UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File Number: 33-90342
MAIN STREET TRUST, INC.
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(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
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(Address of principal executive offices) (Zip Code)
(217) 351-6500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class On Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of Class)
Indicate by check mark 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 check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The index to exhibits is located on page 62 of 68 total sequentially numbered
pages.
1
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X - No ___
As of March 5, 2004, the Registrant had issued and outstanding 9,512,251 shares
of the Registrant's Common Stock. The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant, based on the
last reported price on June 30, 2003, the last business day of the registrant's
most recently completed second fiscal quarter, was approximately $209,495,280.
* Based on the last reported price ($30.00) of an actual transaction in
Registrant's Common Stock on June 30, 2003, and reports of beneficial
ownership filed by directors and executive officers of Registrant and by
beneficial owners of more than 5% of the outstanding shares of Common Stock
of Registrant; however, such determination of shares owned by affiliates
does not constitute an admission of affiliate status or beneficial interest
in shares of Registrant's Common Sock.
Documents Incorporated By Reference
Part III of Form 10-K - Portions of Proxy Statement for annual meeting of
shareholders to be held May 11, 2004.
2
MAIN STREET TRUST, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Description of Business.......................................... 4
A. General
B. Business of the Company and Subsidiaries
C. Competition
D. Monetary Policy and Economic Conditions
E. Supervision and Regulation
F. Employees
G. Internet Website
Item 2. Properties....................................................... 12
Item 3. Legal Proceedings................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.............. 12
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities.............. 13
Item 6. Selected Consolidated Financial Data............................. 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk....... 33
Item 8. Financial Statements and Supplementary Data...................... 33
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure......................... 60
Item 9a. Controls and Procedures.......................................... 60
Part III
Item 10. Directors and Executive Officers of the Registrant.............. 60
Item 11. Executive Compensation.......................................... 61
Item 12. Security Ownership of Certain Beneficial Owners
And Management and related shareholder matters................ 61
Item 13. Certain Relationships and Related Transactions.................. 62
Item 14. Principal Accountants Fees and Services......................... 62
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports
On Forms 8-K.................................................. 62
3
PART I
Item 1. Description of Business
A. General
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.
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. Accordingly, prior period consolidated financial data has been restated as
though the prior entities had been consolidated for all periods presented. The
Company subsequently merged the Company's former banking subsidiary, First Trust
Bank of Shelbyville, into BankIllinois effective June 19, 2002.
B. Business of the Company and Subsidiaries
General
The Company conducts the business of banking and offers trust services through
BankIllinois and The First National Bank of Decatur (the "Banks"), and retail
payment processing through FirsTech, Inc., its wholly owned subsidiaries. As of
December 31, 2003, the Company had consolidated total assets of $1.154 billion,
shareholders' equity of $111.450 million and trust assets under administration
of approximately $ 1.514 billion. Substantially all of the income of the Company
is currently derived from dividends and management fees received from the
subsidiaries. The amount of these dividends is directly related to the earnings
of the subsidiaries and is subject to various regulatory restrictions. See
"Regulation and Supervision".
Banking Segment
The Banks conduct a general banking business embracing most of the services,
both consumer and commercial, which banks may lawfully provide, including the
following principal services: the acceptance of deposits to demand, savings,
time and individual retirement accounts and the servicing of such accounts;
commercial, consumer and real estate lending, including installment loans and
personal lines of credit; safe deposit operations; and additional services
tailored to the needs of individual customers, such as the sale of traveler's
checks, cashier's checks and other specialized services. The Company offers
personalized financial planning services through Raymond James, which services
include a broad spectrum of investment products, including stocks, bonds, mutual
funds and tax advantaged investments. In addition, the Wealth Management
division offers a wide range of services such as investment management, acting
as trustee, serving as guardian, executor or agent, farm management, 401K
administration and miscellaneous consulting.
Commercial lending at the Banks covers such categories as agriculture,
manufacturing, capital, inventory, construction, real estate development and
commercial mortgages. Commercial lending, particularly loans to small and medium
sized businesses, accounts for a major portion of the Banks' loan portfolios.
The Banks' retail banking divisions make loans to consumers for various
purposes, including home equity and automobile loans. The consumer mortgage loan
departments, which are part of the retail banking divisions, specialize in real
estate loans to individuals. The Banks also purchase installment obligations
from retailers, primarily without recourse.
The Banks' principal sources of income are interest and fees on loans and
investments and service fees. Their principal expenses are interest paid on
deposits and general operating expenses. The Banks' primary service area is
Central Illinois.
4
Remittance Services Segment
FirsTech, Inc. 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. For the years ended December 31, 2003, 2002 and 2001, FirsTech, Inc.
accounted for $7.3 million (10%), $7.5 million (9%), and $7.7 million (9%),
respectively, of the consolidated total revenues of the Company and accounted
for $2.3 million (9%), $2.4 million (9%) and $2.1 million (9%), respectively, of
the consolidated income before income tax of the Company. See Note 2 to the
Consolidated Financial Statements for an analysis of segment operations.
FirsTech, Inc. provides retail lockbox processing for organizations, which
provided approximately 41%, 41% and 42% of the total revenue of FirsTech, Inc.
in 2003, 2002 and 2001, respectively.
FirsTech, Inc. processes payments delivered by customers to pay agents. Many
businesses and merchants such as grocery stores and convenience stores located
throughout the United States serve as agents of utilities in collecting customer
payments. In 2003, 2002 and 2001, the remittance collection business for these
companies accounted for approximately 55%, 54% and 53%, respectively, of the
total revenue of FirsTech, Inc.
FirsTech, Inc. competes in the retail payment processing business with companies
that range from large national companies to small, local businesses. In
addition, many companies do their own remittance processing rather than
out-source the work to an independent processor such as FirsTech, Inc. The
principal methods of competition in the remittance processing industry are
pricing of services, use of technology and quality of service.
C. Competition
The Company faces strong competition both in originating loans and in attracting
deposits. Competition in originating real estate loans comes primarily from
other commercial banks, savings institutions and mortgage bankers making loans
secured by real estate located in the Company's market area. Commercial banks
and finance companies, including finance company affiliates of automobile
manufacturers, provide vigorous competition in consumer lending. In addition to
competition from the local market, the Company faces competition from large
national organizations, such as financial organizations and insurance companies,
for large commercial real estate loans. The Company competes for real estate and
other loans primarily on the basis of the interest rates and loan fees it
charges, the types of loans it originates and the quality of services it
provides to borrowers.
The Company faces substantial competition in attracting deposits from other
commercial banks, savings institutions, money market and mutual funds, credit
unions and other investment vehicles. The ability of the Company to attract and
retain deposits depends on its ability to provide investment opportunities that
satisfy the requirements of investors as to rate of return, liquidity, risk and
other factors. The Company attracts a significant amount of deposits through its
branch offices, primarily from the communities in which those branch offices are
located; therefore, competition for those deposits is principally from other
commercial banks and savings institutions located in the same communities. The
Company competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours and convenient branch locations
with interbranch deposit and withdrawal privileges at each.
Under the Gramm-Leach-Bliley Act, which was enacted in 2000, securities firms
and insurance companies that elect to become financial holding companies may
acquire banks and other financial institutions. Although the Company has seen no
significant impact from this change, it has the potential to change the
competitive environment in which the Company and the Banks conduct business. The
financial services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services.
These technological advances may diminish the importance of depository
institutions and other financial intermediaries in the transfer of funds between
parties.
D. Monetary Policy and Economic Conditions
The earnings of commercial banks and bank holding companies are affected not
only by general economic conditions, but also by the policies of various
governmental regulatory agencies. In particular, the Federal Reserve regulates
money and credit conditions and interest rates in order to influence general
economic conditions and interest rates, primarily through open market operations
in U.S. government securities, varying the discount rate on member banks and
nonmember bank borrowings and setting reserve requirements against bank
deposits. Such Federal Reserve policies and acts have a significant influence on
overall growth and distribution of bank loans, investments, deposits and related
interest rates. The Company cannot accurately predict the effect, if any, such
policies and acts may have in the future on its business or earnings.
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E. Supervision and Regulation
General
Financial institutions, their holding companies and their affiliates are
extensively regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Illinois Commissioner of Banks and Real
Estate (the "Commissioner"), the Office of the Comptroller of the Currency (the
"OCC"), the Board of Governors of the Federal Reserve System (the "Federal
Reserve") and the Federal Deposit Insurance Corporation (the "FDIC").
Furthermore, taxation laws administered by the Internal Revenue Service and
state taxing authorities and securities laws administered by the Securities and
Exchange Commission (the "SEC") and state securities authorities have an impact
on the business of the Company. The effect of these statutes, regulations and
regulatory policies may be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions regulate, among other things, the scope of business, the kinds and
amounts of investments, reserve requirements, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers and consolidations and the payment of dividends. This system
of supervision and regulation establishes a comprehensive framework for the
respective operations of the Company and its subsidiaries and is intended
primarily for the protection of the FDIC-insured deposits and depositors of the
Bank Subsidiaries, rather than shareholders.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those that are described. As such, the
following is qualified in its entirety by reference to applicable law. Any
change in statutes, regulations or regulatory policies may have a material
effect on the business of the Company and its subsidiaries.
Recent Regulatory Developments
National Bank Preemption. On January 7, 2004, the OCC issued two final rules
that clarify the federal character of the national banking system. The first
rule provides that, except where made applicable by federal law, state laws that
obstruct, impair or condition national banks' ability to fully exercise their
deposit-taking, lending and operational powers are not applicable to national
banks. That rule further provides that the following types of state laws apply
to national banks to the extent that they only incidentally affect the exercise
of national banks' deposit-taking, lending and operational powers: contract,
criminal, taxation, tort, zoning and laws relating to certain homestead rights,
rights to collect debts, acquisitions and transfers of property and other laws
as determined to apply to national banks by the OCC. The second rule affirms
that, under federal law, with some exceptions, the OCC has exclusive visitorial
authority (the power to inspect, examine, supervise and regulate) with respect
to the content and conduct of activities authorized for national banks. These
controversial rules give national banks, especially those that operate in
multiple states, a significant competitive advantage over state-chartered banks
and are therefore likely to be challenged by individuals and organizations that
represent the interests of individual states and state-chartered banks. Both the
U.S. House Committee on Financial Services and the New York Attorney General
have already initiated such challenges.
FACT Act. On December 4, 2003, President Bush signed into law the Fair and
Accurate Credit Transactions Act of 2003 (the "FACT Act"), which contains
numerous amendments to the Fair Credit Reporting Act relating to matters
including identity theft and privacy. Among its other provisions, the FACT Act
requires financial institutions: (i) to establish an identity theft prevention
program; (ii) to enhance the accuracy and integrity of information furnished to
consumer reporting agencies; and (iii) to allow customers to prevent financial
institution affiliates from using, for marketing solicitation purposes,
transaction and experience information about the customers received from the
financial institution. The FACT Act also requires the federal banking
regulators, and certain other agencies, to promulgate regulations to implement
its provisions. The various provisions of the FACT Act contain different
effective dates including March 31, 2004, for those provisions of the FACT Act
that do not require significant changes to business procedures and December 1,
2004, for certain other provisions that will require significant business
procedure changes.
6
The Company
General. The Company, as the sole shareholder of the Bank Subsidiaries, is a
bank holding company. As a bank holding company, the Company is registered with,
and is subject to regulation by, the Federal Reserve under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to the
Bank Subsidiaries and to commit resources to support the Bank Subsidiaries in
circumstances where the Company might not otherwise do so. Under the BHCA, the
Company is subject to periodic examination by the Federal Reserve. The Company
is also required to file with the Federal Reserve periodic reports of the
Company's operations and such additional information regarding the Company and
its subsidiaries as the Federal Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank
holding company is to control and manage banks. The BHCA generally requires the
prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank
holding company acquisition involving a bank holding company. Subject to certain
conditions (including deposit concentration limits established by the BHCA), the
Federal Reserve may allow a bank holding company to acquire banks located in any
state of the United States. In approving interstate acquisitions, the Federal
Reserve is required to give effect to applicable state law limitations on the
aggregate amount of deposits that may be held by the acquiring bank holding
company and its insured depository institution affiliates in the state in which
the target bank is located (provided that those limits do not discriminate
against out-of-state depository institutions or their holding companies) and
state laws that require that the target bank have been in existence for a
minimum period of time (not to exceed five years) before being acquired by an
out-of-state bank holding company.
The BHCA generally prohibits a bank holding company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company that is not a bank and from engaging in any business other than that of
banking, managing and controlling banks or furnishing services to banks and
their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in,
and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be "so closely related to banking...as to be a proper
incident thereto." This authority would permit the Company to engage in a
variety of banking-related businesses, including the operation of a thrift,
consumer finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements
prescribed by the BHCA and elect to operate as financial holding companies may
engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance underwriting and sales, merchant
banking and any other activity that the Federal Reserve, in consultation with
the Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The
Company has elected (and the Federal Reserve has accepted the Company's
election) to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring "control" of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. "Control" is conclusively presumed to
exist upon the acquisition of 25% or more of the outstanding voting securities
of a bank or bank holding company, but may arise under certain circumstances at
10% ownership.
Capital Requirements. Bank holding companies are required to maintain minimum
levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital levels fall below minimum required levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
7
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a risk-based
requirement expressed as a percentage of total assets weighted according to
risk; and (ii) a leverage requirement expressed as a percentage of total assets.
The risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8%, and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio
of Tier 1 capital to total assets of 3% for the most highly rated companies,
with a minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders' equity
less intangible assets (other than certain loan servicing rights and purchased
credit card relationships.) Total capital consists primarily of Tier 1 capital
plus certain other debt and equity instruments which do not qualify as Tier 1
capital and a portion of the company's allowance for loan losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels. As of December 31, 2003, the Company had
regulatory capital in excess of the Federal Reserve's minimum requirements.
Dividend Payments. The Company's ability to pay dividends to its shareholders
may be affected by both general corporate law considerations and policies of the
Federal Reserve applicable to bank holding companies. As an Illinois
corporation, the Company is subject to the limitations of the Illinois Business
Corporation Act, as amended, which prohibits the Company from paying a dividend
if, after giving effect to the dividend: (i) the Company would be insolvent; or
(ii) the net assets of the Company would be less than zero; or (iii) the net
assets of the Company would be less than the maximum amount then payable to
shareholders of the company who would have preferential distribution rights if
the Company were liquidated. Additionally, policies of the Federal Reserve
caution that a bank holding company should not pay cash dividends that exceed
its net income or that can only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing. The Federal Reserve also
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies.
Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is
subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The Bank Subsidiaries
General. BankIllinois is an Illinois-chartered bank, the deposit accounts of
which are insured by the FDIC's Bank Insurance Fund ("BIF"). As an
Illinois-chartered FDIC-insured bank, BankIllinois is subject to the
examination, supervision, reporting and enforcement requirements of the
Commissioner, the chartering authority for Illinois banks, and the FDIC,
designated by federal law as the primary federal regulator of insured state
banks that, like BankIllinois, are not members of the Federal Reserve System
(non-member banks"). BankIllinois is a member of the Federal Home Loan Bank
System, which provides a central credit facility primarily for member
institutions.
The First National Bank of Decatur ("Decatur") is a national bank chartered by
the OCC under the National Bank Act. The deposit accounts of Decatur are insured
by the BIF, and Decatur is a member of the Federal Reserve System and the
Federal Home Loan Bank System. Decatur is subject to the examination,
supervision, reporting and enforcement requirements of the OCC, the chartering
authority for national banks. The FDIC, as administrator of the BIF, also has
regulatory authority over Decatur.
Deposit Insurance. As FDIC-insured institutions, the Bank Subsidiaries are
required to pay deposit insurance premium assessments to the FDIC. The FDIC has
adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well-capitalized (as defined
by the FDIC) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (as defined by the FDIC) and
considered of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
8
During the year ended December 31, 2003, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2004, BIF assessment will continue to range from 0% of deposits to
0.27% of deposits.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations until the final maturity of such obligations in 2019. These FICO
assessments are in addition to amounts assessed by the FDIC for deposit
insurance. During the year ended December 31, 2003, the FICO assessment rate for
BIF and SAIF members were approximately 0.02% of deposits.
Supervisory Assessments. All Illinois banks and national banks are required to
pay supervisory assessments to the Commissioner and the OCC, respectively, to
fund the operations of those agencies. The amount of the assessment paid by an
Illinois bank to the Commissioner is calculated on the basis of the
institution's total assets, including consolidated subsidiaries, as reported to
the Commissioner. In the case of a national bank, the amount of the assessment
paid to the OCC is calculated using a formula that takes into account the bank's
size and its supervisory condition (as determined by the corporate rating
assigned to the bank as a result of its most recent OCC examination). During the
year ended December 31, 2003, BankIllinois paid supervisory assessments to the
Commissioner totaling $106,000 and Decatur paid supervisory assessments to the
OCC totaling $109,000.
Capital Requirements. Banks are generally required to maintain capital levels in
excess of other businesses. The federal bank regulatory agencies have
established the following minimum capital standards for insured state and
national banks, such as the Bank Subsidiaries: (i) a leverage requirement
consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the
most highly-rated banks with a minimum requirement of at least 4% for all
others; and (ii) a risk-based capital requirement consisting of a minimum ratio
of total capital to total risk-weighted assets of 8%, and a minimum ratio of
Tier 1 capital to total risk-weighted assets of 4%. For purposes of these
capital standards, the components of Tier 1 capital and total capital are the
same as those for bank holding companies discussed above.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
FDIC and the OCC provide that additional capital may be required to take
adequate account of, among other things, interest rate risk or the risks posed
by concentrations of credit, nontraditional activities or securities trading
activities.
Further, federal law and regulations provide various incentives to financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
"well-capitalized" may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or applications.
Additionally, one of the criteria which determines a bank holding company's
eligibility to operate as a financial holding company is a requirement that all
of its financial institution subsidiaries be "well-capitalized". Under the
regulations of the FDIC and the OCC, in order to be "well-capitalized", a
financial institution must maintain a ratio of total capital to total
risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total
risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total
assets of 5% or greater.
9
Federal law also provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "adequately capitalized", "undercapitalized",
"significantly undercapitalized", or "critically undercapitalized", in each case
as defined by regulation. Depending upon the capital category to which an
institution is assigned, the regulators' correction powers include: (i)
requiring the institution to submit a capital restoration plan; (ii) limiting
the institution's asset growth and restricting its activities; (iii) requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution
and its affiliates; (v) restricting the interest rate the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii)
requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting
the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As of December 31, 2003: (i) none of the Bank Subsidiaries were subject to a
directive from the FDIC (in the case of BankIllinois) or the OCC (in the case of
Decatur) to increase its capital to an amount in excess of the minimum
regulatory capital requirements; (ii) each of the Bank Subsidiaries exceeded its
minimum regulatory capital requirements under applicable capital adequacy
guidelines; and (iii) each of the Bank Subsidiaries was "well-capitalized", as
defined by applicable regulations.
Liability of Commonly Controlled Institutions. Under Federal law, institutions
insured by the FDIC may be liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC in connection with the default of commonly
controlled FDIC-insured depository institutions or any assistance provided by
the FDIC to commonly controlled FDIC-insured depository institutions in danger
of default. Because the Company controls each of the Bank Subsidiaries, the Bank
Subsidiaries are commonly controlled for purposes of these provisions of federal
law.
Dividend Payments. The primary source of funds for the Company is dividends from
the subsidiaries. Under the Illinois Banking Act, BankIllinois generally may not
pay dividends in excess of their net profits. Under the National Bank Act,
Decatur may pay dividends out of its undivided profits in such amounts and at
such times as its board of directors deemed prudent. Without prior OCC approval,
however, Decatur may not pay dividends in any calendar year that, in the
aggregate, exceed its year-to-date net income plus its retained net income for
the two preceding years.
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, each of the Bank
Subsidiaries exceeded its minimum capital requirements under applicable
guidelines as of December 31, 2003. As of December 31, 2003, approximately
$29,378,000 was available to be paid as dividends by the Bank Subsidiaries.
Notwithstanding the availability of funds for dividends, however, the FDIC (in
case of BankIllinois) and the OCC (in case of Decatur) may prohibit the payment
of dividends if the agency determines such payment would constitute an unsafe or
unsound practice.
Insider Transactions. The Bank Subsidiaries are subject to certain restrictions
imposed by federal law on extensions of credit to the Company and its
subsidiaries, on investments in the stock or other securities of the Company and
its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans made by the Bank
Subsidiaries. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank Subsidiaries to their directors and officers,
to directors and officers of the Company and its subsidiaries, to principal
shareholders of the Company and to "related interests" of such directors,
officers and principal shareholders. In addition, federal law and regulations
may affect the terms upon which any person who is a director or officer of the
Company or one of its subsidiaries or a principal shareholder of the Company may
obtain credit from banks with which the Bank Subsidiaries maintain correspondent
relationships.
10
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines that establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. Illinois banks, such as BankIllinois, have the authority
under Illinois law to establish branches anywhere in the State of Illinois,
subject to receipt of all required regulatory approvals. National banks
headquartered in Illinois, such as Decatur, have the same branching rights in
Illinois as banks chartered under Illinois law, subject to OCC approval.
Federal law permits state and national banks to merge with banks in other states
subject to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank
to have been in existence for a minimum period of time (not to exceed five
years) prior to the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is permitted only in those
few states that authorize such expansion.
State Bank Investments and Activities. BankIllinois generally is permitted to
make investments and engage in activities directly or through subsidiaries as
authorized by Illinois law. However, under federal law and FDIC regulation,
FDIC-insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC-insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank unless the bank meets, and continues to meet, its minimum regulatory
capital requirements and the FDIC determines the activity would not pose a
significant risk to the deposit insurance fund of which the bank is a member.
These restrictions have not had, and are not currently expected to have, a
material impact on the operations of BankIllinois.
Financial Subsidiaries. Under Federal law and OCC regulations, national banks
are authorized to engage, through "financial subsidiaries", in any activity that
is permissible for a financial holding company and any activity that the
Secretary of the Treasury, in consultation with the Federal Reserve, determines
is financial in nature or incidental to any such financial activity, except (i)
insurance underwriting, (ii) real estate development or real estate investment
activities (unless otherwise permitted by law), (iii) insurance company
portfolio investments and (iv) merchant banking. The authority of a national
bank to invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). Federal law also provides that state
banks may invest in financial subsidiaries (assuming they have the requisite
investment authority under applicable state law) subject to substantially the
same conditions that apply to national bank investments in financial
subsidiaries. None of the Bank Subsidiaries has applied for or received approval
to establish any financial subsidiaries.
Federal Reserve System. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transactions accounts (primarily NOW and regular checking
accounts), as follows: for transactions accounts aggregating $45.4 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $45.4 million, the reserve
requirement is $1.164 million plus 10% of the aggregate amount of total
transaction accounts in excess of $45.4 million. The first $6.6 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank Subsidiaries are in compliance with the foregoing requirements.
11
F. Employees
The Company had a total of 453 employees at December 31, 2003, consisting of 347
full-time employees and 106 part-time. The Company places a high priority on
staff development, which involves extensive training, including customer service
training. New employees are selected on the basis of both technical skills and
consumer service capabilities. None of the Company's employees are covered by a
collective bargaining agreement with the Company or its subsidiaries. The
Company offers a variety of employee benefits, and management considers its
employee relations to be excellent.
G. Internet Website
The Company maintains internet sites for its subsidiary banks at
www.bankillinois.com and www.1stdecatur.com. The Company makes available free of
charge on these sites its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and other reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the
Securities and Exchange Commission.
Item 2. Properties
The Company and its subsidiaries conduct business in seventeen locations. The
Company and BankIllinois' headquarters are located at 100 W. University Ave. in
Champaign, Illinois. The Company and/or its subsidiaries own the land and
buildings for eleven locations and lease six locations, three of which are
located in supermarkets.
All of the Banks own their main banking facilities. The Company believes that
its facilities are adequate to serve its present needs.
Item 3. Legal Proceedings
In the course of business, the Company and its subsidiaries become involved in
various legal proceedings, claims and litigation arising out of the ordinary
course of business. As of the date of filing this report, there were no causes
of action which would have a material adverse effect on the consolidated
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no items submitted to a vote of security holders in the fourth
quarter of 2003.
12
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
The Company's common stock was held by approximately 700 shareholders of record
as of March 12, 2004 and is traded in the over-the-counter market.
The following table shows, for the periods indicated, the range of prices per
share of the Company's common stock in the over-the-counter market, as reported
to the Company by the brokers known to the Company to regularly follow the
market for the common stock. Certain other private transactions may have
occurred during the periods indicated of which the Company has no knowledge. The
following prices represent inter-dealer prices without retail markups, markdowns
or commissions.
Cash
High Low Dividends
----------------------------------
2002 First quarter $ 18.95 $ 17.85 $ 0.13
Second quarter 24.00 18.70 0.13
Third quarter 24.30 22.60 0.13
Fourth quarter 24.95 24.00 0.13
2003 First quarter $ 25.25 $ 24.25 $ 0.15
Second quarter 30.00 25.00 0.15
Third quarter 31.00 27.75 0.20
Fourth quarter 35.00 29.70 0.20
During the fourth quarter of 2003, the Company declared a $0.21 per share cash
dividend, which was paid on January 23, 2004. The ability of the Company to pay
dividends in the future will be primarily dependent upon its receipt of
dividends from the Banks. In determining cash dividends, the Board of Directors
considers the earnings, capital requirements, debt and dividend servicing
requirements, financial ratio guidelines it has established, the financial
condition of the Company and other relevant factors. The Banks' ability to pay
dividends to the Company and the Company's ability to pay dividends to its
shareholders are also subject to certain regulatory restrictions. See "Business
- Supervision and Regulation - The Company - Dividend Payments" and "Business -
Supervision and Regulation - The Bank Subsidiaries - Dividend Payments" for a
more detailed description of these limitations.
On October 27, 2003, the Company announced that its Board of Directors had
reinstated the Stock Repurchase Program, allowing the purchase of up to 500,000
shares of the Company's outstanding stock. No shares were repurchased during the
fourth quarter of 2003. During that period, 23,485 shares were issued through
exercise of stock options.
13
Item 6. Selected Consolidated Financial Data
The following table presents selected consolidated financial information for the
Company for each of the five years ended December 31, 2003. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements of the Company, including the related notes, presented
elsewhere herein.
Year Ended December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
(dollars in thousands, except per share data)
------------------------------------------------------------------
Interest income ................................... $ 55,686 $ 63,363 $ 73,195 $ 74,271 $ 67,070
Interest expense .................................. 16,723 21,717 33,598 36,599 31,713
------------------------------------------------------------------
Net interest income ............................... 38,963 41,646 39,597 37,672 35,357
Provision for loan losses ......................... 1,470 1,450 2,670 804 573
------------------------------------------------------------------
Net interest income after provision for loan losses 37,493 40,196 36,927 36,868 34,784
Non-interest income ............................... 20,294 18,866 17,266 16,316 17,991
Non-interest expense .............................. 32,341 33,161 30,286 34,769 35,922
Income tax expense ................................ 8,841 8,520 7,736 6,426 5,165
------------------------------------------------------------------
Net income ................................... $ 16,605 $ 17,381 $ 16,171 $ 11,989 $ 11,688
------------------------------------------------------------------
Basic earnings per share .......................... $ 1.62 $ 1.61 $ 1.48 $ 1.08 $ 1.05
------------------------------------------------------------------
Diluted earnings per share ........................ $ 1.60 $ 1.60 $ 1.45 $ 1.06 $ 1.03
------------------------------------------------------------------
Return on average total assets .................... 1.47% 1.58% 1.47% 1.15% 1.16%
Return on average shareholders' equity ............ 12.67% 12.79% 12.32% 10.03% 10.10%
Dividend payout ratio ............................. 46.91% 33.54% 30.41% 37.04% 27.62%
Cash dividends declared per common share1 ......... $ 0.76 $ 0.54 $ 0.45 $ 0.40 $ 0.29
------------------------------------------------------------------
Total assets ...................................... $1,154,174 $1,122,728 $1,151,511 $1,091,081 $1,035,746
Investment in debt and equity securities .......... 370,726 316,210 335,422 303,187 300,040
Loans held for investment, net .................... 666,259 664,142 673,061 659,849 601,594
Deposits .......................................... 898,472 868,586 884,109 839,932 795,075
Borrowings ........................................ 132,978 108,457 120,102 110,636 111,198
Total shareholders' equity ........................ 111,450 134,470 135,993 125,402 116,081
Total shareholders' equity to total assets ........ 9.66% 11.98% 11.81% 11.49% 11.21%
Average shareholders' equity to average assets .... 11.63% 12.35% 11.91% 11.45% 11.46%
1 Prior to the merger of BankIllinois Financial Corporation and First Decatur
Bancshares in March 2000, both companies paid cash dividends each year.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is designed to provide the reader with a
comprehensive review of the consolidated results of operations for 2003, 2002
and 2001 for the Company, including all subsidiaries, and an analysis of the
Company's financial condition at December 31, 2003 compared to December 31, 2002
and at December 31, 2002 compared to December 31, 2001. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and related notes, which begin at page 30 of this report.
Overview
Earnings were flat for the year ended December 31, 2003 compared to 2002, with
diluted earnings per share of $1.60 in both 2003 and 2002. Interest rates
continued to stay at unprecedented lows during 2003. The interest rate
environment caused compression in our margins. Also affecting our margin was the
lack of loan growth during 2003. However, the economy continued to improve in
the fourth quarter of 2003, and loan demand, which showed growth late in the
fourth quarter of 2003, should continue to increase. Loan quality was strong in
2003, with non-performing loans as a percentage of gross loans improving to
0.15%, compared to 0.33% in 2002 and 0.74% in 2001. The years ended December 31,
2002 and 2001 were years of transition for the Company involving fundamental
reorganization of the consolidated organization. Despite being in this
post-merger transitional period, and facing a worsening economic environment and
sagging consumer confidence, the Company posted record results during 2001 and
2002. Non-recurring items during 2002 and 2001, many of which were merger
related, had significant effects on the Company's reported results.
14
Merger and related non-recurring restructuring expenses incurred in 2002
consisted of $529,000 of termination of employment contracts, $40,000 of
professional fees and $38,000 of data processing expenses, offset by $243,000 of
tax benefit. The resulting effect of these items on basic and diluted earnings
per share was a decrease of $0.03 for the year 2002. Merger and related
non-recurring restructuring expenses incurred in 2001 consisted of $70,000 of
data processing expense and $256,000 of termination of employment contracts,
offset by $111,000 of tax benefits. Also during 2001, a $2.5 million
reconciliation liability expense, net of tax of $1.0 million, was reversed
against non-interest expense. The resulting effect of these items on basic and
diluted earnings per share for 2001 was an increase of approximately $0.12 and
$0.11 respectively.
During the second quarter of 2002, the Company completed a tender offer in which
711,832 of its shares of common stock were acquired for an aggregate cost of
$16.556 million. Also in the second quarter of 2002, one of the Company's bank
subsidiaries, First Trust Bank of Shelbyville, was merged into BankIllinois. The
Company completed a second tender offer during the third quarter of 2003 in
which 1,074,140 of its shares of common stock were acquired for an aggregate
cost of $32.395 million.
Segment Operations
FirsTech, Inc. operates as a separate segment of the Company. Results of
FirsTech, Inc.'s operations are included as non-interest income and non-interest
expense of the Company.
Critical Accounting Policies
The Company's significant accounting policies are more fully described in Note 2
to the Company's consolidated financial statements located in Item 8 of this
Annual Report on form 10-K. The preparation of financial statements in
conformity with accounting principles 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 or conditions. The Company
believes that it has one critical accounting policy that is subject to estimates
and judgements used in the preparation of its consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses is a material estimate
that is particularly susceptible to significant changes in the near term. The
allowance for loan losses is increased by provisions charged to operations and
is reduced by loan charge-offs less recoveries. Management utilizes an approach,
which provides for general and specific valuation allowances, that is based on
current economic conditions, past losses, collection experience, risk
characteristics of the portfolio, assessment of collateral values by obtaining
independent appraisals for significant properties, and such other factors which,
in management's judgment, deserve current recognition in estimating loan losses,
to determine the appropriate level of the allowance for loan losses.
The allowance for loan losses related to impaired loans that are identified for
evaluation is based on discounted cash flow using the loan's initial effective
interest rate or the fair value, less selling costs, of the collateral for
collateral dependent loans. Loans are categorized as "impaired" when, based on
current information or events, it is probable that the Company will be unable to
collect all amounts due, including principal and interest, in accordance with
the contractual terms of the loan agreement. The Company reviews all non-accrual
and substantially delinquent loans, as well as problem loans identified by
management, for impairment as defined above. A specific reserve amount will be
established for impaired loans in which the present value of the expected cash
flows to be generated is less than the amount of the loan recorded on the
Company's books. As an alternative to discounting, the Company may use the "fair
value" of any collateral supporting a collateral-dependent loan in reviewing the
necessity for establishing a specific loan loss reserve amount. Specific
reserves will be established for accounts having a collateral deficiency
estimated to be $50,000 or more. The Company's general reserve is maintained at
an adequate level to cover accounts having a collateral deficiency of less than
$50,000. Loans evaluated as groups or homogeneous pools of loans will be
excluded from this analysis.
15
The Company utilizes its data processing system to identify loan payments not
made by their contractual due date and calculate the number of days each loan
exceeds the contractual due date. The accrual of interest on any loan is
discontinued when, in the opinion of management, there is reasonable doubt as to
the collectibility of interest or principal. Management believes the allowance
for loan losses is adequate to absorb probable credit losses inherent in the
loan portfolio. However, there can be no assurance that the allowance for loan
losses will be adequate to cover all losses. While management uses available
information to recognize loan losses, future additions to the allowance for loan
losses may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of the allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance for loan losses
based on their judgments of information available to them at the time of their
examination.
Results of Operations
The Company had earnings of $16.605 million in 2003 compared to $17.381 million
in 2002 and $16.171 million in 2001. The Company had a return on average assets
of 1.47%, 1.58% and 1.47% in 2003, 2002 and 2001, respectively. Basic earnings
per share was $1.62, $1.61 and $1.48 in 2003, 2002 and 2001, respectively.
Diluted earnings per share was $1.60, $1.60 and $1.45 in 2003, 2002 and 2001,
respectively. Management believes that a strong balance sheet and excellent
profitability are critical to success.
Net Interest Income
Interest rates and fees charged on loans are affected primarily by the market
demand for loans and the supply of money available for lending purposes. These
factors are affected by, among other things, general economic conditions and the
policies of the Federal government, including the Board of Governors of the
Federal Reserve, legislative tax policies and governmental budgetary matters.
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% in 2003 and 2002 and 34%
in 2001. The adjustment to net interest income for the tax effect of tax-exempt
assets is shown in the following schedule.
Net Interest Income on a Tax Equivalent Basis
(in thousands)
2003 2002 2001
-----------------------------------
Total interest income ................ $55,686 $63,363 $73,195
Total interest expense ............... 16,723 21,717 33,598
-----------------------------------
Net interest income ............... 38,963 41,646 39,597
Tax equivalent adjustment:
Tax-exempt investments ............ 1,222 1,279 1,210
Tax-exempt loans .................. 16 19 59
-----------------------------------
Total adjustment ............. 1,238 1,298 1,269
-----------------------------------
Net interest income (TE) ............. $40,201 $42,944 $40,866
===================================
16
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)
2003 2002 2001
--------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------
Assets
Taxable investment securities1 ...... $ 305,146 $11,502 3.77% $ 262,275 $ 12,471 4.75% $ 250,890 $13,831 5.51%
Tax-exempt investment
securities1 (TE) ................. 55,601 3,492 6.28% 55,134 3,654 6.63% 52,836 3,557 6.73%
Federal funds sold and interest
bearing deposits2 ................ 36,786 447 1.22% 25,602 437 1.71% 39,526 1,737 4.39%
Loans3,4 (TE) ....................... 645,543 41,483 6.43% 673,423 48,099 7.14% 669,702 55,339 8.26%
--------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ...... $1,043,076 $56,924 5.46% $1,016,434 $ 64,661 6.36% $1,012,954 $74,464 7.35%
-------------------------------------------------------------------------------------------
Cash and due from banks ............. $ 45,872 $ 46,771 $ 49,282
Premises and equipment .............. 17,864 18,928 20,336
Other assets ........................ 19,848 18,149 20,013
-------------------------------------------------------------------------------------------
Total assets ..................... $1,126,660 $1,100,282 $1,102,585
===========================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits .... $ 87,351 $ 641 0.73% $ 90,916 $ 944 1.04% $ 107,992 $ 2,229 2.06%
Savings ............................. 284,641 2,586 0.91% 261,063 3,689 1.41% 229,493 6,743 2.94%
Time deposits ....................... 337,737 10,843 3.21% 350,353 14,081 4.02% 360,590 19,859 5.51%
Federal funds purchased, repurchase
agreements and notes payable ..... 95,029 1,094 1.15% 68,615 1,169 1.70% 74,918 2,550 3.40%
FHLB advances & other
borrowings ....................... 28,492 1,559 5.47% 32,889 1,834 5.58% 38,980 2,217 5.69%
-------------------------------------------------------------------------------------------
Total interest bearing liabilities
and interest expense .......... $ 833,250 $16,723 2.01% $ 803,836 $21,717 2.70% $ 811,973 $33,598 4.14%
-------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits ......................... 89,935 93,590 102,136
Non-interest bearing savings
deposits ......................... 62,056 56,204 42,810
Other liabilities ................... 10,339 10,738 14,375
-------------------------------------------------------------------------------------------
Total liabilities ................ $ 995,580 $ 964,368 $ 971,294
Shareholders' equity ................ 131,080 135,914 131,291
-------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity .......... $1,126,660 $1,100,282 $1,102,585
------------------------------------------------------------------------------------------
Interest spread (average
rate earned minus
average rate paid) (TE) .......... 3.45% 3.66% 3.21%
==========================================================================================
Net interest income (TE) ............ $40,201 $42,944 $40,866
==========================================================================================
Net yield on interest
earnings assets (TE) ............. 3.85% 4.22% 4.03%
==========================================================================================
Notes: see next page for notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rates Table:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits include approximately
$71,000, $61,000 and $114,000 in 2003, 2002 and 2001, respectively, of
interest income from third party processing of cashier checks.
3 Loans are net of allowance of loan losses and include mortgage loans held
for sale. Nonaccrual loans are included in the total.
4 Loan fees of approximately $1.706 million, $1.269 million, and $1.058
million in 2003, 2002 and 2001, respectively, are included in total loan
income.
17
The following table presents, on a fully taxable equivalent basis, an analysis
of changes in net interest income resulting from changes in average volumes of
earning assets and interest bearing liabilities and average rates earned and
paid. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the absolute dollar
amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
2003 2002
---------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
From From
Previous Due to Due to Previous Due to Due to
Year Volume Rate Year Volume Rate
---------------------------------------------------------------------
Interest Income
Taxable investment securities ..... ($ 969) $ 1,862 ($ 2,831) ($ 1,360) $ 606 ($ 1,966)
Tax-exempt investment securities .. (162) 16 (178) 97 153 (56)
Federal funds sold and interest
bearing deposits ............... 10 158 (148) (1,300) (475) (825)
Loans ............................. (6,616) (1,933) (4,683) (7,240) 306 (7,546)
---------------------------------------------------------------------
Total interest income ...... ($ 7,737) $ 103 ($ 7,840) ($ 9,803) $ 590 ($10,393)
--------------------------------------------------------------------
Interest Expense
Interest bearing demand
and savings deposits ........... ($ 1,406) $ 250 ($ 1,656) ($ 4,339) $ 370 ($ 4,709)
Time deposits ..................... (3,238) (492) (2,746) (5,778) (550) (5,228)
Federal funds purchased, repurchase
agreements and notes payable ... (75) 371 (446) (1,381) (199) (1,182)
Federal Home Loan Bank advances
and other borrowings ........... (275) (241) (34) (383) (341) (42)
---------------------------------------------------------------------
Total interest expense ......... ($ 4,994) ($ 112) ($ 4,882) ($11,881) ($ 720) ($11,161)
--------------------------------------------------------------------
Net Interest Income (TE) ............. ($ 2,743) $ 215 ($ 2,958) $ 2,078 $ 1,310 $ 768
====================================================================
Total average earning assets increased from $1.016 billion in 2002 to $1.043
billion in 2003, but generated lower interest income mainly as a result of
reduced interest rates in 2003 compared to 2002. Average taxable investment
securities increased $42.871 million, but generated $969,000 less interest
income, of which $2.831 million was due to lower rates, offset somewhat by
$1.862 million due to an increase in volume. Average federal funds sold and
interest-bearing deposits increased $11.184 million and generated $10,000 more
interest income. Average tax-exempt investment securities increased $467,000 in
2003, but generated $162,000 less interest income, of which $178,000 was due to
a decrease in rates, offset slightly by $16,000 due to higher volume. Somewhat
offsetting these increases in average balances was a decrease in average loans
of $27.880 million, resulting in a decrease in interest income of $6.616
million, of which $4.683 million was due to lower rates and $1.933 million was
attributable to a decrease in volume.
Total average earning assets increased from $1.013 billion in 2001 to $1.016
billion in 2002, but generated lower levels of interest income due to a
significant decrease in interest rates during 2002. Average taxable investment
securities increased $11.385 million, but generated $1.360 million less interest
income, of which $1.966 million was due to lower rates, offset somewhat by
$606,000 due to an increase in volume. Average loans increased $3.721 million,
but generated $7.240 million less interest income, of which $7.546 million was
due to lower rates, offset slightly by a $306,000 increase attributable to an
increase in volume. Average tax-exempt investment securities increased $2.298
million in 2002, resulting in an increase of $97,000 in interest income. Of this
increase, $153,000 was due to an increase in volume, offset somewhat by $56,000
due to lower rates. Somewhat offsetting these increases in average balances was
a decrease in average federal funds sold and interest-bearing deposits of
$13.924 million, resulting in a decrease in interest income in this category of
$1.300 million. Of this decrease, $825,000 was due to lower rates and $475,000
was due to a decrease in volume.
18
The Company establishes interest rates on loans and deposits based on market
rates - such as the 91-day Treasury Bill rate and the prime rate - and interest
rates offered by other financial institutions in the local community. The level
of risk and the value of collateral also are evaluated when determining loan
rates. Rates were generally lower in 2003 compared to 2002. The average rate
earned on loans decreased 71 basis points from 7.14% in 2002 to 6.43% in 2003.
The yield on tax-exempt investment securities decreased 35 basis points from
6.63% in 2002 to 6.28% in 2003. The yield on taxable investment securities
decreased 98 basis points from 4.75% for the year ended December 31, 2002 to
3.77% for the year ended December 31, 2003. The yield on federal funds sold and
interest-bearing deposits decreased 49 basis points from 1.71% in 2002 to 1.22%
in 2003.
The total actual balance of loans at December 31, 2003 was higher than at
December 31, 2002. Commercial, financial and agricultural loans increased
$15.750 million from 2002 to 2003 as a result of the favorable rate environment.
Real estate loans increased $5.170 million from 2002 to 2003, primarily due to a
$32.106 million increase in commercial real estate loans aided by the favorable
rate environment, offset somewhat by a decrease of $26.936 million in
residential real estate loans. The decrease in real estate loans was caused
primarily by long-term fixed rate loans being refinanced and subsequently sold
on the secondary market. Installment and consumer loans decreased $18.276
million from 2002 to 2003. This was primarily due to alternative funding sources
available to consumers, such as special financing offered by the automobile
manufacturers' captive financing companies.
Average rates on total interest bearing liabilities decreased 69 basis points,
from 2.70% in 2002 to 2.01% in 2003, resulting in a decrease in interest expense
of $4.994 million in 2003 compared to 2002 due to the low rate environment
throughout 2003. The overall decrease in interest expense was caused by a
decrease in interest expense on all categories of interest bearing liabilities.
The average rate paid on time deposits decreased 81 basis points, from 4.02% in
2002 to 3.21% in 2003. This resulted in a decrease of $3.238 million in interest
expense, of which $2.746 million was due to lower rates and $492,000 was due to
a decrease in volume. The average rate paid on federal funds purchased,
repurchase agreements and notes payable decreased 55 basis points from 1.70% in
2002 to 1.15% in 2003. This resulted in a decrease in interest expense of
$75,000 of which $446,000 was due to lower rates, offset somewhat by a $371,000
increase in volume. The average rate paid on interest bearing demand and savings
deposits decreased 45 basis points, from 1.32% in 2002 to 0.87% in 2003. This
resulted in a decrease in interest expense of $1.406 million in 2003, of which
$1.656 million was attributable to lower rates, offset slightly by a $250,000
increase in volume. The average rate paid on Federal Home Loan Bank advances and
other borrowings decreased 11 basis points, from 5.58% in 2002 to 5.47% in 2003.
This resulted in a decrease in interest expense of $275,000, of which $34,000
was due to lower rates and $241,000 was due to a decrease in volume.
Average rates on total interest bearing liabilities decreased 144 basis points,
from 4.14% in 2001 to 2.70% in 2002, resulting in a decrease in interest expense
of $11.881 million in 2002 compared to 2001, due to the low rate environment
throughout 2002. This was caused by a decrease in interest expense on all
categories of interest bearing liabilities. The average rate paid on federal
funds purchased, repurchase agreements and notes payable decreased 170 basis
points from 3.40% in 2001 to 1.70% in 2002. This resulted in a decrease in
interest expense of $1.381 million of which $1.182 million was due to rate
decreases and $199,000 was due to lower volume. The average rate paid on time
deposits decreased 149 basis points, from 5.51% in 2001 to 4.02% in 2002. This
resulted in a decrease of $5.778 million in interest expense, of which $5.228
million was due to lower rates and $550,000 was due to a decrease in volume. The
average rate paid on interest bearing demand and savings deposits decreased 134
basis points, from 2.66% in 2001 to 1.32% in 2002. This resulted in a decrease
in interest expense of $4.339 million in 2002, of which $4.709 million was
attributable to lower rates, offset slightly by a $370,000 increase in volume.
The average rate paid on Federal Home Loan Bank advances and other borrowings
decreased 11 basis points, from 5.69% in 2001 to 5.58% in 2002. This resulted in
a decrease in interest expense of $383,000, of which $42,000 was due to lower
rates and $341,000 was due to a decrease in volume.
Provision for Loan Losses
The quality of the Company's loan portfolio is of prime importance to the
Company's management and its board of directors, as loans are the largest
component of the Company's assets. The Company maintains an independent credit
administration function, which performs reviews of all large credit
relationships and all loans that present indications of additional credit risk.
19
Continued emphasis on loan quality was reflected in the ratio of net charge-offs
to average net loans of 0.15% in 2003, compared to 0.22% in 2002. Net
charge-offs decreased to $943,000 in 2003 from $1.450 million in 2002. The
Company charged off $1.640 million in loans during 2003 compared to $1.927
million in 2002. This was due to decreases in charge-offs for installment and
consumer loans and residential real estate loans of $249,000 and $83,000,
respectively, in 2003 compared to 2002. The decrease in charge-offs for
installment and consumer loans was reflective of the decrease in loan balances
in this category in 2003 compared to 2002. These decreases were offset somewhat
by an increase in charge-offs for commercial, financial and agricultural loans
of $45,000. Recoveries of previously charged off loans increased from $477,000
in 2002 to $697,000 in 2003, with the largest increase in the area of
commercial, financial and agricultural loans, which increased $207,000 from 2002
to 2003. The provision for loan losses increased $20,000 from $1.450 million in
2002 to $1.470 million in 2003. The Company continues to emphasize credit
analysis and early detection of problem loans.
We believe that an improvement in employment levels would positively impact our
levels of problem assets, delinquencies and losses on loans. While the economy
has shown recent strength (as measured in GDP growth), growth in the labor
market has been sporadic. We are cautiously optimistic that long-awaited job
recovery, which is essential for sustainable economic growth, is underway.
However, it is still too early to consider robust jobs growth a certainty.
Non-interest income
Non-interest income increased $1.428 million, or 7.6%, from 2002 to 2003.
Included in this increase was an increase of $1.168 million, or 85.4%, in gains
on sales of mortgage loans held-for-sale. This increase resulted from a $70.294
million, or 50.6%, increase in mortgage loans sold during 2003 compared to 2002
due to the low interest rate environment and strong housing market. Other
non-interest income increased $523,000, or 30.6%, in 2003 compared to 2002. In
2002, other non-interest income included a write-down of approximately $300,000
in the value of mortgage servicing rights as a result of the sharp rise in
prepayment speeds. Service charges on deposit accounts increased $172,000, or
7.2%, in 2003 compared to 2002. Somewhat offsetting these increases was a
decrease in income from securities transactions of $223,000, or 105.7%, in 2003
compared to 2002. In 2002, income from securities transactions included gains
from some securities sold to reposition the portfolio in the low rate
environment. Income from trust and brokerage fees decreased $146,000, or 2.5%,
in 2003 compared to 2002. Remittance processing income decreased $66,000, or
0.9%, during 2003 compared to 2002.
Non-interest income increased $1.600 million, or 9.3%, from 2001 to 2002.
Included in this increase was an increase of $702,000, or 13.4%, in income from
trust and brokerage fees from $5.227 million in 2001 to $5.929 million in 2002.
This was primarily the result of the adoption of a uniform trust fee schedule
throughout the Company in 2002 that resulted in the recognition of increased
fees as well as a $29.000 million increase in assets under management in 2002
compared to 2001. Gains on sales of mortgage loans held-for-sale increased
$540,000, or 65.2%, from $828,000 in 2001 to $1.368 million in 2002. This
increase resulted from a $34.743 million, or 33.4%, increase in mortgage loans
sold during 2002 compared to 2001 due to the low interest rate environment.
Service charges on deposit accounts increased $156,000, or 7.0%, in 2002
compared to 2001. Income from securities transactions increased $101,000, or
91.8%, in 2002 compared to 2001. This was the result of the sale of some
securities to reposition the portfolio in the low rate environment. Remittance
processing income increased $90,000, or 1.3%, during 2002 compared to 2001.
Other non-interest income increased $11,000, or 0.6%, in 2002 compared to 2001.
20
Non-interest expense
During 2003, non-interest expense decreased $820,000, or 2.5% to $32.341 million
in 2003 from $33.161 million in 2002. Salaries and employee benefits expense
decreased $476,000, or 2.5%, equipment expense decreased $390,000, or 14.0%,
data processing expense decreased $192,000, or 8.3% and service charges from
correspondent banks decreased $1,000, or 0.1%. Somewhat offsetting these
decreases were increases in other non-interest expense of $121,000, or 2.5%,
occupancy expense of $113,000, or 4.8% and office supplies expense of $5,000, or
0.4%. During 2002, non-interest expense increased $2.875 million, or 9.5%, from
$30.286 million in 2001. $2.5 million of this increase was due to the reversal
of a reconciliation liability. During 1999, the Company investigated
reconciliation differences, which involved the Company's subsidiary, FirsTech,
Inc. in connection with its commercial remittance processing services. After
consultation with its professional advisors, the Company's Board of Directors
directed that a liability in the amount of $2.5 million be recorded in the
fourth quarter of 1999. Investigation of these differences was completed during
the fourth quarter of 2001. It was determined that no liability existed and the
$2.5 million liability was reversed in non-interest expense in 2001. In 2002,
there was no reconciliation liability effect. During 2002, salaries and employee
benefits expense increased $960,000, or 5.4%, data processing expense increased
$357,000, or 18.4%, occupancy expense increased $79,000, or 3.4%, and service
charges from correspondent banks increased $47,000, or 5.3%. Somewhat offsetting
these increases were decreases in equipment expense of $626,000, or 18.4%,
office supplies expense of $274,000, or 17.9%, and other non-interest expense of
$168,000, or 3.4%.
Salaries and employee benefits expense decreased $476,000, or 2.5%, from $18.721
million in 2002 to $18.245 million in 2003. Contributing to salaries and
employee benefits expense in 2002 was $529,000 in salaries and benefits related
to organizational restructuring that resulted in the termination of employment
contracts. In 2002, salaries and employee benefits increased $960,000, or 5.4%,
from $17.761 million in 2001. Contributing to the increase in 2002 were the
salaries and benefits expense related to the restructuring.
Equipment expense decreased $390,000, or 14.0%, from $2.779 million in 2002 to
$2.389 million in 2003. Equipment expense decreased largely due to efficiencies
gained from restructuring and the merger of BankIllinois and First Trust Bank of
Shelbyville in June 2002. In 2002, equipment expense decreased $626,000, or
18.4%, from $3.405 million in 2001. This decrease was due, in part, to
conversion to third party service bureau data processing from in-house data
processing at the Company's Decatur bank during 2001.
Data processing expense decreased $192,000, or 8.3%, from $2.300 million in 2002
to $2.108 million in 2003. Contributing to data processing expense in 2002 were
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. In 2002, data processing expense
increased $357,000, or 18.4%, from $1.943 million in 2001. Contributing to this
increase were a computer system conversion at the Company's Decatur bank late in
the first quarter of 2001 from in-house data processing to third party service
bureau data processing, conversion to a new system and a software upgrade at the
Company's remittance processing subsidiary FirsTech, costs to merge First Trust
Bank of Shelbyville and BankIllinois computer records, as well as a continuation
in development of the Company's internet services during 2002 compared to 2001.
Service charges from correspondent banks decreased $1,000, or 0.1%, from
$932,000 in 2002 to $931,000 in 2003. In 2002, service charges from
correspondent banks increased $47,000, or 5.3%, from $885,000 in 2001. This
increase was mainly due to a reduction in monthly earnings credits, which offset
a portion of the charges, due to the falling rate environment. Earnings credits
are typically indexed to a key government rate, like the monthly average 91-day
Treasury bill rate. The average 91-day T-bill rate dropped from 3.43% in 2001 to
1.64% in 2002.
Other non-interest expense increased $121,000, or 2.5%, from $4.792 million in
2002 to $4.913 million in 2003. In 2002, other non-interest expense decreased
$168,000, or 3.4%, from $4.960 million in 2001.
Occupancy expense increased $113,000, or 4.8%, from $2.376 million in 2002 to
$2.489 million in 2003. In 2002, occupancy expense increased $79,000, or 3.4%,
from $2.297 million in 2001.
Office supplies expense increased $5,000, or 0.4%, from $1.261 million in 2002
to $1.266 million in 2003. In 2002, office supplies expense decreased $274,000,
or 17.9%, from $1.535 million in 2001. Included in office supplies expense in
2001 were additional printing and mailing expenses and additional supplies
purchased to announce and support a computer system conversion to move the
Company's subsidiaries toward the same data processing system.
21
Income Tax Expense
Income tax expense increased $321,000, or 3.8%, from $8.520 million in 2002 to
$8.841 million in 2003. In 2002, income tax expense increased $784,000, or
10.1%, from $7.736 million in 2001, which was mainly due to an increase in
taxable income. This was mainly due to an increase in taxable income. The
Company's effective tax rate was 34.7%, 32.9% and 32.4% for the years ended
December 31, 2003, 2002 and 2001, respectively.
The tax effects of temporary differences, which gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2003 and 2002, are shown in note 11 in the Notes to Consolidated Financial
Statements.
Financial Condition
Total assets increased $31.446 million, or 2.8%, from $1.123 billion at December
31, 2002 to $1.154 billion at December 31, 2003. Increases in investments in
debt and equity securities, other assets, and loans were somewhat offset by
decreases in cash and due from banks, federal funds sold and interest bearing
deposits, mortgage loans held-for-sale, accrued interest receivable and premises
and equipment.
Cash and due from banks decreased $13.845 million, or 23.2%, at December 31,
2003 compared to December 31, 2002. This was primarily due to a smaller dollar
amount of deposit items in process of collection at December 31, 2003 compared
to December 31, 2002.
Federal funds sold and interest bearing deposits decreased $12.998 million, or
30.2%, at December 31, 2003 compared to 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 $54.516 million, or
17.2%, at December 31, 2003 compared to December 31, 2002 due to increases in
all categories. Investments in debt and equity securities available-for-sale
increased $25.298 million, or 10.5%, investments in debt and equity securities
held-to-maturity increased $28.493 million, or 41.6%, and investments in
non-marketable equity securities increased $725,000, or 10.3%, at December 31,
2003 compared to December 31, 2002.
Loans, net of loan allowance, increased $2.117 million, or 0.3%, at December 31,
2003 compared to December 31, 2002. Commercial, financial and agricultural loans
increased $15.750 million from 2002 to 2003. Real estate loans increased $5.170
million from 2002 to 2003, primarily due to a $32.106 million increase in
commercial real estate loans offset somewhat by a decrease of $26.936 million in
residential real estate loans. The increases in commercial, financial and
agricultural loans and commercial real estate loans were primarily the result of
the favorable rate environment and the Company's emphasis on business
development. The decrease in residential real estate loans was caused primarily
by long-term fixed rate loans being refinanced and subsequently sold on the
secondary market. Installment and consumer loans decreased $18.276 million from
2002 to 2003 primarily due to a decrease in indirect consumer loans due to
competition from alternative funding sources available to consumers, such as
special financing offered by the auto manufacturer's captive financing
companies.
Mortgage loans held-for-sale decreased $2.340 million, or 78.7%, at December 31,
2003 compared to December 31, 2002. This decrease was reflective of a decrease
in demand at the end of 2003 as compared to 2002.
The increase in year-end assets was primarily the result of funds provided by an
increase in total deposits of $29.886 million, or 3.4%, at December 31, 2003
compared to December 31, 2002. This was due to the increase in interest bearing
deposits of $31.614 million, or 4.5%, offset somewhat by a decrease of $1.728
million, or 1.1%, in non-interest bearing deposits. Also, federal funds
purchased, repurchase agreements and notes payable were $22.347 million, or
27.7%, higher, and Federal Home Loan Bank advances and other borrowings were
$2.174 million, or 7.8%, higher at December 31, 2003 than at December 31, 2002.
Somewhat offsetting these increases was a decrease of $23.020 million in capital
primarily due to the repurchase of stock in the 2003 tender offer and payment of
cash dividends, somewhat offset by net income.
Average assets were $26.378 million, or 2.4%, higher in 2003 than 2002. Included
in the increase in average assets were increases in taxable investment
securities of $42.871 million, or 16.3%, federal funds sold and interest bearing
deposits of $11.184 million, or 43.7%, other assets of $1.699 million, or 9.4%,
and tax-exempt investment securities of $467,000, or 0.8%. These increases were
somewhat offset by average decreases of $27.880 million, or 4.1%, in net loans,
a decrease of $1.064 million, or 5.6%, in premises and equipment, and a decrease
of $899,000, or 1.9%, in cash and due from banks.
22
Shifts in funding sources occurred as total average federal funds purchased,
repurchase agreements and notes payable increased $26.414 million, or 38.5%, and
total average deposits increased $9.594 million, or 1.1%, while average Federal
Home Loan Bank advances and other borrowings decreased $4.397 million, or 13.4%,
in 2003 from 2002. Included in the increase in average deposits was a shift in
the average deposit mix in 2003 versus 2002. Average savings increased $23.578
million, or 9.0%, and average non-interest bearing savings increased $5.852
million, or 10.4%. Somewhat offsetting these increases were decreases in average
time deposits of $12.616 million, or 3.6%, average non-interest bearing demand
deposits of $3.655 million, or 3.9%, and average interest bearing demand
deposits of $3.565 million, or 3.9%.
Investment Securities
The carrying value of investments in debt and equity securities was as follows:
Carrying Value of Securities1
(in thousands)
December 31, 2003 2002 2001
--------------------------------------------------------------------------------
Securities available-for-sale:
U.S. Treasury ........................ $ -- $ 3,066 $ 8,577
Federal agencies ..................... 220,199 185,469 191,325
Mortgage-backed securities ........... 23,007 30,884 28,279
State and municipal .................. 17,317 16,168 15,642
Corporate and other obligations ...... -- 1,008 3,099
Marketable equity securities ......... 5,391 4,021 19,574
----------------------------------
Total .......................... $265,914 $240,616 $266,496
==================================
Securities held-to-maturity:
Federal agencies ..................... $ 10,704 $ 1,750 $ 1,750
Mortgage-backed securities ........... 50,029 23,595 19,842
State and municipal .................. 36,323 43,218 42,226
----------------------------------
Total .......................... $ 97,056 $ 68,563 $ 63,818
==================================
Non-marketable equity securities:
FHLB and FRB stock2 .................. $ 4,259 $ 3,963 $ 3,766
Other equity investments ............. 3,497 3,068 1,342
----------------------------------
Total .......................... $ 7,756 $ 7,031 $ 5,108
==================================
Total securities ............... $370,726 $316,210 $335,422
==================================
1 Investment securities available-for-sale are carried at fair value.
Investment securities held-to-maturity are carried at amortized cost.
2 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank, respectively.
The unrealized gain on securities available-for-sale, net of tax effect,
decreased $1.835 million to a gain of $1.941 million at December 31, 2003 from a
gain of $3.776 million at December 31, 2002.
23
The following table shows the maturities and weighted-average yields of
investment securities at December 31, 2003:
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
December 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
1 Year 1 to 5 5 to 10 Over
or Less Years Years 10 years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
Federal agencies ............. $ 55,508 4.35% $163,690 3.20% $ 1,001 3.01% $ -- -- $220,199 3.49%
Mortgage-backed securities1 .. 1,708 3.51% 21,127 4.50% 138 6.56% 34 3.53% 23,007 4.44%
State and municipal .......... 2,766 2.90% 8,768 4.30% 4,674 5.02% 1,109 5.11% 17,317 4.32%
Marketable equity securities2 -- -- -- -- -- -- -- -- 5,391 --
------------------------------------------------------------------------------------------------
Total .................. $ 59,982 $193,585 $ 5,813 $1,143 $265,914
================================================================================================
Average Yield ................... 4.26% 3.39% 4.71% 5.06% 3.63%
================================================================================================
Securities held-to-maturity:
Federal agencies ............. $ 512 2.00% $ 5,267 2.94% $ 4,925 4.53% $ -- -- $ 10,704 3.63%
Mortgage-backed securities1 .. 36,843 0.05% 12,404 4.32% 322 3.95% 460 6.20% 50,029 1.19%
State and municipal .......... 12,992 3.92% 20,453 4.07% 2,373 4.83% 505 5.25% 36,323 4.08%
------------------------------------------------------------------------------------------------
Total .................. $ 50,347 $ 38,124 $ 7,620 $ 965 $ 97,056
================================================================================================
Average Yield ................... 1.06% 4.00% 4.60% 5.70% 2.54%
================================================================================================
Non-marketable equity securities2
FHLB and FRB stock ........... -- -- -- -- -- -- -- -- $ 4,259 --
Other equity investments ..... -- -- -- -- -- -- -- -- 3,497 --
------------------------------------------------------------------------------------------------
Total .................. $ -- -- $ -- -- $ -- -- $ -- -- $ 7,756 --
================================================================================================
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 tables present the amounts and percentages of loans at December 31
for the years indicated according to the categories of commercial, financial and
agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
2003 2002 2001 2000 1999
----------------------------------------------------
Commercial, financial and agricultural $249,795 $234,045 $246,042 $219,541 $188,430
Real estate .......................... 348,997 343,827 316,693 319,412 293,761
Installment and consumer ............. 77,253 95,529 119,585 129,775 128,085
----------------------------------------------------
Total loans ...................... $676,045 $673,401 $682,320 $668,728 $610,276
====================================================
Percentage of Loans Outstanding
2003 2002 2001 2000 1999
-----------------------------------------------
Commercial, financial and agricultural 36.95% 34.75% 36.06% 32.83% 30.88%
Real estate .......................... 51.62% 51.06% 46.41% 47.76% 48.13%
Installment and consumer ............. 11.43% 14.19% 17.53% 19.41% 20.99%
-----------------------------------------------
Total ............................ 100.00% 100.00% 100.00% 100.00% 100.00%
===============================================
24
The Company's loan portfolio totaled approximately $676.045 million at December
31, 2003, representing 58.6% of total assets at that date. Total loans increased
$2.644 million, or 0.4%, from December 31, 2002 to December 31, 2003 with
increases in commercial, financial and agricultural loans and real estate loans
of $15.750 million and $5.170 million, respectively, offset somewhat by a
decrease in installment and consumer loans of $18.276 million.
Total loans decreased $8.919 million, or 1.3%, from December 31, 2001 to
December 31, 2002, with decreases in installment and consumer loans and in
commercial, financial and agricultural loans of $24.056 million and $11.997
million, respectively, offset somewhat by an increase in real estate loans of
$27.134 million.
The balance of loans outstanding as of December 31, 2003 by maturities is shown
in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
December 31, 2003
--------------------
1 Year 1-5 Over 5
or Less Years Years Total
--------------------------------------------
Commercial, financial and agricultural $162,793 $ 70,707 $ 16,295 $249,795
Real estate .......................... 64,723 166,210 118,064 $348,997
Installment and consumer ............. 27,626 40,804 8,823 $ 77,253
--------------------------------------------
Total ........................... $255,142 $277,721 $143,182 $676,045
============================================
Percentage of total loans outstanding 37.74% 41.08% 21.18% 100.00%
============================================
As of December 31, 2003, commercial, financial and agricultural loans with
maturities of greater than one year were comprised of $35.119 million in
fixed-rate loans and $51.883 million in floating-rate loans. Real estate loans
with maturities greater than one year at December 31, 2003 included $103.173
million in fixed-rate loans and $181.101 million in floating-rate loans.
Allowance for Loan Losses and Loan Quality
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)
2003 2002 2001 2000 1999
-------------------------------------------------------
Allowance for loan losses at
beginning of year ...................... $ 9,259 $ 9,259 $ 8,879 $ 8,682 $ 8,852
-------------------------------------------------------
Charge-offs during period:
Commercial, financial and agricultural . $ (148) $ (103) $(1,165) $ (99) $ (506)
Residential real estate ................ (42) (125) (27) (34) --
Installment and consumer ............... (1,450) (1,699) (1,481) (1,119) (750)
-------------------------------------------------------
Total ........................... $(1,640) $(1,927) $(2,673) $(1,252) $(1,256)
-------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural . $ 452 $ 245 $ 179 $ 463 $ 268
Residential real estate ................ 46 31 37 9 53
Installment and consumer ............... 199 201 167 173 192
-------------------------------------------------------
Total ........................... $ 697 $ 477 $ 383 $ 645 $ 513
-------------------------------------------------------
Net charge-offs ............ $ (943) $(1,450) $(2,290) $ (607) $ (743)
Provision for loan losses ................. 1,470 1,450 2,670 804 573
-------------------------------------------------------
Allowance for loan losses at end of year .. $ 9,786 $ 9,259 $ 9,259 $ 8,879 $ 8,682
=======================================================
Ratio of net charge-offs to
average net loans ...................... 0.15% 0.22% 0.34% 0.10% 0.14%
=======================================================
25
Management reviews criteria such as the customer's historic loan payment
performance, financial statements, financial ratios, cash flow, net worth,
collateral and guaranties, as well as local and national economic factors, in
determining whether loans should be written off as uncollectible. The Company
records a loss if it is probable that a loss will occur and the amount can be
reasonably estimated.
The Company's risk of loan loss is dependent on many factors: economic
conditions, the extent and values of underlying collateral, significant
concentrations of loans within the portfolio, the ability and willingness of
borrowers to perform according to loan terms and management's competence and
judgment in overseeing lending, collecting and loan-monitoring activities. The
risk of loss from commercial, financial and agricultural loans is significantly
impacted by economic factors and how these factors affect the particular
industries involved.
An analysis of the allowance for loan loss adequacy is performed on a quarterly
basis by the Company's credit administration department. This analysis is
reported to executive management and discussed at a quarterly meeting where
specific allocations for problem credits, charge-offs and monthly provisions for
loan losses are reviewed and revised, as necessary. The results are reported to
the board of directors. The analysis includes assessment of the allowance for
loan loss adequacy based on historic loan losses and current quality grades of
specific credits reviewed, credit concentrations, current delinquent and
nonperforming loans, current economic conditions, peer group information and
results of recent audits or regulatory examinations. In 2002, charge-offs in
commercial, financial and agricultural loans decreased to $103,000 compared to
$1.165 million in 2001, primarily due to the charge-off of two agricultural
credits totaling $847,000. The level of charge-offs of installment and consumer
loans in 2001, 2002, and 2003 were reflective of the significant growth of the
indirect loan portfolio in 1999 and 2000.
The following table shows the allocation of the allowance for loan losses to
each loan category.
Allocation of the Allowance for Loan Losses
(in thousands)
2003 2002 2001 2000 1999
------------------------------------------
Allocated:
Commercial, financial and agricultural $5,973 $5,732 $5,487 $3,426 $3,476
Residential real estate .............. 153 345 419 855 799
Installment and consumer ............. 2,428 1,763 2,000 1,649 1,289
------------------------------------------
Total allocated allowance ..... $8,554 $7,840 $7,906 $5,930 $5,564
Unallocated allowances .................. 1,232 1,419 1,353 2,949 3,118
------------------------------------------
Total ......................... $9,786 $9,259 $9,259 $8,879 $8,682
==========================================
The allocated portion of the allowance for loan losses increased $714,000 from
$7.840 million at December 31, 2002 to $8.554 million at December 31, 2003. Of
this increase, the allowance for installment and consumer loans increased
$665,000 from $1.763 million at December 31, 2002 to $2.428 million at December
31, 2003, and the allowance for commercial, financial and agricultural loans
increased $241,000 from $5.732 million to $5.973 million during the same period.
Somewhat offsetting these increases was a decrease in the allowance for
residential real estate loans of $192,000 from $345,000 at December 31, 2002 to
$153,000 at December 31, 2003 as residential real estate loans decreased during
2003. The portion of the allowance for loan losses that was unallocated
decreased by $187,000 to $1.232 million at December 31, 2002 from $1.419 million
a year earlier. The unallocated amount is determined based on management's
judgment, which considers, in addition to the other factors previously
discussed, the risk of error in the specific allocation.
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 has not been a significant
amount of loans charged off which had been previously identified as problem
loans by the credit administration department or the loan committees.
26
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."
Nonperforming Loans
(in thousands)
2003 2002 2001 2000 1999
------------------------------------------
Nonaccrual loans1 ................. $ 399 $1,392 $3,341 $ 602 $ 112
==========================================
Loans past due 90 days or more .... $ 621 $ 829 $1,774 $ 846 $ 440
==========================================
Renegotiated loans ................ $ 18 $ 20 $ 67 $ 88 $ 104
==========================================
1 Includes $269,000, $628,000, $3,216,000, $505,000 and $112,000 at December
31, 2003, 2002, 2001, 2000 and 1999, respectively, of loans which
management does not consider impaired as defined by the Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairments of a Loan" (SFAS 114).
Other Nonperforming Assets
(in thousands)
2003 2002 2001 2000 1999
----------------------------------------
Other real estate owed ............ $ -- $ 58 $ -- $ 7 $246
========================================
Nonperforming other assets ........ $ 55 $ 94 $153 $192 $132
========================================
There were no other interest earning assets that would be required to be
disclosed as being nonperforming if such other assets were loans.
At December 31, 2003, the Company had approximately $7.730 million in potential
problem loans, excluding nonperforming loans. Potential problem loans are those
loans identified by management as being worthy of special attention, and
although currently performing, may have some underlying weaknesses. None of
these potential problem loans were considered impaired as defined in SFAS 114.
The $7.730 million of potential problem loans have either had timely payments or
are adequately secured and loss of principal or interest is determined to be
unlikely.
Loans over 90 days past due, which are not well secured and in the process of
collection, are placed on nonaccrual status. There were $399,000 of nonaccrual
loans at December 31, 2003 compared to $1.392 million at December 31, 2002.
Loans past due 90 days or more but still accruing interest decreased by $208,000
in 2003 to a balance of $621,000 at December 31, 2003, from $829,000 at December
31, 2002. These loans are well secured and in the process of collection.
The following table categorizes nonaccrual loans as of December 31, 2003 based
on levels of performance and also details the allocation of interest collected
during the period in 2003 in which the loans were on nonaccrual. Substantial
performance, yet contractually past due, includes borrowers making sizable
periodic payments relative to the required periodic payments due. A borrower
that is not making substantial payments but is making periodic payments would be
included in the limited performance category.
Nonaccrual and Related Interest Payments
(in thousands)
Cash Interest Payments Applied As:
-------------------------------------------------------------
At December 31, 2003 Recovery of Reduction
Book Contractual Interest Prior Partial of
Balance Balance Income Charge-offs Principal
-------------------------------------------------------------
Contractually past due with:
Substantial performance ......... $237 $241 $ 23 $-- $ 4
Limited performance ............. 5 11 -- -- 1
No performance .................. 157 176 -- -- --
------------------------------------------------------------
Total .............................. $399 $428 $ 23 $-- $ 5
============================================================
27
The difference between the book balance and the contractual balance represents
charge-offs made since the loans were funded.
Management believes that the allowance for loan losses at December 31, 2003 was
adequate to absorb credit losses in the total loan portfolio and that the
policies and procedures in place to identify potential problem loans are being
effectively implemented. However, there can be no assurance that the allowance
for loan losses will be adequate to cover all losses.
Premises and Equipment
Total premises and equipment decreased $727,000 in 2003 from 2002. This decrease
was primarily due to depreciation expense of $2.453 million somewhat offset by
$1.726 million of purchases.
Other Assets
Other assets increased $5.608 million in 2003 from 2002. This increase included
an investment of $2.268 million in a low-income housing development and
increases in cash value life insurance, deferred tax assets, and servicing
rights.
Deposits
The following table shows the average balance and weighted average rate of
deposits at December 31 for the years indicated:
Average Balance and Weighted Average Rate of Deposits
(dollars in thousands)
2003 2002 2001
--------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balane Rate Balance Rate
--------------------------------------------------------------------
Demand
Non-interest bearing $ 89,935 -- $ 93,590 -- $102,136 --
Interest bearing ... 87,351 0.73% 90,916 1.04% 107,992 2.06%
Savings
Non-interest bearing 62,056 -- 56,204 -- 42,810 --
Interest bearing ... 284,641 0.91% 261,063 1.41% 229,493 2.94%
Time
$100,000 and more .. 113,604 3.22% 121,591 3.89% 110,966 4.73%
Under $100,000 ..... 224,133 3.21% 228,762 4.09% 249,624 5.85%
-------------------------------------------------------------------
Totals ....... $861,720 $852,126 $843,021
===================================================================
In analyzing its deposit activity, management has noted that average total
deposits increased $9.594 million, or 1.1%, during 2003. Included in this
increase were shifts in the average deposit mix in 2003 versus 2002. There were
increases in average interest bearing savings deposits of $23.578 million, or
9.0%, and average non-interest bearing savings deposits of $5.852 million, or
10.4%. Somewhat offsetting these increases were decreases in average time
$100,000 and over of $7.987 million, or 6.6%, average time under $100,000 of
$4.629 million, or 2.0%, average non-interest bearing demand deposits of $3.655
million, or 3.9%, and average interest bearing demand of $3.565 million, or
3.9%.
The table below sets forth the maturity of deposits greater than $100,000 at
December 31, 2003:
Maturity of Time Depsoits of $100,000 or More
(in thousands)
Total Time
State of Illinois Brokered Deposits of
Maturity at December 31, 2003: Time Deposits CDs CDs IRAs $100,000 or More
--------------------------------------------------------------------------------------------------------
3 months or less ........ $ 7,000 $ 7,000 $ 22,676 $ 940 $ 37,616
3 to 6 months ........... 3,000 -- 11,893 737 15,630
6 to 12 months .......... -- -- 23,692 619 24,311
Over 12 months .......... -- 5,000 28,520 2,840 36,360
-----------------------------------------------------------
Total ........... $ 10,000 $ 12,000 $ 86,781 $ 5,136 $113,917
===========================================================
28
Federal Funds Purchased, Repurchase Agreements and Notes Payable
This category includes federal funds purchased, which are generally overnight
transactions, securities sold under repurchase agreements, which mature from one
day to three years from the date of sale and U.S. Treasury demand notes. The
table in note 8 in the Notes to Consolidated Financial Statements shows the
balances of federal funds purchased, repurchase agreements and notes payable at
December 31, 2003 and 2002, the average balance for the years ended December 31,
2003, 2002 and 2001, and the maximum month-end value during each year.
Fair Values of Financial Instruments
The estimated fair values of financial instruments for which no listed market
exists and the fair values of investment securities, which are based on listed
market quotes at December 31, 2003 and 2002, are disclosed in note 17 in the
Notes to Consolidated Financial Statements.
Capital
Total shareholders' equity declined $23.020 million from $134.470 million at
December 31, 2002 to $111.450 million at December 31, 2003. Included in the
decrease were net treasury stock transactions of $30.157 million, primarily due
to the completion of the $32.395 million tender offer during the third quarter
of 2003, offset partially by the exercise of stock options by employees and
directors of the Company. Cash dividends declared of $7.567 million, a decrease
in accumulated other comprehensive income of $1.835 million, and a $66,000
decrease from stock appreciation rights also contributed to the overall decrease
in capital. Somewhat offsetting the decreases in capital was net income of
$16.605 million for the year ended December 31, 2003.
Financial institutions are required by regulatory agencies to maintain minimum
levels of capital based on asset size and risk characteristics. Currently, the
Company and the Banks are required by their primary regulators to maintain
adequate capital based on two measurements: the total assets leverage ratio and
the risk-weighted assets ratio.
Based on Federal Reserve guidelines, a bank holding company generally is
required to maintain a leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points. The Company's total assets leverage ratio at
December 31, 2003 and 2002 was 9.6% and 11.8%, respectively. The leverage ratios
for the individual banks are disclosed in note 19 in the Notes to the
Consolidated Financial Statements. All are well above the regulatory minimum.
The decrease in the total assets leverage ratio in 2003 compared to 2002 was
primarily due to the completion of the tender offer in the third quarter of 2003
The minimum risk-weighted assets ratio for bank holding companies is 8%. The
Company's total risk-weighted assets ratio at December 31, 2003 and 2002 was
14.5% and 18.0%, respectively -- significantly higher than the regulatory
minimum. The individual banks' total risk-weighted assets ratio are disclosed in
note 19 in the Notes to Consolidated Financial Statements. All are significantly
higher than the regulatory minimum. The decrease in the risk-weighted assets
ratio in 2003 compared to 2002 was primarily due to the completion of the tender
offer in the third quarter of 2003.
Inflation and Changing Prices
Changes in interest rates and a bank's ability to react to interest rate
fluctuations have a much greater impact on a bank's balance sheet and net income
than inflation. A review of net interest income, liquidity and rate sensitivity
should assist in the understanding of how well the Company is positioned to
react to changes in interest rates.
29
Liquidity and Cash Flows
The Company requires cash to fund loan growth and deposit withdrawals. Cash
flows fluctuate with changes in economic conditions, current interest rate
trends and as a result of management strategies and programs. The Company
monitors the demand for cash and initiates programs and policies as considered
necessary to meet funding gaps.
The Company was able to adequately fund loan demand and meet liquidity needs in
2003. A review of the consolidated statement of cash flows in the accompanying
financial statements shows that the Company's cash and cash equivalents
decreased $26.843 million from December 31, 2002 to December 31, 2003. The
decrease in 2003 resulted from cash used in investing activities, offset
somewhat by cash provided by operating and financing activities. There were
differences in sources and uses of cash during 2003 compared to 2002. Cash was
used by investing activities in 2003 compared to cash provided in 2002. Funding
of new loans increased in 2003 compared to 2002 as net loans increased $3.647
million in 2003 compared to a $7.172 million decrease in 2002. Also, there were
more net purchases of investments in debt and equity securities compared to
proceeds from maturities, calls and sales of the same in 2003 compared to 2002.
Principal paydowns from mortgage-backed securities were slightly higher in 2003
compared to 2002, reflective of the ongoing low interest rate environment. Less
cash was provided by operating activities in 2003 compared to 2002. Cash was
provided by financing activities in 2003 compared to cash used in 2002. This was
mainly due to increases in deposits, federal funds purchased, repurchase
agreements and notes payable and net FHLB and other borrowings in 2003 compared
to decreases in 2002. Somewhat offsetting these increases was a decrease in cash
due to the use of more funds to complete the 2003 tender offer compared to the
tender offer completed in 2002.
The Company's future short-term cash requirements are expected to continue to be
provided by investment maturities, sales of loans and deposits. Cash required to
meet longer-term liquidity requirements will mostly depend on future goals and
strategies of management, the competitive environment, economic factors and
changes in the needs of customers. No additional outside borrowing is
anticipated. The Company expects to maintain FHLB advances near the current
level. If current sources of liquidity cannot provide needed cash in the future,
the Company can obtain funds from several sources. The Company is able to borrow
funds on a temporary basis from the Federal Reserve Bank, the FHLB and
correspondent banks to meet short-term requirements. With sound capital levels,
the Company has several options for longer-term cash needs, such as for future
expansion and acquisitions.
Management is not aware of any current recommendations by the Company's primary
regulators which if implemented would have a material effect on the Company's
liquidity, capital resources or operations.
The following table summarizes significant obligations and other commitments at
December 31, 2003 (in thousands):
Short and Long-Term Operating
Years Ended December 31, Time Deposits Borrowings1 Leases Total
----------------------------------------------------------------------------------------------------------------------------
2004 $ 203,731 $ 15,023 $ 201 $218,955
2005 83,902 93 143 $ 84,138
2006 22,018 7,221 134 $ 29,373
2007 17,720 2,620 115 $ 20,455
2008 12,549 5,023 2 $ 17,574
Thereafter 6 - - $ 6
----------------------------------------------------------------------------------------------------------------------------
Total $ 339,926 $ 29,980 $ 595 $ 370,501
============================================================================================================================
Commitments to extend credit:
Commitments $ 237,615
Standby letters of credit 20,192
----------------------------------------------------------------------------------------------------------------------------
1 Fixed rate callable FHLB advances are included in the period of their
modified duration rather than in the period in which they are due. Short
and long-term borrowings include fixed rate callable advances of $15
million maturing in fiscal year 2008.
30
Interest Rate Sensitivity
The concept of interest 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. One way the
Company monitors its interest rate sensitivity and liquidity is through the use
of static gap reports, which measure the difference between assets and
liabilities maturing or repricing within specified time periods.
The following table shows the company's interest rate sensitivity position at
various intervals at December 31, 2003:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(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 $ 30,004 $ -- $ -- $ -- $ -- $ 30,004
Debt and equity securities1 .................... 18,827 17,580 36,175 45,559 252,585 370,726
Loans2 ......................................... 251,811 39,834 31,184 68,270 285,578 676,677
-----------------------------------------------------------------------------
Total interest earning assets ........... $ 300,642 $ 57,414 $ 67,359 $ 113,829 $ 538,163 $1,077,407
-----------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing demand deposits ... $ 44,039 $ 1,568 $ 2,352 $ 4,710 $ 178,957 $ 231,626
Money market savings deposits .................. 164,745 -- -- -- -- 164,745
Time deposits .................................. 24,727 47,317 46,850 84,837 136,195 339,926
Federal funds purchased, repurchase agreements
and notes payable ........................... 101,184 9 422 897 486 102,998
FHLB Advances and other borrowings ............. 7,268 10,115 -- -- 12,597 29,980
-----------------------------------------------------------------------------
Total interest bearing liabilities ...... $ 341,963 $ 59,009 $ 49,624 $ 90,444 $ 328,235 $ 869,275
=============================================================================
Net asset (liability) funding gap ................. $ (41,321) $ (1,595) $ 17,735 $ 23,385 $ 209,928 $ 208,132
-----------------------------------------------------------------------------
Repricing gap ..................................... 0.88 0.97 1.36 1.26 1.64 1.24
Cumulative repricing gap .......................... 0.88 0.89 0.94 1.00 1.24 1.24
=============================================================================
1 Debt and equity securities include securities available-for-sale.
2 Loans include mortgage loans held-for-sale.
Included in the 1-30 day category of savings and interest bearing demand
deposits is non-core deposits plus a percentage, based upon industry-accepted
assumptions, 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, 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 December 31, 2003, the Company tended to be slightly liability sensitive due
to the levels of savings and interest bearing demand deposits, time deposits,
federal funds purchased, repurchase agreements and notes payable. As such, the
effect of a decrease in the prime rate of 100 basis points would increase net
interest income by approximately $413,000 in 30 days and $429,000 in 90 days
assuming no management intervention. A rise in interest rates would have the
opposite effect for the same 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 shall fall
within the range of 0.75-1.25. As of December 31, 2003, the Company's RSA/RSL
was 1.00, which was within the established guidelines.
31
In addition to managing interest 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 $10 million unsecured
line of credit with a correspondent bank. Als0, the Company can borrow
approximately $52.973 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 software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 200 basis points in 100 basis point increments.
The following table shows projected results at December 31, 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.
+200 +100 -100 -200
-----------------------------------------------------
December 31, 2003 ..... 11.7% 5.9% (5.9%) (11.7%)
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 maximize current earnings
while positioning the Company to minimize the effect of a prolonged shift in
interest rates that would adversely affect future results of operations.
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.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document (including information incorporated by reference) 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 and on
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.
32
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 then 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
and 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.
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 7a. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section contained in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
The financial statements begin on page 34.
33
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2003, 2002 and 2001
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
34
Independent Auditor's Report
The Board of Directors
Main Street Trust, Inc.
Champaign, Illinois
We have audited the accompanying consolidated balance sheets of Main Street
Trust, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Main
Street Trust, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
---------------------------
Champaign, Illinois
February 6, 2004
35
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002
(in thousands, except share data)
2003 2002
--------------------------
Assets
Cash and due from banks ........................................ $ 45,899 $ 59,744
Federal funds sold and interest bearing deposits ............... 30,004 43,002
--------------------------
Cash and cash equivalents .............................. 75,903 102,746
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value ............................ 265,914 240,616
Held-to-maturity, at cost (fair value of $96,628 and $70,489
at December 31, 2003 and 2002, respectively) ............... 97,056 68,563
Non-marketable equity securities ............................. 7,756 7,031
--------------------------
Total investments in debt and equity securities ............ 370,726 316,210
--------------------------
Loans, net of allowance for loan losses of $9,786 and $9,259
at December 31, 2003 and 2002, respectively .................. 666,259 664,142
Mortgage loans held for sale ................................... 632 2,972
Premises and equipment ......................................... 17,622 18,349
Accrued interest receivable .................................... 6,430 7,315
Other assets ................................................... 16,602 10,994
--------------------------
Total assets ........................................... $ 1,154,174 $ 1,122,728
==========================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing ....................................... $ 162,175 $ 163,903
Interest bearing ........................................... 736,297 704,683
--------------------------
Total deposits ......................................... 898,472 868,586
Federal funds purchased, repurchase agreements and notes
payable .................................................... 102,998 80,651
Federal Home Loan Bank advances and other borrowings ......... 29,980 27,806
Accrued interest payable ..................................... 1,669 2,252
Other liabilities ............................................ 9,605 8,963
--------------------------
Total liabilities ...................................... 1,042,724 988,258
--------------------------
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized .. -- --
Common stock, $0.01 par value; 15,000,000 shares authorized;
11,219,319 shares issued ................................... 112 112
Paid in capital .............................................. 55,271 55,337
Retained earnings ............................................ 101,521 92,853
Accumulated other comprehensive income ....................... 1,941 3,776
--------------------------
158,845 152,078
Less: treasury stock, at cost, 1,718,950 and 755,047 shares
at December 31, 2003 and 2002, respectively ............... (47,395) (17,608)
--------------------------
Total shareholders' equity ............................. 111,450 134,470
--------------------------
Total liabilities and shareholders' equity ............. $ 1,154,174 $ 1,122,728
==========================
See accompanying notes to consolidated financial statements.
36
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2003, 2002 and 2001
(in thousands, except share data)
2003 2002 2001
-------------------------------------------
Interest income:
Loans and fees on loans ........................................ $ 41,467 $ 48,080 $ 55,280
Investments in debt and equity securities
Taxable ...................................................... 11,502 12,471 13,831
Tax-exempt ................................................... 2,270 2,375 2,347
Federal funds sold and interest bearing deposits ............... 447 437 1,737
-------------------------------------------
Total interest income .................................... 55,686 63,363 73,195
Interest expense:
Deposits ....................................................... 14,070 18,714 28,831
Federal funds purchased, repurchase agreements and notes payable 1,094 1,169 2,550
Federal Home Loan Bank advances and other borrowings ........... 1,559 1,834 2,217
-------------------------------------------
Total interest expense ................................... 16,723 21,717 33,598
-------------------------------------------
Net interest income ...................................... 38,963 41,646 39,597
Provision for loan losses ........................................ 1,470 1,450 2,670
-------------------------------------------
Net interest income after provision for loan losses ...... 37,493 40,196 36,927
Non-interest income:
Remittance processing .......................................... 7,211 7,277 7,187
Trust and brokerage fees ....................................... 5,783 5,929 5,227
Service charges on deposit accounts ............................ 2,545 2,373 2,217
Securities transactions, net ................................... (12) 211 110
Gain on sales of mortgage loans, net ........................... 2,536 1,368 828
Other .......................................................... 2,231 1,708 1,697
-------------------------------------------
Total non-interest income ................................ 20,294 18,866 17,266
Non-interest expense:
Salaries and employee benefits ................................. 18,245 18,721 17,761
Occupancy ...................................................... 2,489 2,376 2,297
Equipment ...................................................... 2,389 2,779 3,405
Data processing ................................................ 2,108 2,300 1,943
Office supplies ................................................ 1,266 1,261 1,535
Service charges from correspondent banks ....................... 931 932 885
Reconciliation liability ....................................... -- -- (2,500)
Other .......................................................... 4,913 4,792 4,960
-------------------------------------------
Total non-interest expense ............................... 32,341 33,161 30,286
Income before income taxes ............................... 25,446 25,901 23,907
Income taxes ..................................................... 8,841 8,520 7,736
-------------------------------------------
Net income ............................................... $ 16,605 $ 17,381 $ 16,171
===========================================
Per share data:
Basic earnings per share ....................................... $ 1.62 $ 1.61 $ 1.48
Weighted average shares of common stock outstanding ............ 10,242,929 10,792,092 10,930,736
Diluted earnings per share ..................................... $ 1.60 $ 1.60 $ 1.45
Weighted average shares of common stock and dilutive potential
common shares outstanding ................................... 10,359,836 10,878,823 11,138,290
Dividends declared per share ................................... $ 0.76 $ 0.54 $ 0.45
See accompanying notes to consolidated financial statements.
37
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2003, 2002 and 2001
(in thousands, except share data)
Accumulated
Other
Comprehensive Treasury Stock
Common Stock Paid-in Retained Income ------------------
Shares Amount Capital Earnings (Loss) Shares Amount Total
--------------------------------------------------------------------------------------
Balance, December 31, 2000 ...... 11,111,582 $ 111 $54,222 $ 72,591 $ 600 117,786 $ (2,122) $125,402
Comprehensive Income:
Net income .................... -- -- -- 16,171 -- -- -- 16,171
Net change in unrealized
gain (loss) on securities
available-for-sale, net of
taxes of $1,172 ............. -- -- -- -- 2,221 -- -- 2,221
Reclassification adjustment,
net of tax of ($39) ......... -- -- -- -- (71) -- -- (71)
--------
Comprehensive income ....... 18,321
--------
Fractional shares of common stock
purchased following
stock dividend ................ (301) -- (6) -- -- -- -- (6)
Stock appreciation rights ....... -- -- 23 -- -- -- -- 23
Cash dividends ($0.45 per share) -- -- -- (4,945) -- -- -- (4,945)
Treasury stock transactions, net -- -- (92) (7) -- 149,997 (2,703) (2,802)
--------------------------------------------------------------------------------------
Balance, December 31, 2001 ...... 11,111,281 111 54,147 83,810 2,750 267,783 (4,825) 135,993
Comprehensive Income:
Net income .................... -- -- -- 17,381 -- -- -- 17,381
Net change in unrealized
gain (loss) on securities
available-for-sale, net of
taxes of $1,159 ............. -- -- -- -- 1,153 -- -- 1,153
Reclassification adjustment,
net of tax of ($84) ......... -- -- -- -- (127) -- -- (127)
--------
Comprehensive income ....... 18,407
--------
Stock appreciation rights ....... -- -- (31) -- -- -- -- (31)
Cash dividends ($0.54 per share) -- -- -- (5,752) -- -- -- (5,752)
Issuance of new shares of common
stock ......................... 108,038 1 1,221 -- -- -- -- 1,222
Treasury stock transactions, net -- -- -- (2,586) -- 487,264 (12,783) (15,369)
--------------------------------------------------------------------------------------
Balance, December 31, 2002 ...... 11,219,319 112 55,337 92,853 3,776 755,047 (17,608) 134,470
Comprehensive Income:
Net income .................... -- -- -- 16,605 -- -- -- 16,605
Net change in unrealized
gain (loss) on securities
available-for-sale, net of
taxes of ($1,228) ........... -- -- -- -- (1,842) -- -- (1,842)
Reclassification adjustment,
net of tax of $5 ............ -- -- -- -- 7 -- -- 7
--------
Comprehensive income ....... 14,770
--------
Stock appreciation rights ....... -- -- (66) -- -- -- -- (66)
Cash dividends ($0.76 per share) -- -- -- (7,567) -- -- -- (7,567)
Treasury stock transactions, net -- -- -- (370) -- 963,903 (29,787) (30,157)
--------------------------------------------------------------------------------------
Balance, December 31, 2003 ...... 11,219,319 $ 112 $55,271 $101,521 $1,941 1,718,950 $(47,395) $111,450
======================================================================================
See accompanying notes to consolidated financial statements.
38
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
(in thousands)
2003 2002 2001
-----------------------------------
Cash flows from operating activities:
Net income ............................................................ $ 16,605 $ 17,381 $ 16,171
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................................... 2,453 2,647 2,731
Amortization (accretion) of bond premiums, net ...................... 2,249 1,188 (78)
Provision for loan losses ........................................... 1,470 1,450 2,670
Deferred income taxes ............................................... (637) (1,016) (1,643)
Securities transactions, net ........................................ 12 (211) (110)
Federal Home Loan Bank stock dividend ............................... (296) (187) (240)
Undistributed earnings from non-marketable equity securities ........ (172) -- --
Gain on sales of mortgage loans, net ................................ (2,536) (1,368) (828)
Proceeds from sales of mortgage loans originated for sale ........... 209,192 138,898 104,155
Mortgage loans originated for sale .................................. (204,316) (131,727) (110,012)
Other, net .......................................................... (3,281) 1,309 (2,351)
---------=-------------------------
Net cash provided by operating activities ..................... 20,743 28,364 10,465
-----------------------------------
Cash flows from investing activities:
Net (increase) decrease in loans .................................... (3,647) 7,172 (15,882)
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 15,217 2,956 32,239
Available-for-sale ................................................ 163,034 116,835 140,054
Proceeds from sales of investments in debt and equity securities:
Available-for-sale ................................................ 11,085 44,732 29,567
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (63,526) (25,158) (21,744)
Available-for-sale ................................................ (222,498) (150,268) (223,994)
Other equity securities ........................................... (830) (1,970) (750)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 18,923 17,272 9,948
Available-for-sale ................................................ 18,738 16,012 6,127
Return of principal on other equity securities ...................... 490 106 31
Purchases of premises and equipment ................................. (1,726) (1,737) (1,116)
-----------------------------------
Net cash (used in) provided by investing activities ........... (64,740) 25,952 (45,520)
-----------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits ................................. 29,886 (15,523) 44,177
Net increase (decrease) in federal funds purchased,
repurchase agreements, and notes payable .......................... 22,347 (4,556) 15,549
Advances from Federal Home Loan Bank and other borrowings ........... 2,268 13,000 5,000
Payments on Federal Home Loan Bank and other borrowings ............. (94) (20,089) (11,083)
Cash dividends paid ................................................. (7,142) (5,634) (4,540)
Issuance of new shares of common stock, net ......................... -- 1,222 --
MSTI stock transactions, net ........................................ (30,111) (15,369) (2,808)
-----------------------------------
Net cash provided by (used in) financing activities ........... 17,154 (46,949) 46,295
-----------------------------------
Net (decrease) increase in cash and cash equivalents .......... (26,843) 7,367 11,240
Cash and cash equivalents at beginning of year ........................ 102,746 95,379 84,139
-----------------------------------
Cash and cash equivalents at end of period ............................ $ 75,903 $ 102,746 $ 95,379
===================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 17,306 $ 22,855 $ 34,792
Income taxes ...................................................... 8,937 9,061 8,775
Real estate acquired through or in lieu of foreclosure .............. 60 297 --
Dividends declared not paid ......................................... 1,995 1,570 1,452
See accompanying notes to consolidated financial statements.
39
MAIN STREET TRUST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization
Main Street Trust, Inc. is a holding company whose subsidiaries BankIllinois,
The First National Bank of Decatur and FirsTech, Inc., (the "Company") provide a
full range of banking services to individual and corporate customers located
within Champaign, Decatur, and Shelbyville, Illinois, and the surrounding
communities. The subsidiaries are subject to competition from other financial
institutions and nonfinancial institutions providing financial products.
Additionally, the Company is subject to the regulations of certain regulatory
agencies and undergo periodic examinations by those regulatory agencies.
2. Summary of Significant Accounting Policies
The consolidated financial statements of the Company have been prepared in
conformity with accounting principles generally accepted in the United States of
America and conform to predominant practices within the banking industry. The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions, including the
determination of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosure or in satisfaction of loans, that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The significant accounting policies used by the Company in the preparation of
the consolidated financial statements are summarized below:
(a) Principles of Consolidation and Financial Statement Presentation
The consolidated financial statements include the accounts of Main Street
Trust, Inc. and its wholly owned subsidiaries, BankIllinois, The First
National Bank of Decatur, (the "Banks") and FirsTech, Inc., a retail
payment processing company. During 2002, First Trust Bank of Shelbyville,
previously a bank subsidiary, was merged into BankIllinois. Significant
intercompany accounts and transactions have been eliminated in
consolidation.
Property held in fiduciary or agency capacities for its customers is not
included in the accompanying consolidated balance sheets, since such items
are not assets of the Company.
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.
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.
40
The following is a summary of selected data for the various business
segments as of and for the year ending December 31:
Banking Remittance
Services Services Company Eliminations Total
------------------------------------------------------------------------------------------------
2003
Total interest income ...... $ 55,288 $ 46 $ 466 $ (114) $ 55,686
Total interest expense ..... 16,816 -- 21 (114) 16,723
Provision for loan losses .. 1,470 -- -- -- 1,470
Total non-interest income .. 13,314 7,294 4,653 (4,967) 20,294
Total non-interest expense . 26,486 5,014 5,808 (4,967) 32,341
Income before income tax ... 23,830 2,326 (710) -- 25,446
Income tax expense ......... 8,185 942 (286) -- 8,841
Net income ................. 15,645 1,384 (424) -- 16,605
Total assets ............... 1,136,418 3,740 118,241 (104,225) 1,154,174
Depreciation and amortization 1,542 429 482 -- 2,453
2002
Total interest income ...... $ 63,207 $ 88 $ 210 $ (142) $ 63,363
Total interest expense ..... 21,843 -- 16 (142) 21,717
Provision for loan losses .. 1,450 -- -- -- 1,450
Total non-interest income .. 12,259 7,396 (60) (729) 18,866
Total non-interest expense . 27,298 5,051 1,541 (729) 33,161
Income before income tax ... 24,875 2,433 (1,407) -- 25,901
Income tax expense ......... 8,110 974 (564) -- 8,520
Net income ................. 16,765 1,459 (843) -- 17,381
Total assets ............... 1,110,691 6,774 137,243 (131,980) 1,122,728
Depreciation and amortization 2,105 512 30 -- 2,647
2001
Total interest income ...... $ 73,122 $ 135 $ 111 $ (173) $ 73,195
Total interest expense ..... 33,771 -- -- (173) 33,598
Provision for loan losses .. 2,670 -- -- -- 2,670
Total non-interest income .. 10,669 7,543 (148) (798) 17,266
Total non-interest expense . 26,964 5,565 (1,445) (798) 30,286
Income before income tax ... 20,386 2,113 1,408 -- 23,907
Income tax expense ......... 6,355 790 591 -- 7,736
Net income ................. 14,031 1,323 817 -- 16,171
Total assets ............... 1,143,675 7,208 138,392 (137,764) 1,151,511
Depreciation and amortization 2,152 549 30 -- 2,731
(b) Investments in Debt and Equity Securities
Debt securities classified as held-to-maturity are those securities which
the Company has the ability and intent to hold until maturity. These
securities are carried at amortized cost, in which the amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income, are recorded using methods which approximate the interest
method. These methods consider the timing and amount of prepayments of
underlying mortgages in estimating future cash flows on individual
mortgage-related securities. Unrealized holding gains and losses for
held-to-maturity securities are excluded from earnings and shareholders'
equity.
Debt and equity securities classified as available-for-sale are those
securities that the Company intends to hold for an indefinite period of
time but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors,
including significant movements in interest rates, changes in the maturity
mix of the Company's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value. The difference between fair
value and cost, adjusted for amortization of premium and accretion of
discounts, results in an unrealized gain or loss. Unrealized gains or
losses are reported as accumulated other comprehensive income (loss), net
of the related deferred tax effect. Gains or losses from the sale of
securities are determined using the specific identification method.
Premiums and discounts are recognized in interest income using methods,
which approximate the interest method over their contractual lives.
41
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to
earnings and results in the establishment of a new cost basis for the
security. Declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers (1) the length
of time and the extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in
fair value.
Non-marketable equity securities include other investments which are
carried at fair value as well as Federal Reserve Bank stock and the Banks'
required investment in the capital stock of the Federal Home Loan Bank
which are carried at cost which approximates fair value.
(c) Loans
Loans are stated at the principal amount outstanding, net of the allowance
for loan losses. Interest is credited to income as earned, based upon the
principal amount outstanding.
The accrual of interest on loans is discontinued when, in the opinion of
management, the borrower is unable to meet payments as they become due.
Interest accrued in the current year is reversed against interest income,
and prior years' interest is charged to the allowance for loan losses.
Interest income on impaired loans is recognized to the extent interest
payments are received and the principal is considered fully collectible.
Mortgage loans held for sale are carried at the lower of aggregate cost or
estimated market value. Gains or losses on sales of loans held for sale are
computed using the specific-identification method and are reflected in
income at the time of sale.
The fair market value of servicing rights on mortgage loans that are sold
with servicing retained is capitalized. The capitalized servicing rights
are amortized against income based on the estimated lives of the loans.
Capitalized servicing rights are evaluated for impairment based on the fair
value of the servicing rights and any impairment is reflected in income.
(d) Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to
operations and is reduced by loan charge-offs less recoveries. Management
utilizes an approach, which provides for general and specific valuation
allowances, that is based on current economic conditions, past losses,
collection experience, risk characteristics of the portfolio, assessment of
collateral values by obtaining independent appraisals for significant
properties, and such other factors which, in management's judgment, deserve
current recognition in estimating loan losses, to determine the appropriate
level of the allowance for loan losses.
The allowance for loan losses related to impaired loans that are identified
for evaluation is based on discounted cash flow using the loan's initial
effective interest rate or the fair value, less selling costs, of the
collateral for collateral dependent loans.
Loans are categorized as "impaired" when, based on current information or
events, it is probable that the Company will be unable to collect all
amounts due, including principal and interest, in accordance with the
contractual terms of the loan agreement. The Company reviews all
non-accrual and substantially delinquent loans, as well as problem loans
identified by management, for impairment as defined above. A specific
reserve amount will be established for impaired loans in which the present
value of the expected cash flows to be generated is less than the amount of
the loan recorded on the Company's books. As an alternative to discounting,
the Company may use the "fair value" of any collateral supporting a
collateral-dependent loan in reviewing the necessity for establishing a
specific loan loss reserve amount. Specific reserves will be established
for accounts having a collateral deficiency estimated to be $50,000 or
more. The Company's general reserve is maintained at an adequate level to
cover accounts having a collateral deficiency of less than $50,000. Loans
evaluated as groups or homogeneous pools of loans will be excluded from
this analysis.
42
The Company utilizes their data processing system to identify loan payments
not made by their contractual due date and calculate the number of days
each loan exceeds the contractual due dates. The accrual of interest on any
loan is discontinued when, in the opinion of management, there is
reasonable doubt as to the collectibility of interest or principal.
Management believes the allowance for loan losses is adequate to absorb
probable credit losses inherent in the loan portfolio. While management
uses available information to recognize loan losses, future additions to
the allowance for loan losses may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the adequacy of the
allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance for loan losses based on their
judgments of information available to them at the time of their
examination.
(e) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization applicable to furniture and
equipment and buildings and leasehold improvements is charged to the
related occupancy or equipment expense using straight-line and accelerated
methods over the estimated useful lives of the assets. Estimated lives are
3 to 39 years for buildings and leasehold improvements and 3 to 7 years for
furniture and equipment. Maintenance and repairs are charged to operations
as incurred.
(f) Other Real Estate
Other real estate, included in other assets in the accompanying
consolidated balance sheets, is initially recorded at fair value, if it
will be held and used, or at its fair value less costs to sell if it will
be disposed of. If, subsequent to foreclosure, the fair value is less than
the carrying amount, the carrying value is reduced through a charge to
income. Expenses incurred in maintaining the properties are charged to
operations. The Company had no other real estate owned at December 31, 2003
and $58,000 at December 31, 2002.
(g) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(h) Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common stock shares outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average number of
common stock and dilutive potential common shares outstanding. Options to
purchase shares of the Company's common stock and stock appreciation rights
are the only dilutive potential common shares. The weighted average number
of dilutive potential common shares is calculated using the treasury stock
method.
Earnings per share has been computed as follows:
2003 2002 2001
---------------------------------------
Net Income ............................................ $16,605,000 $17,381,000 $16,171,000
Shares:
Weighted average common shares outstanding .......... 10,242,929 10,792,092 10,930,736
Dilutive effect of outstanding options, as determined
by the application of the treasury stock method ... 116,907 86,731 207,554
---------------------------------------
Weighted average common shares outstanding,
as adjusted ....................................... 10,359,836 10,878,823 11,138,290
=======================================
Basic earnings per share .............................. $ 1.62 $ 1.61 $ 1.48
=======================================
Diluted earnings per share ............................ $ 1.60 $ 1.60 $ 1.45
=========== =========== ===========
(i) Cash and Cash Equivalents
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. Cash flows from loans, deposits, and federal funds purchased,
repurchase agreements and notes payable are reported net.
43
(j) Reclassification
Certain amounts in the 2001 and 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.
(k) Stock Option Plans
The Company has five stock-based compensation plans which have been in
existence for all periods presented, and which are more fully described in
Note 13. 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.
2003 2002 2001
--------------------------------------
Net income on common stock:
As reported .................................. $ 16,605 $ 17,381 $ 16,171
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ........... (263) (290) (293)
--------------------------------------
Pro forma ................................. $ 16,342 $ 17,091 $ 15,878
======================================
Basic earnings per share:
As reported .................................. $ 1.62 $ 1.61 $ 1.48
Pro forma .................................... 1.60 1.58 1.45
Diluted earnings per share:
As reported .................................. $ 1.60 $ 1.60 $ 1.45
Pro forma .................................... 1.58 1.57 1.43
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.
2003 2002 2001
----------------------------------------
Number of options granted ...... 135,000 158,000 169,050
Risk-free interest rate ........ 3.64% 5.20% 5.05%
Expected life, in years ........ 8.00 8.00 6.97
Expected volatility ............ 13.35% 10.34% 14.10%
Expected dividend yield ........ 2.42% 2.80% 2.23%
3. Cash and Due from Banks
The compensating balances held at correspondent banks were $35,630,000 and
$47,424,000 at December 31, 2003 and 2002, respectively. The Banks maintain such
compensating balances with correspondent banks to offset charges for services
rendered by those banks. In addition, the Banks were required by the Federal
Reserve Bank to maintain reserves in the form of cash on hand or balances at the
Federal Reserve Bank. The balance of reserves held was $10,369,000 and
$8,312,000 at December 31, 2003 and 2002, respectively.
44
4. Investments in Debt and Equity Securities
The amortized cost and fair values of investments in debt and equity securities
(in thousands) were as follows:
Available-for-Sale
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
December 31, 2003
U.S. Treasury and other
government agencies ......................................................... $217,773 $ 2,917 $ 491 $220,199
Mortgage-backed securities .................................................... 23,196 518 707 23,007
Obligations of state and political subdivisions ............................... 16,319 999 1 17,317
Other ......................................................................... 5,391 981 981 5,391
-----------------------------------------
$262,679 $ 5,415 $ 2,180 $265,914
=========================================
December 31, 2002
U.S. Treasury and other
government agencies ......................................................... $182,726 $ 5,815 $ 6 $188,535
Mortgage-backed securities .................................................... 29,987 927 30 30,884
Obligations of state and political subdivisions ............................... 15,248 922 2 16,168
Other ......................................................................... 6,375 322 1,668 5,029
-----------------------------------------
$234,336 $ 7,986 $ 1,706 $240,616
=========================================
Held-to-Maturity
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
December 31, 2003
U.S. Treasury and other
government agencies ......................................................... $ 10,704 $ 3 $ 154 $ 10,553
Mortgage-backed securities .................................................... 50,029 81 1,789 48,321
Obligations of state and political subdivisions ............................... 36,323 1,433 2 37,754
-----------------------------------------
$ 97,056 $ 1,517 $ 1,945 $ 96,628
=========================================
December 31, 2002
U.S. Treasury and other
government agencies ......................................................... $ 1,750 $ 4 $ -- $ 1,754
Mortgage-backed securities .................................................... 23,595 184 48 23,731
Obligations of state and political subdivisions ............................... 43,218 1,787 1 45,004
-----------------------------------------
$ 68,563 $ 1,975 $ 49 $ 70,489
=========================================
45
Continuous gross unrealized losses of investments in debt and equity securities
(in thousands) which are classified as temporary were as follows:
Continuous Continuous
Unrealized Losses Unrealized Losses
Existing for Less Existing Greater
Than 12 months Than 12 months Total
------------------ ------------------- ------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------------------------------------------------------
Available-for-Sale:
U.S. Treasury and other
government agencies .......... $56,784 $ 491 $ -- $ -- $56,784 $ 491
Mortgage-backed securities ..... 9,854 707 -- -- 9,854 707
Obligations of state and
political subdivisions ....... 1,114 1 -- -- 1,114 1
---------------------------------------------------------
Subtotal, debt securities $67,752 $ 1,199 $ -- $ -- $67,752 $ 1,199
Other .......................... -- -- 1,433 981 1,433 981
---------------------------------------------------------
Total temporarily impaired
securities ............... $67,752 $ 1,199 $ 1,433 $ 981 $69,185 $ 2,180
=========================================================
Held-to-Maturity:
U.S. Treasury and other
government agencies .......... $ 8,094 $ 154 $ -- $ -- $ 8,094 $ 154
Mortgage-backed securities ..... 38,654 1,789 -- -- 38,654 1,789
Obligations of state and
political subdivisions ....... 346 2 -- -- 346 2
---------------------------------------------------------
Total temporarily impaired
securities ............... $47,094 $ 1,945 $ -- $ -- $47,094 $ 1,945
=========================================================
The $981,000 continuous unrealized loss greater than 12 months on other
securities is made up of 10 stocks and is believed to be a temporary loss. The
loss on these stocks at December 31, 2002 was $1,331,000 compared to $981,000 at
December 31, 2003, an improvement of $350,000. Management believes the market
value of these stocks will continue to improve as the economy continues to
recover. Unrealized losses on debt securities are generally due to changes in
interest rates and, as such, are considered, by the Company, to be temporary.
A summary of non-marketable equity securities (in thousands) at December 31,
2003 and 2002 is as follows:
2003 2002
--------------------
Federal Home Loan Bank Stock, at cost .............. $4,028 $3,732
Federal Reserve Bank Stock, at cost ................ 231 231
Other investments, at fair value ................... 3,497 3,068
--------------------
$7,756 $7,031
====================
Realized gains and (losses) (in thousands) on sales and maturities for the years
ended December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001
----------------------------------
Gross gains ............................. $ 173 $ 1,016 $ 563
Gross (losses) .......................... (185) (805) (453)
---------------------------------
Net gains (losses) ...................... $ (12) $ 211 $ 110
=================================
Applicable income taxes (benefit) ....... $ (5) $ 84 $ 39
=================================
46
Investments in debt and equity securities with a carrying value of $244,099,000
and $212,414,000 were pledged at December 31, 2003 and 2002, respectively, to
secure public deposits, repurchase agreements, and for other purposes as
required or permitted by law.
The amortized cost and fair value of investments in debt and equity securities
(in thousands) at December 31, 2003, by contractual maturity, are shown below.
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.
Therefore, these securities and equity securities with no stated maturities are
not included in the following maturity summary.
Available-For-Sale Held-To-Maturity
------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------
Due in one year or less .............. $ 57,433 $ 58,274 $ 13,504 $ 13,692
Due after one year through five years 170,361 172,458 25,720 26,687
Due after five years through ten years 5,277 5,675 7,298 7,360
Due after ten years .................. 1,021 1,109 505 568
-----------------------------------------
$234,092 $237,516 $ 47,027 $ 48,307
Mortgage-backed securities ........... 23,196 23,007 50,029 48,321
Marketable equity securities ......... 5,391 5,391 -- --
Non-marketable equity securities ..... 7,756 7,756 -- --
-----------------------------------------
Total debt securities ...... $270,435 $273,670 $ 97,056 $ 96,628
=========================================
5. Loans
A summary of loans (in thousands), by classification, at December 31, 2003 and
2002 is as follows:
2003 2002
-----------------------
Commercial, financial, and agricultural .......... $249,795 $234,045
Real estate ...................................... 348,997 343,827
Installment and consumer ......................... 77,253 95,529
-----------------------
$676,045 $673,401
Less:
Allowance for loan losses ................... 9,786 9,259
-----------------------
$666,259 $664,142
=======================
The Company makes commercial, financial, and agricultural; real estate; and
installment and consumer loans to customers located in central Illinois and the
surrounding communities. As such, the Company is susceptible to changes in the
economic environment in central Illinois.
During 2003, 2002 and 2001, the Company sold approximately $209,192,000,
$138,898,000 and $104,155,000, respectively, of residential mortgage loans in
the secondary market with servicing released on approximately $50,595,000,
$49,040,000 and $52,511,000, respectively. Gross gains of approximately
$2,542,000, $1,385,000 and $856,000, and gross losses of approximately $6,000,
$17,000 and $28,000, were realized on the sales during 2003, 2002 and 2001,
respectively. Capitalized mortgage servicing rights totaled $949,000 and
$544,000 at December 31, 2003 and 2002, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid balances of these loans consisted
of the following (in thousands) at December 31, 2003, 2002 and 2001:
2003 2002 2001
--------------------------------
Fannie Mae ................................. $191,505 $137,888 $107,950
Freddie Mac ................................ 10,287 6,250 4,216
Illinois Housing Development Authority ..... 1,219 1,655 2,288
47
In the normal course of business, loans are made to directors, executive
officers, and principal shareholders of the Company and to parties which the
Company or its directors, executive officers, and shareholders have the ability
to significantly influence its management or operating policies (related
parties). The terms of these loans, including interest rates and collateral, are
similar to those prevailing for comparable transactions with other customers and
do not involve more than a normal risk of collectibility. Activity associated
with loans (in thousands) made to related parties during 2003 was as follows:
2003
--------
Balance, January 1 ..................................... $ 49,617
New loans .............................................. 40,503
Repayments ............................................. (51,527)
--------
Balance, December 31 ................................... $ 38,593
========
At December 31, 2003, one to four family real estate mortgage loans of
approximately $75,115,000 were pledged to secure advances from the Federal Home
Loan Bank, and approximately $25,057,000 of consumer loans were pledged to the
Federal Reserve Bank to secure potential future borrowings from the Fed Discount
Window.
Activity in the allowance for loan losses (in thousands) for 2003, 2002 and 2001
was as follows:
2003 2002 2001
-----------------------------
Balance, beginning of year .................... $ 9,259 $ 9,259 $ 8,879
Provision charged to expense .................. 1,470 1,450 2,670
Loans charged off ............................. (1,640) (1,927) (2,673)
Recoveries on loans previously charged off .... 697 477 383
-----------------------------
Balance, end of year .......................... $ 9,786 $ 9,259 $ 9,259
=============================
The following table presents summary data on nonaccrual and other impaired loans
(in thousands) at December 31, 2003, 2002 and 2001:
2003 2002 2001
-----------------------
Impaired loans on nonaccrual ......................... $ 130 $ 764 $ 125
Impaired loans continuing to accrue interest ......... 288 -- --
------ ----- ------
Total impaired loans ................................. $ 418 $ 764 $ 125
====== ===== ======
Other non-accrual loans not classified
as impaired ....................................... $ 269 $ 628 $3,216
====== ===== ======
Loans contractually past due 90 days or
more, still accruing interest and not classified
as impaired ....................................... $ 590 $ 829 $1,774
====== ===== ======
Allowance for loan losses on impaired loans .......... $ 63 $ 115 $ 19
====== ===== ======
Impaired loans for which there is no related
allowance for loan losses ......................... $ -- $ -- $ --
====== ===== ======
Average recorded investment in impaired
loans ............................................. $ 847 $ 515 $ 142
====== ===== ======
Interest income recognized from impaired
loans ............................................. $ 13 $ -- $ --
====== ===== ======
Cash basis interest income recognized from
impaired loans .................................... $ 10 $ 6 $ 5
====== ===== ======
48
6. Premises and Equipment
A summary of premises and equipment (in thousands) at December 31, 2003 and 2002
is as follows:
2003 2002
-------------------
Land ................................................... $ 4,818 $ 4,788
Furniture and equipment ................................ 14,951 14,889
Buildings and leasehold improvements ................... 23,947 23,388
-------------------
$43,716 $43,065
Less: accumulated depreciation and amortization ........ 26,094 24,716
-------------------
$17,622 $18,349
===================
Depreciation and amortization expense was $2,453,000, $2,647,000 and $2,731,000
for 2003, 2002 and 2001, respectively.
The Company leases various operating facilities and equipment under
noncancellable operating lease arrangements. These leases expire at various
dates through March 2008 and have renewal options to extend the lease terms for
various dates. The rental expense for these operating leases was $218,000,
$240,000 and $239,000 in 2003, 2002 and 2001, respectively.
Minimum annual rental payments required under the operating leases (in
thousands), which have initial or remaining terms in excess of one year at
December 31, 2003 are as follows:
2004 $ 201
2005 143
2006 134
2007 115
2008 2
--------
$ 595
========
7. Deposits
The aggregate amount of time certificate of deposits in denominations of
$100,000 or more was $113,917,000 and $118,173,000 at December 31, 2003 and
2002, respectively. As of December 31, 2003, the scheduled maturities of time
deposits (in thousands) were as follows:
2004 $ 203,731
2005 83,902
2006 22,018
2007 17,720
2008 12,549
Thereafter 6
---------
$ 339,926
=========
8. Federal Funds Purchased, Repurchase Agreements, and Notes Payable
A summary of short-term borrowings (in thousands) at December 31, 2003 and 2002
is as follows:
2003 2002
---------------------
Federal funds purchased .............................. $ 1,550 $ 3,700
U.S. Treasury demand notes ........................... 1,000 1,000
Securities sold under agreements to repurchase ....... 100,448 75,951
---------------------
$102,998 $ 80,651
=====================
49
Information relating to short-term borrowings (dollars in thousands) is as
follows:
2003 2002 2001
------------------------------
Federal funds purchased:
Average daily balance ....................... $ 5,004 $ 4,599 $ 4,629
Maximum balance at month-end ................ $ 7,550 $ 21,300 $ 12,090
Weighted average interest rate at year-end .. 0.56% 0.50% 1.29%
Weighted average interest rate for the year . 0.81% 1.70% 4.36%
Securities sold under agreements to repurchase:
Average daily balance ....................... $ 89,261 $ 62,298 $ 68,061
Maximum balance at month-end ................ $100,448 $ 75,951 $ 77,281
Weighted average interest rate at year-end .. 1.06% 1.36% 2.27%
Weighted average interest rate for the year . 1.17% 1.71% 3.32%
U.S. Treasury demand notes:
Average daily balance ....................... $ 764 $ 1,459 $ 2,228
Maximum balance at month-end ................ $ 1,000 $ 4,437 $ 5,186
Weighted average interest rate at year-end .. 0.72% 1.14% 2.70%
Weighted average interest rate for the year . 0.91% 1.58% 4.12%
The securities underlying the agreements to repurchase are under the control of
the Banks.
9. Federal Home Loan Bank Advances and Other Borrowings
A summary of Federal Home Loan Bank (FHLB) advances and other borrowings
(dollars in thousands) at December 31, 2003 is as follows:
December 31
----------------------------------------------------------------
2003 2002
---------------------------------------------------- -------
Weighted
FHLB Other Average
Advances Borrowings Total Rate Total
----------------------------------------------------------------
Maturing in year ending:
2003 $ -- $ -- $ -- --% $ 23
2004 -- 23 23 4.25% 23
2005 -- 93 93 3.17% 23
2006 5,000 2,221 7,221 4.81% 5,023
2007 2,597 23 2,620 6.82% 2,691
2008 20,000 23 20,023 5.23% 20,023
----------------------------------------------------------------
$ 27,597 $ 2,383 $ 29,980 5.26% $ 27,806
================================================================
The terms of a security agreement with the FHLB require the Banks to pledge as
collateral for advances both qualifying first mortgage loans in an amount equal
to at least 167% of these advances and all stock of the FHLB. Advances are
subject to restrictions or penalties in the event of prepayment. The Banks had a
total remaining borrowing capacity with the FHLB of approximately $52,973,000 at
December 31, 2003 at a rate equal to the FHLB current advance rates.
The other borrowings include $2.268 million to finance an investment in a
low-income housing development and $115,000 for the purchase of land. Principal
of $70,000 is due August 22, 2005 with the remaining balance due August 22, 2006
on the low-income housing development investment. Interest is based on the
one-month LIBOR rate plus 1.70%. The loan rate at December 31, 2003 was 2.82%.
The land was originally purchased in 1999 at a cost of $266,000, with principal
of $23,000 and annual interest due March 8th of each year until the balance has
been paid in full. Interest is based on the prime rate at March 8th of each
year. The rate at December 31, 2003 was 4.25%.
10. Line of Credit
The Company has an unsecured line of credit of $10,000,000 from a third party
lender. As of December 31, 2003, the entire line was available.
50
11. Income Taxes
Federal income tax expense (in thousands) for 2003, 2002 and 2001 is summarized
as follows:
2003 2002 2001
-----------------------------------------
Federal ..................... $ 8,480 $ 8,707 $ 8,353
State ....................... 998 829 1,026
-----------------------------------------
Current ..................... 9,478 9,536 9,379
Deferred .................... (637) (1,016) (1,643)
-----------------------------------------
Total ....................... $ 8,841 $ 8,520 $ 7,736
=========================================
Actual income tax expense (in thousands) for 2003, 2002 and 2001 differ from the
"expected" income taxes (computed by applying the maximum U.S. federal corporate
income tax rate of 35% to earnings before income taxes) as follows:
2003 2002 2001
---------------------------------
Computed "expected" income taxes ........ $ 8,906 $ 9,066 $ 8,367
Tax-exempt interest income, net of
disallowed interest expense ........... (744) (764) (718)
State tax, net of federal benefit ....... 649 539 667
Other, net .............................. 30 (321) (580)
---------------------------------
$ 8,841 $ 8,520 $ 7,736
=================================
The tax effects of temporary differences (in thousands) that give rise to
significant portions of the deferred tax assets and deferred tax liabilities,
included in other assets, at December 31, 2003 and 2002 are as follows:
2003 2002
------------------
Deferred tax assets:
Allowance for loan losses ............................... $ 3,889 $ 3,347
Deferred compensation ................................... 1,564 1,611
Stock appreciation rights ............................... 36 73
Other employee benefits ................................. 279 115
Phantom stock ........................................... 282 225
Other ................................................... 111 148
------------------
Total deferred tax assets ......................... $ 6,161 $ 5,519
------------------
Deferred tax liabilities:
Unrealized holding gain on available-for-sale securities $(1,294) $(2,517)
Premises and equipment ................................. (658) (852)
Mortgage servicing rights .............................. (201) (153)
Deferred loan fees ..................................... (197) (93)
Discount accretion ..................................... (61) (138)
FHLB Stock Dividend .................................... (372) (248)
------------------
Total deferred tax liabilities .................... $(2,783) $(4,001)
------------------
Net deferred tax assets ....................... $ 3,378 $ 1,518
==================
12. Retirement Plans
The Company has established a profit sharing plan and a 401(k) plan for
substantially all employees who meet the eligibility requirements. The 401(k)
plan allowed for participants' contributions up to the maximum amount allowed by
IRS regulations, of which, the first 6% of gross salary was available for the
Company's 50% match. The profit sharing plan is non-contributory. All
contributions to the profit sharing plan are at the discretion of the Company.
Total contributions by the Company totaled $887,000, $926,000 and $746,000 for
2003, 2002 and 2001, respectively.
Certain key officers and directors participate in various deferred compensation
or supplemental retirement agreements with the Company. The Company accrues the
liability for these agreements based on the present value of the amount the
employee or director is currently eligible to receive. The Company recorded
expenses of $288,000, $281,000 and $281,000 in 2003, 2002 and 2001,
respectively, related to these agreements. At December 31, 2003 and 2002, the
Company had a recorded liability in the amount of approximately $3,915,000 and
$3,731,000, respectively for these plans.
51
Additionally, in connection with the merger, the Company assumed the outstanding
liability for a deferred compensation plan for nonemployee directors of the
Company which allowed participating directors to defer directors' fees in a
fixed income fund or, alternatively, in the form of "phantom stock units." For
directors that elected to receive phantom stock, a deferred compensation
account, included in other liabilities on the consolidated balance sheet, was
credited with phantom stock units. After the merger, no additional contributions
were allowed to these plans, however, phantom stock units continue to be
increased by any dividends or stock splits declared by the Company. At December
31, 2003 and 2002, there were 23,205 and 23,326 phantom stock units with a
recorded liability in the amount of $710,000 and $567,000, respectively.
Additionally, the Company had a recorded liability of $20,000 and $25,000 at
December 31, 2003 and 2002, respectively for the fixed income fund.
13. Stock Options and Related Plans
In 2000, after the merger of BankIllinois Financial Corporation and First
Decatur Bancshares, Inc. to form the Company, the Company established a stock
incentive plan, which provides for the granting of options of the Company's
common stock to certain directors, officers and employees. This plan provides
for the granting of both qualified and non-qualified options. Existing director
options granted prior to 2003 are fully vested and exercisable on the date
granted while director options granted in 2003 vest, and thus become
exercisable, ratably over a one-year period from the date granted. Existing
officer and employee options vest, and thus become exercisable, ratably over a
three-year period from the date granted. Under the 2000 incentive plan, the
Company has outstanding options of 545,381 shares and 1,626,458 remain eligible
for grant. This is the Company's only existing stock incentive plan.
Additionally, in connection with the merger, the Company assumed all of the
outstanding options under First Decatur Bancshares, Inc.'s and BankIllinois
Financial Corporation's stock option and incentive plans. There were four plans
in place at the time of the merger. All of the options granted under these prior
plans fully vested at the time of the merger and no additional options were
available for grant after the merger. One of the plans included the granting of
options in tandem with stock appreciation rights ("SAR's"). As of December 31,
2003, there were options outstanding for an aggregate of 36,399 shares of the
Company's common stock and 3,992 SAR's under the prior plans.
The following is a summary of the changes in options outstanding under the stock
incentive and stock option plans:
2003 2002 2001
-----------------------------------------------------------------------------------
Grant Grant Grant
Price Price Price
Shares Range Shares Range Shares Range
------------------------------------------------------------------------------------
Options outstanding,
beginning of year ............ 589,250 $ 6.92 - $19.76 868,998 $ 5.36 - $19.76 726,273 $ 5.36 - $19.76
Granted ........................ 135,000 $24.80 - $24.85 158,000 $18.60 - $18.60 169,050 $17.50 - $17.50
Exercised ...................... (142,470) $ 6.92 - $24.80 (428,553) $ 5.36 - $19.76 (17,360) $ 5.36 - $12.05
Options forfeited .............. -- -- (9,195) $17.50 - $18.60 (8,965) $16.86 - $19.76
------------------------------------------------------------------------------------
Options oustanding, end of year 581,780 $ 6.92 - $24.85 589,250 $ 6.92 - $19.76 868,998 $ 5.36 - $19.76
====================================================================================
Options exercisable, end of year 467,769 $ 6.92 - $24.85 493,893 $ 6.92 - $19.76 784,769 $ 5.36 - $19.76
====================================================================================
Weighted average fair value
of options granted ........... $3.96 $3.36 $3.73
====================================================================================
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
Range as of Remaining Average as of Average
of December 31, Contractual Exercise December 31, Exercise
Exercise price 2003 Life Price 2003 Price
-----------------------------------------------------------------------------------------
$ 6.92 - $6.92 3,992 1.0 $ 6.92 3,992 $ 6.92
$17.50 - $19.76 442,943 6.8 18.26 404,975 18.24
$24.80 - $24.85 134,845 9.2 24.80 58,802 24.80
-------------------------------------------------------------------
581,780 7.3 $ 19.70 467,769 $ 18.97
===================================================================
52
14. Dividend Restrictions
Without prior approval of the Comptroller of the Currency, The First National
Bank of Decatur is restricted by national banking laws as to the maximum amount
of dividends it can pay in any calendar year to The First National Bank of
Decatur's retained net profits (as defined) for that year and the two preceding
years. At December 31, 2003, The First National Bank of Decatur had paid
dividends in excess of available retained earnings and, therefore, must obtain
approval from the Comptroller of the Currency before declaring future dividends.
Without prior approval, BankIllinois is restricted by Illinois law and
regulations of the Office of Banks and Real Estate, State of Illinois, and the
Federal Deposit Insurance Corporation as to the maximum amount of dividends it
can pay to its parent to the balance of the retained earnings account, as
adjusted (as defined). At December 31, 2003, BankIllinois had available retained
earnings of approximately $29,378,000 for the payment of dividends without
obtaining prior regulatory approval.
15. Condensed Financial Information of Parent Company
Following are the condensed balance sheets as of December 31, 2003 and 2002 and
the related condensed statements of income and cash flows for the years ended
December 31, 2003, 2002 and 2001 for Main Street Trust, Inc.:
Condensed Balance Sheets
------------------------
(in thousands)
2003 2002
-----------------------
Assets:
Cash ........................................... $ 10,841 $ 2,287
Investment in Banks ............................ 88,370 118,251
Investment in FirsTech ......................... 3,408 6,524
Investment in other securities ................. 8,655 6,875
Other assets ................................... 6,967 3,306
-----------------------
$118,241 $137,243
=======================
Liabilities and shareholders' equity:
Dividend payable ............................... $ 1,995 $ 1,570
Other borrowings ............................... 2,268 --
Other liabilities .............................. 2,528 1,203
Shareholders' equity ........................... 111,450 134,470
-----------------------
$118,241 $137,243
=======================
Condensed Statements of Income
------------------------------
(in thousands)
2003 2002 2001
--------------------------------
Revenue:
Dividends received from subsidiaries ............ $ 47,400 $ 20,000 $ 12,000
Interest income on deposits ..................... 77 54 39
Income on securities ............................ 389 152 72
Securities transactions, net .................... (106) (193) (279)
Other ........................................... 4,759 136 131
--------------------------------
Total revenue ............................. 52,519 20,149 11,963
--------------------------------
Expenses:
Salary and benefits ............................. 4,066 -- --
Reconciliation liability ........................ -- -- (2,500)
Other ........................................... 1,763 1,556 1,055
--------------------------------
Total expenses ............................ 5,829 1,556 (1,445)
-------------------------------
Income before applicable income tax expense
(benefit) and equity in undistributed
income of subsidiaries .................... 46,690 18,593 13,408
Applicable income tax expense (benefit) ........... (286) (564) 591
Equity in undistributed income of subsidiaries .... (30,371) (1,776) 3,354
--------------------------------
Net income ................................ $ 16,605 $ 17,381 $ 16,171
================================
53
Condensed Statements of Cash Flows
----------------------------------
(in thousands)
2003 2002 2001
--------------------------------
Cash flows from operating activities:
Net income ...................................... $ 16,605 $ 17,381 $ 16,171
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries 30,371 1,776 (3,354)
Depreciation ................................. 482 30 30
Other, net ................................... (2,043) (812) (1,649)
--------------------------------
Net cash provided by operating activities: 45,415 18,375 11,198
--------------------------------
Cash flows from investing activities:
Equity securities transactions, net ............. (462) (1,687) (37)
Purchases of premises and equipment ............. (1,348) -- (12)
--------------------------------
Net cash used in investing activities ..... (1,810) (1,687) (49)
--------------------------------
Cash flows from financing activities:
Stock transactions, net ......................... (30,111) (15,369) (2,802)
Fractional shares purchased following
stock dividend and merger .................... -- -- (6)
Proceeds from other borrowings, net ............. 2,268 -- --
Cash dividends paid ............................. (7,142) (5,634) (4,540)
Issuance of new shares of common stock .......... -- 1,222 --
Other, net ...................................... (66) (31) 23
--------------------------------
Net cash used in financing activities ..... (35,051) (19,812) (7,325)
--------------------------------
Cash at beginning of year .......................... 2,287 5,411 1,587
--------------------------------
Cash at end of year ................................ $ 10,841 $ 2,287 $ 5,411
================================
54
16. Quarterly Results of Operations (Unaudited) (in thousands, except per share
data)
Condensed Statements of Cash Flows
(in thousands)
Year Ended December 31, 2003
Three Months Ended
-------------------------------------------------
December 31 September 30 June 30 March 31
-------------------------------------------------
Interest income ...................... $13,406 $13,686 $14,028 $14,566
Interest expense ..................... 3,913 4,008 4,282 4,520
-------------------------------------------------
Net interest income ............. 9,493 9,678 9,746 10,046
Provision for losses on loans ........ 480 330 330 330
-------------------------------------------------
Net interest income after
provision for losses
on loans ................... 9,013 9,348 9,416 9,716
Non-interest income .................. 5,104 5,420 4,934 4,836
Non-interest expense ................. 7,906 8,250 8,121 8,064
-------------------------------------------------
Income before income taxes ...... 6,211 6,518 6,229 6,488
Income taxes ......................... 2,301 2,253 2,097 2,190
-------------------------------------------------
Net income ...................... $ 3,910 $ 4,265 $ 4,132 $ 4,298
=================================================
Basic earnings per share ............. $ 0.41 $ 0.41 $ 0.39 $ 0.41
=================================================
Diluted earnings per share ........... $ 0.40 $ 0.40 $ 0.39 $ 0.41
=================================================
Year Ended December 31, 2002
Three Months Ended
-------------------------------------------------
December 31 September 30 June 30 March 31
-------------------------------------------------
Interest income ...................... $15,265 $15,871 $16,020 $16,207
Interest expense ..................... 4,951 5,399 5,540 5,827
-------------------------------------------------
Net interest income ............. 10,314 10,472 10,480 10,380
Provision for losses on loans ........ 460 330 330 330
-------------------------------------------------
Net interest income after
provision for losses
on loans ................... 9,854 10,142 10,150 10,050
Non-interest income .................. 4,709 4,638 4,765 4,754
Non-interest expense ................. 7,912 8,091 8,960 8,198
-------------------------------------------------
Income before income taxes ...... 6,651 6,689 5,955 6,606
Income taxes ......................... 2,202 2,210 1,912 2,196
-------------------------------------------------
Net income ...................... $ 4,449 $ 4,479 $ 4,043 $ 4,410
=================================================
Basic earnings per share ............. $ 0.42 $ 0.43 $ 0.36 $ 0.40
=================================================
Diluted earnings per share ........... $ 0.42 $ 0.42 $ 0.36 $ 0.40
=================================================
55
17. Disclosures About 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.
These 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 December 31, 2003 and 2002:
2003 2002
-----------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments .................................... $237,615 $201,181
Standby letters of credit ...................... 20,192 11,563
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 receivable; inventory; property, plant and equipment; and
income-producing commercial properties. Also included in commitments is $3.440
million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Banks 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 Banks 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 Banks would be required to fund the commitment. The maximum potential
amount of future payments the Banks could be required to make is represented by
the contractual amount shown in the summary above. If the commitment is funded,
the banks would be entitled to seek recovery from the customer. At December 31,
2003 and 2002, no amounts have been recorded as liabilities for the Banks'
potential obligations under these guarantees.
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2003 and 2002:
2003 2002
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------
Assets:
Cash and cash equivalents ..................... $ 75,903 $ 75,903 $102,746 $102,746
Investments in debt and equity securities ..... 370,726 370,298 316,210 318,136
Mortgage loans held for sale .................. 632 632 2,972 2,972
Loans ......................................... 666,259 676,584 664,142 685,675
Accrued interest receivable ................... 6,430 6,430 7,315 7,315
Cash surrender value of life insurance ........ 5,499 5,499 5,026 5,026
Liabilities:
Deposits ...................................... $898,472 $902,653 $868,586 $885,487
Federal funds purchased, repurchase agreements,
and notes payable ......................... 102,998 103,028 80,651 80,692
FHLB advances and other borrowings ............ 29,980 30,133 27,806 28,963
Accrued interest payable ...................... 1,669 1,669 2,252 2,252
56
Management's fair value estimates, methods, and assumptions are set forth below
for the Company's financial instruments.
Cash and Cash Equivalents
-------------------------
The carrying value of cash and cash equivalents approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Investments in Debt and Equity Securities
-----------------------------------------
The fair value of investments in debt and equity securities is estimated based
on bid prices received from securities dealers.
Mortgage Loans Held For Sale
----------------------------
Fair values of mortgage loans held for sale are based on commitments on hand
from investors or prevailing market prices.
Loans
-----
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
nonperforming categories. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates equal to rates at which loans, similar in type, would be
originated at December 31, 2003 and 2002. Estimated maturities are based upon
the average remaining contractual lives for each loan classification. Fair value
for nonperforming loans is based on the use of discounted cash flow techniques.
Accrued Interest Receivable
---------------------------
The carrying value of accrued interest receivable approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
Cash Surrender Value of Life Insurance
--------------------------------------
Life insurance agreements reprice periodically with no significant change in
credit risk. Fair values approximate carrying value for these agreements.
Deposit Liabilities
-------------------
The fair value of deposits with no stated maturity, such as non-interest bearing
and interest bearing demand deposits and savings deposits is the amount payable
on demand. The fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using rates currently
offered for deposits of similar remaining maturities. The fair value estimates
do not include the benefit that results from the low-cost funding provided by
the deposit liabilities compared to the cost of borrowing funds in the market
nor the benefit derived from the customer relationship inherent in existing
deposits.
Federal Funds Purchased, Repurchase Agreements, and Notes Payable
-----------------------------------------------------------------
The fair value of federal funds purchased, repurchase agreements, and notes
payable is based on the discounted value of contractual cash flows. The discount
rate is estimated using current rates on federal funds purchased, repurchase
agreements, and notes payable with similar remaining maturities.
Federal Home Loan Bank Advances and Other Borrowings
----------------------------------------------------
The fair value of FHLB advances is based on the discounted value of contractual
cash flows. The discount rate is estimated using rates on current FHLB advances
with similar remaining maturities.
Accrued Interest Payable
------------------------
The carrying value of accrued interest payable approximates fair value due to
the relatively short period of time between the origination of the instrument
and its expected realization.
57
Commitments to Extend Credit and Standby Letters of Credit
----------------------------------------------------------
The fair value of commitments to extend credit is generally estimated using the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties. The estimated fair value of commitments to
extend credit and standby letters of credit approximates the balances of such
commitments.
18. Litigation
The Company and its subsidiaries are involved in various legal proceedings,
claims and litigation arising out of the ordinary course of business.
It is the opinion of management that the disposition or ultimate resolution of
any other claims and lawsuits arising out of the ordinary course of business
will not have a material adverse effect on the consolidated financial position
of the Company.
19. Regulatory Capital
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 capital 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 December 31,
2003, that the Company and its subsidiary banks exceeded all capital adequacy
requirements to which they are subject.
As of December 31, 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.
58
The Company's and the Banks' actual capital amounts and ratios as of December
31, 2003 and 2002 are presented in the following tables:
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual(1) Purposes: Action Provisions:
---------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------
As of December 31, 2003:
Total capital
(to risk-weighted assets)
Consolidated ..................... $118,821 14.5% $ 65,654 8.0% N/A
BankIllinois ..................... $ 60,520 11.9% $ 40,801 8.0% $ 51,001 10.0%
The First National Bank of Decatur $ 35,333 12.1% $ 23,430 8.0% $ 29,288 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ..................... $109,035 13.3% $ 32,827 4.0% N/A
BankIllinois ..................... $ 54,460 10.7% $ 20,401 4.0% $ 30,601 6.0%
The First National Bank of Decatur $ 31,670 10.8% $ 11,715 4.0% $ 17,573 6.0%
Tier I capital
(to average assets)
Consolidated ..................... $109,035 9.6% $ 45,336 4.0% N/A
BankIllinois ..................... $ 54,460 7.9% $ 27,638 4.0% $ 34,547 5.0%
The First National Bank of Decatur $ 31,670 7.4% $ 17,215 4.0% $ 21,519 5.0%
As of December 31, 2002:
Total capital
(to risk-weighted assets)
Consolidated ..................... $138,701 18.0% $ 61,660 8.0% N/A
BankIllinois ..................... $ 74,396 15.8% $ 37,685 8.0% $ 47,107 10.0%
The First National Bank of Decatur $ 48,351 16.0% $ 24,213 8.0% $ 30,266 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ..................... $129,442 16.8% $ 30,830 4.0% N/A
BankIllinois ..................... $ 68,739 14.6% $ 18,843 4.0% $ 28,264 6.0%
The First National Bank of Decatur $ 44,659 14.8% $ 12,106 4.0% $ 18,160 6.0%
Tier I capital
(to average assets)
Consolidated ..................... $129,442 11.8% $ 43,732 4.0% N/A
BankIllinois ..................... $ 68,739 10.5% $ 26,236 4.0% $ 32,795 5.0%
The First National Bank of Decatur $ 44,659 10.3% $ 17,324 4.0% $ 21,655 5.0%
1 The Banks' decreases in capital amounts and ratios between December 31,
2002 and 2003 were primarily due to dividends paid to Main Street Trust,
Inc. which were used to fund the tender offer that was completed in the
third quarter of 2003.
59
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None.
Item 9a. 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
December 31, 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 III
Item 10. Directors and Executive Officers of the Registrant
The information in the Company's 2004 Proxy Statement under the caption
"Election of Directors" and under the caption "Security Ownership of Certain
Beneficial Owners and Management" is incorporated by reference. The information
regarding executive officers not provided in the 2004 Proxy Statement is noted
below.
Executive Officers
The term of office for the executive officers of the Company is from the date of
election until the next annual organizational meeting of the Board of Directors.
In addition to the information provided in the 2004 Proxy Statement, the names
and ages of the executive officers of the Company as of December 31, 2003, as
well as the offices of the Company and the Subsidiaries held by these officers
on that date, and principal occupations for the past five years are set forth
below.
Name Position with Main Street, its subsidiaries
(Age) and occupation for the last five years
----- --------------------------------------
David B. White Executive Vice President and Chief Financial
(Age 52) Officer of Main Street, BankIllinois and The
First National Bank of Decatur and
Director of FirsTech; Executive Vice President
and Chief Financial Officer of
BankIllinois Financial and BankIllinois
(1993-2000)
Christopher M. Shroyer President, Chief Executive Officer and
(Age 38) Director of The First National Bank of
Decatur; Executive Vice President, Lending,
The First National Bank of Decatur
(2000-2001); Senior Vice President, Lending,
The First National Bank of Decatur
(1999-2000); Vice President and Department
Head, Commercial Lending, The First National
Bank of Decatur (1997-1999)
Robert F. Plecki, Jr. President and Director of BankIllinois;
(Age 43) Executive Vice President, Retail Banking,
BankIllinois (1998-2001); Senior Vice
President, Retail Banking, BankIllinois
(1996-1998)
Leanne C. Heacock Executive Vice President, Management
(Age 38) Information Systems, Main Street, BankIllinois
and The First National Bank of Decatur and
Director of FirsTech; Executive Vice
President, Management Information Systems,
BankIllinois and The First National Bank of
Decatur (2001-2002); Executive Vice President,
Management Information Systems, BankIllinois
(1999-2001); Senior Vice President, Management
Information Systems, BankIllinois (1998-1999)
60
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires that the directors,
executive officers and persons who own more than 10% of our common stock file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. These persons are also required to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review of the copies of such
forms furnished to us and representations made by any reporting person
concerning whether a Form 5 was required to be filed for 2003, we are not aware
of any failures to comply with the filing requirements of Section 16(a) during
2003.
Item 11. Executive Compensation
The information in the 2004 Proxy Statement under the caption "Executive
Compensation" is incorporated by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The information in the 2004 Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management" is incorporated by
reference.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 2003 for
(i) all compensation plans previously approved by our shareholders and (ii) all
compensation plans not previously approved by our shareholders:
(a) the number of securities to be issued upon the exercise of outstanding
options, warrants and rights;
(b) the weighted-average exercise price of such outstanding options, warrants
and rights;
(c) other than securities to be issued upon the exercise of such outstanding
options, warrants and rights, the number of securities remaining available
for future issuance under the plans.
====================================================================================================================================
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------------------------------------------------------------------------------------------------------
Number of securities to be
issued upon exercise of Weighted-average exercise Number of securities remaining
Plan category outstanding options price of outstanding options available for future issuance
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders............... 545,381(1) $19.79 1,626,458
Equity compensation plans not
approved by security holders...... 0 -- --
--------------------------------------------------------------------------------------------
Total............................. 545,381 (1) $19.79 1,626,458
============================================================================================
(1) Does not include options assumed by the Company in 2000 in connection with
the merger of First Decatur Bancshares, Inc. and BankIllinois Financial
Corporation with and into the Company. At the time of the merger, there
were options issued under the Central Illinois Financial Corporation Stock
Option Plan, BankIllinois Financial Co. 1994 Stock Incentive Plan,
BankIllinois Financial Corporation 1996 Stock Incentive Plan and the First
Decatur Bancshares, Inc. Employee Stock Option Plan, each of which was
approved by stockholders of the respective company at the time of their
adoption. All of the options granted under these plans fully vested at the
time of the merger and no additional options were available for grant after
the merger. As of December 31, 2003, there were options outstanding for an
aggregate of 36,399 shares of the Company's common stock under the prior
plans with a weighted average exercise price of $18.35.
61
Item 13. Certain Relationships And Related Transactions
The information in the 2004 Proxy Statement under the caption "Transactions with
Management" is incorporated by reference.
Item 14. Principal Accountant Fees and Services
The information in the 2004 Proxy Statement under the caption "Independent
Public Accountants" is incorporated by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Index to Financial Statements
See page 34.
(a)(2) Financial Statement Schedules
N/A
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature
page to this Form 10-K is incorporated by reference.
(b) Reports on Form 8-K
On December 17, 2003, Main Street Trust, Inc. issued a
news release announcing its declaration of a quarterly
dividend to its stockholders.
On October 27, 2003, Main Street Trust, Inc. announced
that its Board of Directors has reinstated the Stock
Repurchase Program, allowing the purchase of up to 500,000
shares of the Company's outstanding stock. The Stock
Repurchase Program had been suspended during the Company's
common stock tender offer, which was completed September
30, 2003. On October 27, 2003, Main Street Trust, Inc.
issued a news release announcing its earnings for the
quarter ended September 30, 2003.
(c) Exhibits
The exhibits required to be filed with this Form 10-K are
included with this Form 10-K and are located immediately
following the Exhibit Index to this Form 10-K.
62
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 12, 2004.
By: /s/ Van A. Dukeman By: /s/ David B. White
----------------------------- ----------------------------
Van A. Dukeman David B. White
President, CEO and Director Executive Vice President and
Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 12, 2004.
/s/ Gregory B. Lykins
-----------------------------
Gregory B. Lykins Chairman and Director
/s/ Van A. Dukeman
-----------------------------
Van A. Dukeman President, CEO and Director
/s/ Phillip C. Wise
-----------------------------
Phillip C. Wise Executive Vice President and Director
/s/ David J. Downey
-----------------------------
David J. Downey Director
/s/ Larry D. Haab
-----------------------------
Larry D. Haab Director
/s/ Frederic L. Kenney
-----------------------------
Frederic L. Kenney Director
/s/ August C. Meyer, Jr.
-----------------------------
August C. Meyer, Jr. Director
/s/ Gene A. Salmon
-----------------------------
Gene A. Salmon Director
/s/ George T. Shapland
-----------------------------
George T. Shapland Director
/s/ Thomas G. Sloan
-----------------------------
Thomas G. Sloan Director
/s/ Roy V. VanBuskirk
-----------------------------
Roy V. VanBuskirk Director
/s/ H. Gale Zacheis
-----------------------------
H. Gale Zacheis Director
63
MAIN STREET TRUST, INC.
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
Incorporated
Exhibit No. Description Herein by Filed
Reference To Herewith
----------------------------------------------------------------------------------------------
3.1 Amended and Restated Exhibit 3.1 to the Form S-4 filed
Articles of Incorporation with the Commission on November 30,
1999 (SEC File No. 33-91759)
3.2 Bylaws Exhibit 3.2 to the Form S-4 filed
with the Commission on November 30,
1999 (SEC File No. 33-91759)
4.1 Specimen common stock Exhibit 4.1 to the Form 10-K filed
certificate with the Commission on March 30,
2001 (SEC File No. 000-30031)
4.2 Second Amended and Exhibit 4.2 to the Form 10-K filed
Restated Shareholders' with the Commission on March 30,
Agreement, dated as of 2001 (SEC File No. 000-30031)
November 1, 2000
10.1 Employment Agreement by Exhibit 10.1 to the Form 10-K filed
and between the Company with the Commission on March 29,
and Gregory B. Lykins 2002 (SEC File No. 000-30031)
10.2 Employment Agreement by Exhibit 10.2 to the Form 10-K filed
and between the Company with the Commission on March 29,
and Van A. Dukeman (2002 (SEC File No. 000-30031)
10.3 Employment Agreement by Exhibit 10.5 to the Registration
and between the Company Statement on Form S-4 filed with
and David B. White the Commission on March 15,
1996, as amended (SEC File No. 33-90342)
10.4 Employment Agreement by Exhibit 10.4 to the Form 10-K filed
and between the Company, with the Commission on March 29,
FirsTech, Inc. and Phillip 2002 (SEC File No. 000-30031)
C. Wise
10.5 Employment Agreement by Exhibit 10.5 to the Form 10-K filed
and between The First with the Commission on March 24,
National Bank of Decatur 2003 (SEC File No. 000-30031)
and Chris Shroyer
10.6 Employment Agreement by X
and between the Company
and Robert F. Plecki
21.1 Subsidiaries of the X
Registrant
23.1 Consent of McGladrey & X
Pullen, LLP
31.1 Certification of Chief X
Executive Officer Pursuant
to Rule 13a-14(a)/15d-
14(a)
31.2 Certification of Chief X
Financail Officer Pursuant
to Rule 13a-14(a)/15d-
14(a)
32.1 Certification of Chief X
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 X
Executive Officer Pursuant
to 18 U.S.C. Section 1350,
as adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
64