
portfolio in light of national and local economic conditions, changes in the
composition and volume of the loan portfolio, changes in the volume of past due
and nonaccrual loans, and other relevant factors. The allowance for loan losses,
which is reported as a deduction from loans, is available for loan charge-offs.
The allowance is increased by the provision charged to expense and is reduced by
loan charge-offs net of loan recoveries. The allowance is allocated between the
commercial, residential real estate and consumer loan portfolios according to
the historical losses experienced in each of these portfolios as well as the
current level of watch list loans and nonperforming loans for each portfolio.
Loans for which borrower cash flow and the estimated liquidation value of
collateral are inadequate to repay the total outstanding balance are evaluated
separately and assigned a specific allocation. The unallocated portion of the
allowance is determined by economic conditions and other factors mentioned
above. The balance of the allowance for loan losses was $9.735 million at June
30, 2003 compared to $9.259 million at December 31, 2002, as net charge-offs
were $184,000 and provisions totaled $660,000 during the first six months of
2003. The allowance for loan losses as a percentage of gross loans, including
loans held-for-sale, was 1.51% at June 30, 2003, compared to 1.37% at December
31, 2002. Gross loans, including loans held-for-sale, decreased 5.0% to $642.867
million at June 30, 2003 from $676.373 million at December 31, 2002.
18
The allowance for loan losses as a percentage of nonperforming loans was 424.4%
at June 30, 2003 compared to 416.9% at December 31, 2002. Nonperforming loans
increased from $2.221 million at December 31, 2002 to $2.294 million at June 30,
2003. The $73,000 increase in nonperforming loans during the first six months
resulted from a $248,000 increase in nonaccrual loans, offset somewhat by a
$175,000 decrease in loans past due 90 days or more. The increase in nonaccruals
consisted primarily of consumer loans as a result of a more aggressive approach
toward placing 90-day consumer loan delinquencies on nonaccrual status.
Management believes that nonperforming and potential problem loans are
appropriately identified and monitored based on the extensive loan analysis
performed by the credit administration department, the internal loan committees
and the board of directors. Historically, there have not been a significant
amount of loans charged off which had not been previously identified as problem
loans by the credit administration department or the loan committees.
Along with other financial institutions, management shares a concern for the
outlook of the economy during the second half of 2003. A slowdown in economic
activity beginning in 2001 severely impacted several major industries as well as
the economy as a whole. Even though there are indications of emerging strength,
it is not certain that this strength is sustainable. In addition, consumer
confidence may be negatively impacted by the decline in equity prices. These
events could still adversely affect cash flows for both commercial and
individual borrowers, as a result of which, the Company could experience
increases in problem assets, delinquencies and losses on loans.
The following table summarizes changes in the allowance for loan losses by loan
categories for each period and additions to the allowance for loan losses which
have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
June 30,
---------------------
2003 2002
---------------------
Allowance for loan losses at beginning of year ..... $ 9,259 $ 9,259
---------------------
Charge-offs during period:
Commercial, financial and agricultural ........... $ (7) $ (40)
Real estate ...................................... (9) (32)
Installment and consumer ......................... (451) (671)
---------------------
Total ...................................... $ (467) $ (743)
---------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ........... $ 181 $ 124
Residential real estate .......................... 14 26
Installment and consumer ......................... 88 75
---------------------
Total ...................................... $ 283 $ 225
---------------------
Net (charge-offs) recoveries ............... $ (184) $ (518)
Provision for loan losses .......................... 660 660
---------------------
Allowance for loan losses at end of quarter ........ $ 9,735 $ 9,401
=====================
Ratio of net (charge-offs) recoveries to
average net loans ................................ (0.03)% (0.08)%
=====================
The following table shows the allocation of the allowance for loan losses
allocated to each category.
Allocation of the Allowance for Loan Losses
(in thousands)
June 30, December 31,
2003 2002
----------------------
Allocated:
Commercial, financial and agricultural ........... $5,497 $5,732
Residential real estate .......................... 214 345
Installment and consumer ......................... 1,954 1,763
-------------------
Total allocated allowance .................. $7,665 $7,840
Unallocated allowances ............................. 2,070 1,419
-------------------
Total .............................................. $9,735 $9,259
===================
19
The following table presents the aggregate amount of loans considered to be
nonperforming for the periods indicated. Nonperforming loans include loans
accounted for on a nonaccrual basis, accruing loans contractually past due 90
days or more as to interest or principal payments and loans which are troubled
debt restructurings as defined in Statement of Financial Accounting Standards
No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings.
Nonaccrual, Past Due and Restructured Loans (dollars in thousands)
June 30, December 31,
2003 2002
-----------------------
Nonaccrual loans1 ............................... $1,640 $1,392
===================
Loans past due 90 days or more ................... $ 654 $ 829
===================
Restructured loans2 .............................. $ 18 $ 20
===================
1 Includes $862,000 at June 30, 2003 and $628,000 at December 31, 2002 of
real estate and consumer loans which management does not considered
impaired as defined by the Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan (SFAS 114).
2 Restructured loans of $18,000 at June 30, 2003 and $20,000 at December 31,
2002 are not considered nonperforming.
Other Nonperforming Assets (dollars in thousands)
June 30, December 31,
2003 2002
--------------------------
Other real estate owned ........................ $ -- $ 58
=======================
Nonperforming other assets .............. $ 259 $ 94
=======================
Results of Operations
Results of Operations For the Six Months Ended June 30, 2003
Net income for the first six months of 2003 was $8.430 million, a $23,000, or
0.3%, decrease from $8.453 million for the same period in 2002. Basic earnings
per share increased $0.03, or 3.9%, to $0.80 per share in the first six months
of 2003 from $0.77 per share in the same period in 2002. Diluted earnings per
share increased $0.04, or 5.3%, to $0.80 per share in the first six months of
2003 from $0.76 per share in the first six months of 2002. The increase in basic
and diluted earnings per share was mainly due to a decrease in weighted average
shares outstanding after the completion of the tender offer for 6.3% of the
Company's outstanding common stock near the end of the second quarter of 2002.
This was offset somewhat by other treasury stock transactions.
20
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
----------------------------------------------------------------------
Six Months Ended June 30,
----------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------
Assets
Taxable investment securities1 ......... $ 291,043 $ 5,772 4.00% $ 267,901 $ 6,455 4.86%
Tax-exempt investment securities1 (TE) . 56,961 1,794 6.35% 55,179 1,837 6.71%
Federal funds sold and interest bearing
deposits2 ............................ 39,675 254 1.29% 20,147 196 1.96%
Loans3,4 (TE) .......................... 645,299 21,413 6.69% 676,729 24,390 7.27%
----------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,032,978 $ 29,233 5.71% $1,019,956 $ 32,878 6.50%
----------------------------------------------------------------------
Cash and due from banks ................ $ 46,539 $ 47,655
Premises and equipment ................. 18,051 19,068
Other assets ........................... 17,566 18,759
----------------------------------------------------------------------
Total assets ................... $1,115,134 $1,105,438
======================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ....... $ 83,720 $ 326 0.79% $ 101,178 $ 578 1.15%
Savings ................................ 278,354 1,367 0.99% 250,925 1,880 1.51%
Time deposits .......................... 338,553 5,798 3.45% 342,511 7,267 4.28%
Federal funds purchased, repurchase
agreements, and notes payable ........ 89,619 547 1.23% 71,629 649 1.83%
FHLB advances and other borrowings ..... 27,775 764 5.55% 35,725 993 5.61%
----------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 818,021 $ 8,802 2.17% $ 801,968 $ 11,367 2.86%
----------------------------------------------------------------------
Noninterest bearing demand deposits .... $ 86,345 $ 103,983
Noninterest bearing savings deposits ... 63,776 48,601
Other liabilities ...................... 9,861 10,717
----------------------------------------------------------------------
Total liabilities .............. $ 978,003 $ 965,269
Shareholders' equity ................... 137,131 140,169
----------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,115,134 $1,105,438
======================================================================
Interest spread (average rate earned
minus average rate paid) (TE) ........ 3.54% 3.64%
======================================================================
Net interest income (TE) ............... $ 20,431 $ 21,511
======================================================================
Net yield on interest
earnings assets (TE) ................. 3.99% 4.25%
======================================================================
See next page for Notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rate Table:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits include approximately
$30,000 and $33,000 in 2003 and 2002, respectively, of interest income from
third party processing of cashier checks.
3 Loans are net of allowance for loan losses and include mortgage loans held
for sale. Nonaccrual loans are included in the total.
4 Loan fees of approximately $931,000 and $492,000 in 2003 and 2002,
respectively, are included in total loan income.
21
Net interest income, the most significant component of the Company's earnings,
is the difference between interest received or accrued on the Company's earning
assets - primarily loans and investments - and interest paid or accrued on
deposits and borrowings. In order to compare the interest generated from
different types of earning assets, the interest income on certain tax-exempt
investment securities and loans is increased for analysis purposes to reflect
the income tax savings provided by these tax-exempt assets. The adjustment to
interest income for tax-exempt investment securities and loans was calculated
based on the federal income tax statutory rate of 35% at June 30, 2003 and 2002.
The following table presents, on a tax equivalent (TE) basis, an analysis of
changes in net interest income resulting from changes in average volumes of
earning assets and interest bearing liabilities and average rates earned and
paid. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the absolute dollar
amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
-----------------------------------
Six Months Ended June 30, 2003
-------------------------------
Increase
(Decrease)
From
Previous Due to Due to
Year Volume Rate
-----------------------------
Interest Income
Taxable investment securities .................. $ (683) $ 1,287 $(1,970)
Tax-exempt investment securities (TE) .......... (43) 134 (177)
Federal funds sold and interest bearing deposits 58 243 (185)
Loans (TE) ..................................... (2,977) (1,100) (1,877)
-----------------------------
Total interest income (TE) ............... $(3,645) $ 564 $(4,209)
-----------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ (765) $ 198 $ (963)
Time deposits .................................. (1,469) (83) (1,386)
Federal funds purchased,
repurchase agreements and notes payable ...... (102) 327 (429)
FHLB advances and other borrowings ............. (229) (219) (10)
-----------------------------
Total interest expense ................... $(2,565) $ 223 $(2,788)
-----------------------------
Net Interest Income (TE) ......................... $(1,080) $ 341 $(1,421)
=============================
Net interest income on a tax equivalent basis was $1.080 million, or 5.0%, lower
for the first six months of 2003 compared to the same period in 2002. Total
tax-equivalent income was $3.645 million, or 11.1%, lower in 2003 compared to
2002, and interest expense decreased $2.565 million, or 22.6%. The decrease in
tax-equivalent interest income and interest expense was mainly due to lower
rates, offset slightly by an increase in average balances.
The decrease in total tax-equivalent interest income was due to a decrease in
interest income from loans, taxable investment securities and tax-exempt
investment securities, offset slightly by an increase in interest income from
federal funds sold and interest bearing deposits. The decrease in interest
income from loans was due to lower rates and lower average balances. The
decrease in interest income from taxable investment securities and tax-exempt
investment securities was due to lower rates offset somewhat by an increase in
average balances. The slight increase in interest income from federal funds sold
and interest bearing deposits was due to higher average balances offset somewhat
by lower interest rates.
The decrease in total interest expense was due to decreases in interest expense
from all categories of interest bearing liabilities. Interest expense on time
deposits and interest bearing demand and savings deposits decreased primarily
due to lower rates and interest expense on FHLB advances and other borrowings
decreased primarily due to lower average balances. Interest expense on federal
funds purchased, repurchase agreements and notes payable decreased primarily due
to lower rates, offset somewhat by an increase in average balances.
22
The provision for loan losses recorded was $660,000 during the first six months
of 2003 and 2002. The provision during both periods was based on management's
analysis of the loan portfolio, as discussed in the provision for loan losses
section above.
Total non-interest income increased $251,000, or 2.6%, during the first six
months of 2003 compared to the first six months of 2002. Included in this
increase was an increase of $847,000, or 214.4%, in gains on sales of mortgage
loans held-for-sale during the first six months of 2003 compared to the same
period in 2002. This increase reflected a $70.073 million, or 154.3%, increase
in funded mortgage loans held-for-sale during the first six months of 2003
compared to the first six months of 2002. This increase was reflective of lower
mortgage interest rates during the first half of 2003 compared to the same
period in 2002. While mortgage rates remain at historically low levels, this
level of mortgage sales gains may not continue throughout the year. Service
charges on deposit accounts increased $90,000, or 7.8%, during the first six
months of 2003 compared to the same period in 2002. Other non-interest income
increased $22,000, or 2.2%, in the first half of 2003 compared to the first half
of 2002. Somewhat offsetting these increases was a decrease of $333,000, or
114.8%, in income from securities transactions in the first six months of 2003
compared to the same period in 2002. This decrease included recognition of loss
on a non-marketable equity security, offset somewhat by a gain on the sale of
one available-for-sale government agency security. Remittance processing income
decreased $288,000, or 7.6%, in the first half of 2003 compared to the same
period in 2002. This was due to a reduction of volume at the Company's
remittance processing subsidiary, FirsTech, associated with a gradual volume
reduction in electronic payments processed for a large telecommunications
company since 2002 as a result of their conversion to an internal processing
platform. Trust and brokerage fees decreased $87,000, or 3.0%, in the first half
of 2003 compared to the first half of 2002. This decrease was primarily due to
lower market values of assets upon which fees were charged during the first six
months of 2003 compared to the same period in 2002.
Total non-interest expense decreased $973,000, or 5.7%, during the first six
months of 2003 compared to the same period of 2002. Of this decrease, salaries
and employee benefits decreased $608,000, or 6.2%, during the first half of 2003
compared to the first half of 2002. Contributing to salaries and employee
benefits in the first 6 months of 2002 was $529,000 in salaries and benefits
related to organizational restructuring that resulted in termination of
employment contracts. Data processing expense decreased $180,000, or 14.5%, in
the first six months of 2003 compared to the first six months of 2002.
Contributing to data processing expense in the first half of 2002 was conversion
to a new system and software upgrade at the Company's remittance processing
subsidiary FirsTech, and costs to merge First Trust Bank of Shelbyville and
BankIllinois computer records. Equipment expense decreased $150,000, or 11.0%,
during the first six months of 2003 compared to the same period in 2002.
Equipment expense decreased largely due to efficiencies gained from
restructuring and the merger of BankIllinois and First Trust Bank of Shelbyville
in June 2002. Other non-interest expense decreased $56,000, or 2.3%, in the
first half of 2003 compared to the first half of 2002. Service charges from
correspondent banks decreased $18,000, or 3.7%, and office supplies expense
decreased $6,000, or 0.9%, in the first six months of 2003 compared to the same
period in 2002. Slightly offsetting these decreases was an increase in occupancy
expense of $45,000, or 3.9%, during the first half of 2003 compared to the first
half of 2002.
Income tax expense increased $179,000, or 4.4%, during the first six months of
2003 compared to the first six months of 2002. The effective tax rate increased
to 33.7% during the first half of 2003 from 32.7% during the first half of 2002.
Results of Operations For the Three Months Ended June 30, 2003
Net income for the second quarter of 2003 was $4.132 million, an $89,000, or
2.2%, increase from $4.043 million for the same period in 2002. Basic earnings
per share increased $0.02, or 5.4%, to $0.39 per share in the second quarter of
2003 compared to $0.37 per share in the second quarter of 2002. Diluted earnings
per share increased $0.03, or 8.3%, to $0.39 per share in the second quarter of
2003 compared to $0.36 per share in the second quarter of 2002.
23
The following schedule "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
----------------------------------------------------------------------
Three Months Ended June 30,
----------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------
Assets
Taxable investment securities1 ......... $ 306,427 $ 2,949 3.86% $ 261,893 $ 3,130 4.79%
Tax-exempt investment securities1 (TE) . 57,066 891 6.26% 54,871 928 6.78%
Federal funds sold and interest bearing
deposits2 ............................ 47,245 152 1.29% 19,755 101 2.05%
Loans3,4 (TE) .......................... 632,220 10,355 6.57% 679,983 12,200 7.20%
----------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,042,958 $ 14,347 5.52% $1,016,502 $ 16,359 6.46%
----------------------------------------------------------------------
Cash and due from banks ................ $ 43,583 $ 46,317
Premises and equipment ................. 17,899 19,000
Other assets ........................... 18,172 18,868
----------------------------------------------------------------------
Total assets ................... $1,122,612 $1,100,687
======================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ....... $ 84,498 $ 129 0.61% $ 96,272 $ 242 1.01%
Savings ................................ 278,523 684 0.99% 250,668 945 1.51%
Time deposits .......................... 339,715 2,805 3.31% 346,634 3,531 4.09%
Federal funds purchased, repurchase
agreements, and notes payable ........ 93,360 280 1.20% 70,954 323 1.83%
FHLB advances and other borrowings ..... 27,757 384 5.55% 36,182 499 5.53%
----------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 823,853 $ 4,282 2.08% $ 800,710 $ 5,540 2.78%
----------------------------------------------------------------------
Noninterest bearing demand deposits .... $ 82,832 $ 102,940
Noninterest bearing savings deposits ... 67,401 45,241
Other liabilities ...................... 10,006 11,690
----------------------------------------------------------------------
Total liabilities .............. $ 984,092 $ 960,581
Shareholders' equity ................... 138,520 140,106
----------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,122,612 $1,100,687
======================================================================
Interest spread (average rate earned
minus average rate paid) (TE) ........ 3.43% 3.68%
======================================================================
Net interest income (TE) ....... $ 10,065 $ 10,819
======================================================================
Net yield on interest
earnings assets (TE) ................. 3.87% 4.27%
======================================================================
See next page for Notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits include approximately
$16,000 and $14,000 in 2003 and 2002, respectively, of interest income from
third party processing of cashier checks.
3 Loans are net of allowance for loan losses. Nonaccrual loans are included
in the total.
4 Loan fees of approximately $433,000 and $242,000 in 2003 and 2002,
respectively, are included in total loan income.
24
The following table presents, on a tax equivalent basis, an analysis of changes
in net interest income resulting from changes in average volumes of earning
assets and interest bearing liabilities and average rates earned and paid. The
change in interest due to the combined rate/volume variance has been allocated
to rate and volume changes in proportion to the absolute dollar amounts of
change in cash.
Analysis of Volume and Rate Changes
(in thousands)
-----------------------------------
Three Months Ended June 30, 2003
--------------------------------
Increase
(Decrease)
From
Previous Due to Due to
Year Volume Rate
-----------------------------
Interest Income
Taxable investment securities .................. $ (181) $ 2,195 $(2,376)
Tax-exempt investment securities (TE) .......... (37) 183 (220)
Federal funds sold and interest bearing deposits 51 277 (226)
Loans (TE) ..................................... (1,845) (824) (1,021)
-----------------------------
Total interest income (TE) ............... $(2,012) $ 1,831 $(3,843)
-----------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ (374) $ 345 $ (719)
Time deposits .................................. (726) (69) (657)
Federal funds purchased,
repurchase agreements and notes payable ...... (43) 404 (447)
FHLB advances and other borrowings ............. (115) (125) 10
-----------------------------
Total interest expense ................... $(1,258) $ 555 $(1,813)
-----------------------------
Net Interest Income (TE) ......................... $ (754) $ 1,276 $(2,030)
=============================
Net interest income on a tax equivalent basis was $754,000, or 7.0%, lower for
the second quarter of 2003 compared to the second quarter of 2002. Total
tax-equivalent interest income was $2.012 million, or 12.3%, lower in 2003
compared to 2002, and interest expense decreased $1.258 million, or 22.7%. The
decrease in interest income and interest expense was due to a decrease in rates
offset somewhat by an increase in average balances.
The decrease in total interest income was due to decreases in interest income
from loans and both taxable and tax-exempt investment securities. These
decreases were offset slightly by an increase in interest income from federal
funds sold and interest bearing deposits. The decreases in interest income from
loans was due to decreases in rates and average balances during the second
quarter of 2003 compared to the same period in 2002. The decreases in interest
income from taxable and tax-exempt investment securities were due to a decrease
in rates during the second quarter of 2003 compared to the second quarter of
2002, offset somewhat by an increase in average balances. The increase in
federal funds sold and interest bearing deposits was due to an increase in
average balance offset somewhat by a decrease in rate.
The decrease in total interest expense was due to decreases in interest expense
on all categories of interest bearing liabilities. The decrease in interest
expense on time deposits was due to decreases in rate and average balance during
the second quarter of 2003 compared to the same period in 2002. The decrease in
interest expense from interest bearing demand and savings deposits was due to a
decrease in rates, offset somewhat by an increase in average balances during the
second quarter of 2003 compared to the second quarter of 2002. Interest expense
on FHLB advances and other borrowings decreased due to a decrease in average
balances, offset slightly by higher rates during the second quarter of 2003
compared to the second quarter of 2002. Interest expense on federal funds
purchased, repurchase agreements and notes payable decreased during the second
quarter of 2003 compared to the second quarter of 2002 due to decreases in
rates, offset somewhat by increases in average balances.
25
The provision for loan losses recorded was $330,000 during both the second
quarter of 2003 and 2002. The provision during both periods was based on
management's analysis of the loan portfolio, as discussed in the provision and
allowance for loan losses section above.
Total non-interest income increased $168,000, or 3.5%, during the second quarter
of 2003 compared to the second quarter of 2002. Included in this increase was an
increase of $522,000, or 296.6%, in gains on sales of mortgage loans
held-for-sale in the second quarter of 2003 compared to the same period in 2002.
This increase reflected a $46.824 million, or 251.7%, increase in funded
mortgage loans held-for-sale in the second quarter of 2003 compared to the same
period in 2002. This increase was reflective of lower mortgage interest rates
during the first half of 2003 compared to the same period in 2002. While
mortgage rates remain at historically low levels, this level of mortgage sales
gains may not continue throughout the year. Service charges on deposit accounts
increased $64,000, or 10.7%, in the second quarter of 2003 compared to the
second quarter of 2002. Somewhat offsetting these increases was a decrease in
income from remittance processing of $105,000, or 5.7%, in the second quarter of
2003 compared to the same quarter in 2002. This was due to a significant
reduction of volume at the Company's remittance processing subsidiary, FirsTech,
associated with a gradual volume reduction in electronic payments processed for
a large telecommunications company since 2002 as a result of their conversion to
an internal processing platform. Trust and brokerage fees decreased $96,000, or
6.7%, in the second quarter of 2003 compared to the same quarter in 2002. This
decrease was primarily due to lower market values of assets upon which fees were
charged during the second quarter of 2003 compared to the same period in 2002.
There was no income generated from securities transactions in the second quarter
of 2003 compared to $220,000 in the second quarter of 2002.
Total non-interest expense decreased $840,000, or 9.4%, during the second
quarter of 2003 compared to the same period in 2002. Of this decrease, salaries
and employee benefits decreased $502,000, or 9.9%, in the second quarter of 2003
compared to the second quarter of 2002. Contributing to salaries and employee
benefits in the second quarter of 2002 was $529,000 in salaries and benefits
related to organizational restructuring that resulted in termination of
employment contracts. Data processing expense decreased $146,000, or 21.6%, in
the second quarter of 2003 compared to the same period in 2002. Contributing to
data processing expense in the second quarter of 2002 was conversion to a new
system and software upgrade at the Company's remittance processing subsidiary
FirsTech, and costs to merge First Trust Bank of Shelbyville and BankIllinois
computer records. Equipment expense decreased $111,000, or 16.5%, in the second
quarter of 2003 compared to the second quarter of 2002. Equipment expense
decreased largely due to efficiencies gained from restructuring, and the merger
of BankIllinois and First Trust Bank of Shelbyville in June 2002. Other
non-interest expense decreased $76,000, or 5.6%, during the second quarter of
2003 compared to the second quarter of 2002. Occupancy expense decreased
$26,000, or 4.3%, in the second quarter of 2003 compared to the second quarter
of 2002. Service charges from correspondent banks decreased $11,000, or 4.5%, in
the second quarter of 2003 compared to the same period in 2002. Slightly
offsetting these decreases was an increase of $32,000, or 10.9%, in office
supplies during the second quarter of 2003 compared to the second quarter of
2002.
Income tax expense increased $185,000, or 9.7%, during the second quarter of
2003 compared to the second quarter of 2002. The effective tax rate increased to
33.7% during the second quarter of 2003 from 32.1% during the same period in
2002.
Business Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services to central Illinois. The Banks offer a full
range of financial services to business and individual customers. These services
include demand, savings, time and individual retirement accounts; commercial,
consumer (including automobile loans and personal lines of credit),
agricultural, and real estate lending; safe deposit and night depository
services; farm management; full service trust departments that offer a wide
range of services such as investment management, acting as trustee, serving as
guardian, executor or agent and miscellaneous consulting; discount brokerage
services and purchases of installment obligations from retailers, primarily
without recourse. The other industry segment involves retail payment processing.
FirsTech provides the following services to electric, water and gas utilities,
telecommunication companies, cable television firms and charitable
organizations: retail lockbox processing of payments delivered by mail on behalf
of the biller; processing of payments delivered by customers to pay agents such
as grocery stores, convenience stores and currency exchanges; and concentration
of payments delivered by the Automated Clearing House network, money management
software such as Quicken and through networks such as Visa e-Pay and MasterCard
RPS.
26
Company information is provided for informational purposes only, since it is not
considered a separate segment for reporting purposes. Effective January 1, 2003,
certain administrative, audit, compliance, accounting, finance, property
management, human resources, courier, information systems and other support
services previously included in the budgets of the Banks were moved to the
Company. During this process, approximately 80 full time equivalent employees
were moved from the Banks to the Company. The net expenses of these functions
are now allocated to the subsidiaries by charging a monthly management fee.
Banking Remittance
Services Services Company Eliminations Total
--------------------------------------------------------------------------------------------------
June 30, 2003
Total interest income ....... $ 28,403 $ 34 $ 206 $ (49) $ 28,594
Total interest expense ...... 8,851 -- -- (49) 8,802
Provision for loan losses ... 660 -- -- -- 660
Total non-interest income ... 6,471 3,543 2,337 (2,581) 9,770
Total non-interest expense .. 13,384 2,364 3,018 (2,581) 16,185
Income before income tax .... 11,979 1,213 (475) -- 12,717
Income tax expense .......... 3,987 485 (185) -- 4,287
Net income .................. 7,992 728 (290) -- 8,430
Total assets ................ 1,111,927 6,972 144,020 (136,437) 1,126,482
Depreciation and amortization 779 199 245 -- 1,223
June 30, 2002
Total interest income ....... $ 32,196 $ 50 $ 75 $ (94) $ 32,227
Total interest expense ...... 11,456 -- 5 (94) 11,367
Provision for loan losses ... 660 -- -- -- 660
Total non-interest income ... 5,876 3,847 58 (323) 9,458
Total non-interest expense .. 13,764 2,605 1,051 (323) 17,097
Income before income tax .... 12,192 1,292 (923) -- 12,561
Income tax expense .......... 3,957 516 (365) -- 4,108
Net income .................. 8,235 776 (558) -- 8,453
Total assets ................ 1,083,377 6,026 134,819 (128,916) 1,095,306
Depreciation and amortization 1,065 241 15 -- 1,321
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document contains, and future oral and written statements of the Company
and its management may contain, forward-looking statements, within the meaning
of such term in the Private Securities Litigation Reform Act of 1995, with
respect to the financial condition, results of operations, plans, objectives,
future performance and business of the Company. Forward-looking statements,
which may be based upon beliefs, expectations and assumptions of the company's
management an don information currently available to management, are generally
identifiable by the use of words such as "believe", "expect", "anticipate",
"plan", "intend", "estimate", "may", "will", "would", "could", "should", or
other similar expressions. Additionally, all statements in this document,
including forward-looking statements, speak only as of the date they are made,
and the Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
27
o The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of the
Board of Governors of the Federal Reserve System.
o The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
o The inability of the Company to obtain new customers and to retain existing
customers.
o The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such as
the Internet.
o Technological changes implemented by the company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to the
Company and its customers.
o The ability of the Company to develop and maintain secure and reliable
electronic systems.
o The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
o Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
o Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
o The costs, effects and outcomes of existing or future litigation.
o Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
o The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including other
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
28
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
June 30, 2003. Based on that evaluation, the Company's management, including the
Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 6, 2003, the Company's annual meeting of shareholders was held.
At the meeting, two items were put to a vote of the shareholders. There
were 10,499,599 issued and outstanding shares of common stock entitled
to vote at the annual meeting. The voting on each item presented at the
annual meeting was as follows:
1. Frederic L. Kenney, Gregory B. Lykins, August C. Meyer, Jr, and
Phillip C. Wise were elected to serve as Class I directors.
Continuing as Class II directors were George T. Shapland, Thomas
G. Sloan, Roy V. VanBuskirk, and H. Gale Zacheis. Continuing as
Class III directors were David J. Downey, Van A. Dukeman, Larry D.
Haab, and Gene A. Salmon. The shareholders also approved an
amendment to the Company's Articles of Incorporation, which
eliminated the classification of directors on the Company's Board.
As a result of this amendment, the Company's directors are now all
in the same class and each director's term expires at the next
annual meeting to be held in 2004.
Election of Directors: Votes For Votes Witheld
------------------------------------------------------------------
Frederic L. Kenney ................ 8,266,766 22,056
Gregory B. Lykins ................. 8,262,566 22,256
August C. Meyer, Jr. .............. 8,266,800 22,022
Phillip C. Wise ................... 8,262,600 26,222
2. Amend the Articles of Incorporation to eliminate the
classification of the Company's Board and to increase the range of
the number of directors:
Votes For Votes Against Abstentions
------------------------------------------------------------
8,204,916 45,974 37,932
Item 5. Other Information
None
29
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
b. Reports
On July 21, 2003, the Company filed a report on Form 8-K, pursuant
to Item 12 regarding the issuance of a letter to shareholders and
a press release announcing its earnings for the quarter ended June
30, 2003.
On April 25, 2003, the Company filed a report on Form 8-K,
pursuant to Item 12 regarding the issuance of a letter to
shareholders and a press release announcing its earnings for the
quarter ended March 31, 2003.
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAIN STREET TRUST, INC.
Date: August 6, 2003
By: /s/ David B. White
----------------------------------------
David B. White, Executive Vice President
and Chief Financial Officer
By: /s/ Van A. Dukeman
----------------------------------------
Van A. Dukeman, President
and Chief Executive Officer
31