UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarterly
Period Ended September 30, 2004
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
------------------------------------------------------
(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)
Indicate by "X" whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by "X" whether the registrant is an accelerated filer (as defined by
Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of the registrant's common stock, as
of November 3, 2004
Main Street Trust, Inc. Common Stock 9,448,373
1
Table of Contents
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 30
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and Use
Of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits 31
SIGNATURES 32
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003
(Unaudited, in thousands, except share data)
September 30, December 31,
2004 2003
----------------------------
ASSETS
Cash and due from banks .......................................... $ 38,206 $ 45,899
Federal funds sold and interest bearing deposits ................. 62,869 30,004
--------------------------
Cash and cash equivalents ................................ 101,075 75,903
--------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value .............................. 269,452 265,914
Held-to-maturity, at cost (fair value of $91,396 and $96,628
at September 30, 2004 and December 31, 2003, respectively) ... 91,095 97,056
Non-marketable equity securities ............................... 7,632 7,756
--------------------------
Total investments in debt and equity securities .......... 368,179 370,726
--------------------------
Loans, net of allowance for loan losses of $9,963 and $9,786
at September 30, 2004 and December 31, 2003, respectively ...... 726,310 666,259
Mortgage loans held for sale ..................................... 910 632
Premises and equipment ........................................... 17,065 17,622
Accrued interest receivable ...................................... 7,119 6,430
Other assets ..................................................... 18,940 16,602
--------------------------
Total assets ............................................. $ 1,239,598 $ 1,154,174
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ......................................... $ 160,775 $ 162,175
Interest bearing ............................................. 829,260 736,297
--------------------------
Total deposits ........................................... 990,035 898,472
--------------------------
Federal funds purchased, repurchase agreements and notes payable 94,694 102,998
Federal Home Loan Bank advances and other borrowings ........... 29,902 29,980
Accrued interest payable ....................................... 2,304 1,669
Other liabilities .............................................. 9,735 9,605
--------------------------
Total liabilities ........................................ 1,126,670 1,042,724
--------------------------
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 ................................................ 55,189 55,271
Retained earnings .............................................. 106,592 101,521
Accumulated other comprehensive income ......................... 233 1,941
--------------------------
162,126 158,845
Less: treasury stock, at cost, 1,770,996 and 1,718,950 shares
at September 30, 2004 and December 31, 2003, respectively .... (49,198) (47,395)
--------------------------
Total shareholders' equity ............................... 112,928 111,450
--------------------------
Total liabilities and shareholders' equity ............... $ 1,239,598 $ 1,154,174
==========================
See accompanying notes to unaudited consolidated financial statements.
3
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Nine Months Ended September 30, 2004 and 2003
(Unaudited, in thousands, except share data)
2004 2003
---------------------------
Interest income:
Loans and fees on loans ........................................ $ 30,571 $ 31,548
Investments in debt and equity securities
Taxable ...................................................... 7,973 8,647
Tax-exempt ................................................... 1,424 1,722
Federal funds sold and interest bearing deposits ............... 339 363
---------------------------
Total interest income .................................... 40,307 42,280
---------------------------
Interest expense:
Deposits ....................................................... 10,189 10,837
Federal funds purchased, repurchase agreements and notes payable 893 817
Federal Home Loan Bank advances and other borrowings ........... 1,202 1,156
---------------------------
Total interest expense ................................... 12,284 12,810
---------------------------
Net interest income ...................................... 28,023 29,470
Provision for loan losses ........................................ 990 990
---------------------------
Net interest income after provision for loan losses ...... 27,033 28,480
---------------------------
Non-interest income:
Remittance processing .......................................... 5,635 5,312
Trust and brokerage fees ....................................... 4,831 4,230
Service charges on deposit accounts ............................ 1,820 1,906
Securities transactions, net ................................... 139 (49)
Gain on sales of mortgage loans, net ........................... 777 2,214
Other .......................................................... 2,075 1,577
---------------------------
Total non-interest income ................................ 15,277 15,190
---------------------------
Non-interest expense:
Salaries and employee benefits ................................. 13,978 13,893
Occupancy ...................................................... 1,968 1,847
Equipment ...................................................... 1,886 1,787
Data processing ................................................ 1,633 1,563
Office supplies ................................................ 887 962
Service charges from correspondent banks ....................... 652 698
Other .......................................................... 3,953 3,685
---------------------------
Total non-interest expense ............................... 24,957 24,435
---------------------------
Income before income taxes ............................... 17,353 19,235
Income taxes ..................................................... 6,137 6,540
---------------------------
Net income ............................................... $ 11,216 $ 12,695
===========================
Per share data:
Basic earnings per share ....................................... $ 1.18 $ 1.21
Weighted average shares of common stock outstanding ............ 9,491,827 10,491,883
Diluted earnings per share ..................................... $ 1.17 $ 1.20
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 9,607,752 10,604,327
See accompanying notes to unaudited consolidated financial statements.
4
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Nine Months Ended September 30, 2004 and 2003
(Unaudited, in thousands)
2004 2003
---------------------
Net income ............................................................................. $ 11,216 $ 12,695
---------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of
($1,083) and ($1,050) for September 30, 2004 and 2003, respectively .............. (1,625) (1,574)
Less: reclassification adjustment for (gains) losses included in net income, net of
tax of ($56) and $20 for September 30, 2004 and 2003, respectively .............. (83) 29
--------------------
Other comprehensive income (loss) .................................................... (1,708) (1,545)
--------------------
Comprehensive income ................................................................. $ 9,508 $ 11,150
====================
See accompanying notes to unaudited consolidated financial statements.
5
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended September 30, 2004 and 2003
(Unaudited, in thousands, except share data)
2004 2003
---------------------------
Interest income:
Loans and fees on loans ........................................ $ 10,507 $ 10,146
Investments in debt and equity securities
Taxable ...................................................... 2,560 2,875
Tax-exempt ................................................... 445 556
Federal funds sold and interest bearing deposits .............. 151 109
---------------------------
Total interest income .................................... 13,663 13,686
---------------------------
Interest expense:
Deposits ....................................................... 3,643 3,346
Federal funds purchased, repurchase agreements and notes payable 336 270
Federal Home Loan Bank advances and other borrowings ........... 405 392
---------------------------
Total interest expense ................................... 4,384 4,008
---------------------------
Net interest income ...................................... 9,279 9,678
Provision for loan losses ........................................ 330 330
---------------------------
Net interest income after provision for loan losses ...... 8,949 9,348
---------------------------
Non-interest income:
Remittance processing .......................................... 1,820 1,814
Trust and brokerage fees ....................................... 1,544 1,435
Service charges on deposit accounts ............................ 619 666
Securities transactions, net ................................... 133 (6)
Gain on sales of mortgage loans, net ........................... 229 972
Other .......................................................... 613 539
---------------------------
Total non-interest income ................................ 4,958 5,420
---------------------------
Non-interest expense:
Salaries and employee benefits ................................. 4,727 4,650
Occupancy ...................................................... 685 641
Equipment ...................................................... 606 575
Data processing ................................................ 546 505
Office supplies ................................................ 270 334
Service charges from correspondent banks ....................... 194 233
Other .......................................................... 1,414 1,312
---------------------------
Total non-interest expense ............................... 8,442 8,250
---------------------------
Income before income taxes ............................... 5,465 6,518
Income taxes ..................................................... 1,910 2,253
---------------------------
Net income ............................................... $ 3,555 $ 4,265
===========================
Per share data:
Basic earnings per share ....................................... $ 0.38 $ 0.41
Weighted average shares of common stock outstanding ............ 9,460,495 10,499,741
Diluted earnings per share ..................................... $ 0.37 $ 0.40
Weighted average shares of common stock and dilutive potential
common shares outstanding .................................... 9,573,370 10,631,293
See accompanying notes to unaudited consolidated financial statements.
6
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended September 30, 2004 and 2003
(Unaudited, in thousands)
2004 2003
------------------
Net income ........................................................................... $ 3,555 $ 4,265
------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of
$418 and ($1,099), for September 30, 2004 and 2003, respectively ................ 625 (1,647)
Less: reclassification adjustment for (gains) losses included in net income, net of
tax of ($54) and $3, for September 30, 2004 and 2003, respectively ............... (79) 3
------------------
Other comprehensive income (loss) .................................................. 546 (1,644)
------------------
Comprehensive income ............................................................... $ 4,101 $ 2,621
==================
See accompanying notes to unaudited consolidated financial statements.
7
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ending September 30, 2004 and 2003
(Unaudited, in thousands)
2004 2003
----------------------
Cash flows from operating activities:
Net income .......................................................... $ 11,216 $ 12,695
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 1,914 1,826
Amortization of bond discounts and premiums, net .................. 1,879 1,534
Provision for loan losses ......................................... 990 990
Securities transactions, net ...................................... (139) 49
Federal Home Loan Bank stock dividend ............................. (187) (247)
Undistributed gain from non-marketable equity securities .......... (36) --
Gain on sales of mortgage loans, net .............................. (777) (2,214)
Gain on disposal of premises and equipment ........................ (286) --
Proceeds from sales of mortgage loans originated for sale ......... 59,411 188,245
Mortgage loans originated for sale ................................ (58,912) (184,946)
Other, net ........................................................ (1,154) (5,672)
----------------------
Net cash provided by operating activities ..................... 13,919 12,260
----------------------
Cash flows from investing activities:
Net (increase) decrease in loans .................................... (61,081) 17,303
Proceeds from maturities and calls of investments in debt securities:
Held-to-maturity .................................................. 9,988 9,753
Available-for-sale ................................................ 171,845 140,574
Proceeds from sales of investments:
Available-for-sale ................................................ 3,223 11,085
Purchases of investments in debt and equity securities:
Held-to-maturity .................................................. (45,789) (58,691)
Available-for-sale ................................................ (192,532) (192,787)
Other equity securities ........................................... (175) (830)
Principal paydowns from mortgage-backed securities:
Held-to-maturity .................................................. 40,797 15,924
Available-for-sale ................................................ 10,304 16,049
Return of principal on other equity securities ...................... 522 490
Purchases of premises and equipment ................................. (1,694) (1,071)
Proceeds from sales of premises and equipment ....................... 623 --
----------------------
Net cash used in investing activities ......................... (63,969) (42,201)
----------------------
Cash flows from financing activities:
Net increase (decrease) in deposits ................................. 91,563 (6,729)
Net (decrease) increase in federal funds purchased,
repurchase agreements, and notes payable .......................... (8,304) 22,059
Advances from Federal Home Loan Bank and other borrowings ........... -- 2,268
Payments on Federal Home Loan Bank and other borrowings ............. (78) (75)
Cash dividends paid ................................................. (5,988) (5,243)
MSTI stock transactions, net ........................................ (1,971) 1,691
----------------------
Net cash provided by financing activities ..................... 75,222 13,971
----------------------
Net increase (decrease) in cash and cash equivalents .......... 25,172 (15,970)
Cash and cash equivalents at beginning of year ........................ 75,903 102,746
----------------------
Cash and cash equivalents at end of period ............................ $ 101,075 $ 86,776
======================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .......................................................... $ 11,649 $ 12,810
Income taxes ...................................................... 5,131 6,745
Real estate acquired through or in lieu of foreclosure .............. 40 10
Dividends declared not paid ......................................... 1,984 1,896
Obligation to purchase treasury stock ............................... -- 32,385
See accompanying notes to unaudited consolidated financial statements.
8
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements for Main Street
Trust, Inc. have been prepared in accordance with the instructions to Form 10-Q
and therefore do not include all information and footnotes necessary for fair
presentation of financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction with the
audited consolidated financial statements and related notes as of and for the
year ended December 31, 2003, and schedules included in Main Street Trust,
Inc.'s Form 10-K filed on March 12, 2004.
In the opinion of management, the consolidated financial statements of Main
Street Trust, Inc. and its subsidiaries, as of September 30, 2004 and for the
three-month and nine-month periods ended September 30, 2004 and 2003, include
all adjustments necessary for a fair presentation of the results of those
periods. All such adjustments are of a normal recurring nature.
Results of operations for the three-month and nine-month periods ended September
30, 2004 are not necessarily indicative of the results which may be expected for
the year ended December 31, 2004.
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold and interest
bearing deposits. Generally, federal funds are sold for one-day periods.
Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform with the 2004 presentation. Such reclassifications have
no effect on previously reported net income or shareholders' equity.
Note 2. Company Information/Business Combination
Main Street Trust, Inc. (the "Company"), an Illinois corporation, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Company was incorporated on August 12, 1999, and is the parent
company of BankIllinois and The First National Bank of Decatur (the "Banks") and
FirsTech, Inc.
In March 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 Company
subsequently merged the Company's former banking subsidiary, First Trust Bank of
Shelbyville, into BankIllinois in June 2002.
The Company is a financial holding company, which allows the Company to engage
in a wider range of nonbanking activities, including greater authority to engage
in securities and insurance activities. However, the Company has no current
plans to do so.
The Company completed a tender offer in June 2002 with 711,832 shares,
representing approximately 6.3% of the total shares then outstanding,
repurchased at cost, including expenses, of $16.556 million. The Company
completed a second tender offer in September 2003 with 1,074,140 shares,
representing approximately 10.2% of the total shares then outstanding,
repurchased at a cost, including expenses, of approximately $32.395 million.
Main Street Trust, Inc. has obtained regulatory approval from the Illinois
Department of Financial and Professional Regulation and the Federal Deposit
Insurance Corporation to merge The First National Bank of Decatur with and into
BankIllinois, with the resulting bank to be named "Main Street Bank & Trust." It
is anticipated that the merger will be consummated at the close of business on
November 10, 2004. The merger is not expected to have a significant impact on
the operations of the Company or the Bank.
9
Note 3. Income per Share
Net income per common share has been computed as follows:
Nine Months Ended Three Months Ended
-----------------------------------------------------
September 30, September 30,
2004 2003 2004 2003
-----------------------------------------------------
Net Income ................................. $11,216,000 $12,695,000 $ 3,555,000 $ 4,265,000
=====================================================
Shares:
Weighted average common shares outstanding 9,491,827 10,491,883 9,460,495 10,499,741
Dilutive effect of outstanding options,
as determined by the application of
the treasury stock method .............. 115,925 112,444 112,875 131,552
-----------------------------------------------------
Weighted average common shares oustanding,
as adjusted ............................ 9,607,752 10,604,327 9,573,370 10,631,293
=====================================================
Basic earnings per share ................... $ 1.18 $ 1.21 $ 0.38 $ 0.41
=====================================================
Diluted earnings per share ................. $ 1.17 $ 1.20 $ 0.37 $ 0.40
=====================================================
Note 4. Stock Option Plans
The Company has established a stock incentive plan, which provides for the
granting of options of the Company's common stock to certain directors, officers
and employees. 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 (in thousands, except per share data 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.
Nine Months Ended Three Months Ended
--------------------------------------------------
September 30, September 30,
2004 2003 2004 2003
--------------------------------------------------
Net income on common stock:
As reported .................................. $ 11,216 $ 12,695 $ 3,555 $ 4,265
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects ........... (280) (189) (86) (72)
--------------------------------------------------
Pro forma .............................. $ 10,936 $ 12,506 $ 3,469 $ 4,193
==================================================
Basic earnings per share:
As reported .................................. $ 1.18 $ 1.21 $ 0.38 $ 0.41
Pro forma .................................... 1.15 1.19 0.37 0.40
Diluted earnings per share:
As reported .................................. $ 1.17 $ 1.20 $ 0.37 $ 0.40
Pro forma .................................... 1.14 1.18 0.36 0.39
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.
Nine Months Ended
September 30,
2004 2003
------------------------
Number of options granted .............. 140,500 129,000
Risk-free interest rate ................ 3.94% 3.64%
Expected life, in years ................ 8.00 8.00
Expected volatility .................... 15.95% 13.35%
Expected dividend yield ................ 2.75% 2.42%
10
Note 5. 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 September 30, 2004 and 2003:
September 30,
-----------------------
2004 2003
-----------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments .................................... $285,407 $207,784
Standby letters of credit ...................... 22,896 11,181
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 $3.265
million to purchase other equity securities.
Standby letters of credit are conditional commitments issued by the Company's
subsidiary 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 September 30, 2004 and 2003, no amounts have been recorded
as liabilities for the Banks' potential obligations under these guarantees.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Assets and Liabilities
Total assets increased $85.424 million, or 7.4%, to $1.240 billion at September
30, 2004 compared to $1.154 billion at December 31, 2003. Increases in loans,
federal funds sold and interest bearing deposits, investments in securities
available-for-sale, other assets, accrued interest receivable and mortgage loans
held for sale were partially offset by decreases in cash and due from banks,
investments in securities held-to-maturity, premises and equipment, and
non-marketable equity securities.
Cash and due from banks decreased $7.693 million, or 16.8% to $38.206 million at
September 30, 2004 compared to $45.899 million at December 31, 2003, primarily
due to a smaller dollar amount of deposit items in process of collection at
September 30, 2004 compared to December 31, 2003.
Federal funds sold and interest bearing deposits increased $32.865 million, or
109.5%, to $62.869 million at September 30, 2004 compared to $30.004 million at
December 31, 2003. Federal funds sold and interest bearing deposits fluctuate
with loan demand, deposit volume and investment opportunities.
11
Total investments in debt and equity securities decreased $2.547 million, or
0.7%, to $368.179 million at September 30, 2004 compared to $370.726 million at
December 31, 2003. This overall decrease was due to decreases in investments in
securities held-to-maturity of $5.961 million, or 6.1%, and non-marketable
equity securities of $124,000, or 1.6%, offset somewhat by an increase in
securities available-for-sale of $3.538 million, or 1.3%. Investments fluctuate
with loan demand, deposit volume and investment opportunities.
Loans, net of allowance for loan losses, increased $60.051 million, or 9.0%, to
$726.310 million at September 30, 2004 from $666.259 million at December 31,
2003. Commercial, financial and agricultural loans increased $45.359 million, or
18.2%, primarily as a result of the Company's emphasis on business development,
the favorable rate environment and relative improvement in the economy in recent
months. Real estate loans increased $6.654 million, or 1.9%, primarily due to an
increase in residential real estate of $9.721 million, or 19.1%, offset somewhat
by a decrease in commercial real estate loans of $3.067 million, or 1.0%.
Residential real estate loans increased during 2004 due to attractive adjustable
rate mortgage rates after decreasing in 2003 due to refinancings. During 2003,
the Company experienced growth of $32.105 million or 12.1% in commercial real
estate loans. During 2004, the Company experienced a slowdown in demand, which
coupled with normal paydowns, resulted in the $3.067 million decrease.
Installment and consumer loans increased $8.215 million, or 10.6%. Included in
the increase was an increase of $15.720 million, or 94.7% in home equity loans.
Home equity loans increased from $16.602 million at December 31, 2003 to $32.322
million at September 30, 2004 as a result of the Company's increased focus on
marketing this product, which included promotional rates. Somewhat offsetting
this increase was a decrease of $8.485 million, or 21.7%, in indirect lending.
Indirect loans decreased from $39.073 million at December 31, 2003 to $30.588
million at September 30, 2004 due to increased competition from alternative
funding sources available to consumers, such as special financing offered by the
auto manufacturers' captive financing companies.
Mortgage loans held for sale increased $278,000, or 44.0%, from $632,000 at
December 31, 2003 to $910,000 at September 30, 2004.
Premises and equipment decreased $557,000, or 3.2%, from $17.622 million at
December 31, 2003 to $17.065 million at September 30, 2004. The decrease
included depreciation expense of $1.914 million and proceeds from sale of
property of $623,000, offset somewhat by purchases of $1.694 million and gain on
disposal of property of $286,000.
Total liabilities increased $83.946 million, or 8.1%, to $1.127 billion at
September 30, 2004 from $1.043 billion at December 31, 2003. Increases in total
deposits, accrued interest payable and other liabilities were somewhat offset by
decreases in federal funds purchased, repurchase agreements and notes payable
and Federal Home Loan Bank advances and other borrowings.
Total deposits increased $91.563 million, or 10.2%, to $990.035 million at
September 30, 2004 from $898.472 million at December 31, 2003. Interest bearing
deposits increased $92.963 million, or 12.6%. Included in this increase was an
increase of approximately $43 million related to the Company's Wealth Management
division. Non-interest bearing deposits decreased $1.400 million, or 0.9%.
Federal funds purchased, repurchase agreements and notes payable decreased
$8.304 million, or 8.1%, to $94.694 million at September 30, 2004 compared to
$102.998 million at December 31, 2003. Included in this change was a decrease of
$9.054 million in repurchase agreements offset by an increase of $750,000 in
federal funds purchased.
Federal Home Loan Bank advances and other borrowings decreased $78,000, or 0.3%,
to $29.902 million at September 30, 2004 compared to $29.980 million at December
31, 2003.
12
Investment Securities
The carrying value of investments in debt and equity securities was as follows
for September 30, 2004 and December 31, 2003:
Carrying Value of Securities
(in thousands)
September 30, December 31,
2004 2003
---------------------------
Available-for-sale:
Federal agencies ................................... $216,067 $220,199
Mortgage-backed securities ......................... 31,645 23,007
State and municipal ................................ 16,157 17,317
Marketable equity securities ....................... 5,583 5,391
---------------------
Total available-for-sale ..................... $269,452 $265,914
=====================
Held-to-maturity:
Federal agencies ................................... $ 44,974 $ 10,704
Mortgage-backed securities ......................... 15,967 50,029
State and municipal ................................ 30,154 36,323
---------------------
Total held-to-maturity ....................... $ 91,095 $ 97,056
=====================
Non-marketable equity securities:
FHLB and FRB stock1 ................................ $ 4,446 $ 4,259
Other equity investments ........................... 3,186 3,497
---------------------
Total non-marketable equity securities ....... $ 7,632 $ 7,756
=====================
Total investment securities .................. $368,179 $370,726
=====================
1 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and
Federal Reserve Bank respectively.
13
The following table shows the maturities and weighted-average yields of
investment securities at September 30, 2004. All securities are shown at their
contractual maturity, with the exception of mortgage backed securities, as
explained in footnote 1.
Maturities and Weighted Average Yields of Debt Securities
(dollars in thousands)
-----------------------------------------------------------------------------------------------
September 30, 2004
-----------------------------------------------------------------------------------------------
1 year 1 to 5 5 to 10 Over 10
or less years years years Total
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------------------------------------------
Securities available-
for-sale:
Federal agencies ............... $100,136 3.57% $114,932 2.68% $ 999 2.61% $ -- -- $216,067 3.09%
Mortgage-backed
securities1 .................. $ 9,940 2.41% $ 21,241 4.42% $ 203 7.19% $ 261 7.15% $ 31,645 3.83%
State and municipal ............ $ 3,740 3.66% $ 7,059 4.30% $4,239 5.02% $ 1,119 5.11% $ 16,157 4.39%
Marketable equity
securities2 .................. $ -- -- $ -- -- $ -- -- $ -- -- $ 5,583 --
-----------------------------------------------------------------------------------------------
Total .................... $113,816 $143,232 $5,441 $ 1,380 $269,452
-----------------------------------------------------------------------------------------------
Average Yield .................... 3.47% 3.02% 4.66% 5.49% 3.26%
===============================================================================================
Securities held-
to-maturity:
Federal agencies ............... $ 11,800 2.79% $ 29,649 2.90% $ 3,525 4.04% $ -- -- $ 44,974 2.96%
Mortgage-backed
securities1 .................. $ 6,968 2.66% $ 8,620 2.98% $ 137 3.45% $ 242 6.54% $ 15,967 2.90%
State and municipal ............ $ 10,002 3.78% $ 19,512 4.06% $ 295 4.74% $ 345 5.25% $ 30,154 3.98%
-----------------------------------------------------------------------------------------------
Total .................... $ 28,770 $ 57,781 $ 3,957 $ 587 $ 91,095
===============================================================================================
Average Yield .................... 3.10% 3.26% 4.07% 5.78% 3.26%
===============================================================================================
Non-marketable equity securities2:
FHLB and FRB stock ............. $ -- -- $ -- -- $ -- -- $ -- -- $ 4,446 --
Other equity investments ....... $ -- -- $ -- -- $ -- -- $ -- -- $ 3,186 --
-----------------------------------------------------------------------------------------------
Total .................... $ -- -- $ -- -- $ -- -- $ -- -- $ 7,632 --
===============================================================================================
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.
14
Continuous gross unrealized losses of investments in debt and equity securities
(in thousands) which are classified as temporary were as follows:
Continuous
Continuous unrealized unrealized losses
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:
Federal agencies..... .......... $121,511 $ (995) $ 18,599 $ (400) $140,110 $ (1,395)
Mortgage-backed securities ..... 10,474 (58) 8,456 (257) 18,930 (315)
Obligations of state and
political subdivisions ....... 1,338 (1) -- -- 1,338 (1)
-----------------------------------------------------------------
Subtotal, debt securities $133,323 $ (1,054) $ 27,055 $ (657) $160,378 $ (1,711)
Other ............................ 972 (108) 1,112 (856) 2,084 (964)
-----------------------------------------------------------------
Total temporarily impaired
securities ............... $134,295 $ (1,162) $ 28,167 $ (1,513) $162,462 $ (2,675)
=================================================================
Held-to-Maturity:
Federal agencies ............... $ 41,442 $ (404) $ 3,038 $ (90) $ 44,480 $ (494)
Mortgage-backed securities ..... 5,990 (55) 7,595 (182) 13,585 (237)
Obligations of state and
political subdivisions ....... 1,553 (14) 334 (1) 1,887 (15)
-----------------------------------------------------------------
Total temporarily impaired
securities ............... $ 48,985 $ (473) $ 10,967 $ (273) $ 59,952 $ (746)
=================================================================
The $1.546 million continuous unrealized loss greater than 12 months on
available-for-sale securities was made up of four debt securities and eight
common stocks and is believed to be a temporary loss. Common stocks represented
$856,000 of the continuous unrealized loss on available-for-sale securities
which was a decrease of $125,000 from the loss on common stocks of $981,000 at
December 31, 2003. Management believes the market value of these securities will
continue to improve as the economy continues to recover. The $239,000 continuous
unrealized loss greater than 12 months on held-to-maturity securities was made
up of six debt securities and is believed to be a temporary loss. Unrealized
losses on debt securities are generally due to changes in interest rates and, as
such, are considered, by the Company, to be temporary.
Loans
The following tables present the amounts and percentages of loans at September
30, 2004 and December 31, 2003 according to the categories of commercial,
financial and agricultural; real estate; and installment and consumer loans.
Amount of Loans Outstanding
(dollars in thousands)
--------------------------------------------
September 30, 2004 December 31, 2003
--------------------------------------------
Amount Percentage Amount Percentage
--------------------------------------------
Commercial, financial and agricultural $295,154 40.09% $249,795 36.95%
Real estate .......................... 355,651 48.30% 348,997 51.62%
Installment and consumer ............. 85,468 11.61% 77,253 11.43%
-------------------------------------------
Total loans .......................... $736,273 100.00% $676,045 100.00%
===========================================
15
The balance of loans outstanding as of September 30, 2004 by maturity is shown
in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
---------------------------------------------
September 30, 2004
---------------------------------------------
1 year 1 to 5 Over 5
or less years years Total
---------------------------------------------
Commercial, financial and agricultural $183,160 $ 93,592 $ 18,402 $ 295,154
Real estate .......................... 57,743 176,658 121,250 355,651
Installment and consumer ............. 25,332 43,522 16,614 85,468
--------------------------------------------
Total ........................ $266,235 $313,772 $156,266 $736,273
============================================
Percentage of total loans outstanding 36.16% 42.62% 21.22% 100.00%
============================================
Capital
Total shareholders' equity increased $1.478 million from December 31, 2003 to
September 30, 2004. Treasury stock transactions were $1.971 million primarily
due to purchases of treasury stock exceeding stock option exercise transactions.
The change in shareholders' equity is summarized as follows:
Shareholders' Equity (in thousands)
Shareholders' equity, December 31, 2003 .................... $ 111,450
Net income ................................................ 11,216
Treasury stock transactions, net .......................... (1,971)
Stock appreciation rights ................................. (82)
Cash dividends declared ................................... (5,977)
Other comprehensive income ................................ (1,708)
----------
Shareholders' equity, September 30, 2004 .................... $ 112,928
==========
On September 21, 2004, the Board of Directors of the Company declared a
quarterly cash dividend of $0.21 per share of the Company's common stock. The
dividend of $1.984 million was paid on October 22, 2004 to holders of record on
October 12, 2004.
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 action by regulators that, if undertaken, could have a
direct material effect on the Company's and its subsidiary banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and its
subsidiary banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of September
30, 2004, that the Company and its subsidiary banks exceeded all capital
adequacy requirements to which they are subject.
16
As of September 30, 2004, the most recent notifications from primary regulatory
agencies categorized both of 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.
The Company's and the Banks' actual capital amounts and ratios are presented in
the following table (in thousands):
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes: action provisions:
--------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------
As of September 30, 2004:
Total capital
(to risk-weighted assets)
Consolidated ................. $122,256 13.7% $71,563 8.0% N/A
BankIllinois ................. $ 63,513 11.2% $45,282 8.0% $56,602 10.0%
First National Bank of Decatur $ 37,337 12.0% $24,812 8.0% $31,016 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated ................. $112,229 12.6% $35,782 4.0% N/A
BankIllinois ................. $ 57,542 10.2% $22,641 4.0% $33,961 6.0%
First National Bank of Decatur $ 33,457 10.8% $12,406 4.0% $18,609 6.0%
Tier I capital
(to average assets)
Consolidated ................. $112,229 9.2% $48,935 4.0% N/A
BankIllinois ................. $ 57,542 7.5% $30,767 4.0% $38,459 5.0%
First National Bank of Decatur $ 33,457 7.6% $17,713 4.0% $22,141 5.0%
Interest Rate Sensitivity
The concept of interest rate sensitivity attempts to gauge exposure of the
Company's net interest income to adverse changes in market driven interest rates
by measuring the amount of interest-sensitive assets and interest-sensitive
liabilities maturing or subject to repricing within a specific time period.
Liquidity represents the ability of the Company to meet the day-to-day demands
of deposit customers balanced by its investments of these deposits. The Company
must also be prepared to fulfill the needs of credit customers for loans with
various types of maturities and other financing arrangements. The Company
monitors its interest rate sensitivity and liquidity through the use of static
gap reports which measure the difference between assets and liabilities maturing
or repricing within specified time periods as well as financial
forecasting/budgeting/reporting software packages.
17
The following table presents the Company's interest rate sensitivity at various
intervals at September 30, 2004:
Rate Sensitivity of Earning Assets and Interest Bearing Liabilities
(dollars in thousands)
------------------------------------------------------------------------------
1-30 31-90 91-180 181-365 Over
Days Days Days Days 1 year Total
------------------------------------------------------------------------------
Interest earning assets:
Federal funds sold and
interest bearing deposits ............ $ 62,869 $ -- $ -- $ -- $ -- $ 62,869
Debt and equity securities 1 ........... 20,608 25,619 27,604 40,991 253,357 368,179
Loans 2 ................................ 295,915 31,630 31,706 71,513 306,419 737,183
------------------------------------------------------------------------------
Total earning assets ............. $ 379,392 $ 57,249 $ 59,310 $ 112,504 $ 559,776 $1,168,231
------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits ...................... $ 95,316 $ 1,622 $ 2,433 $ 4,872 $ 185,200 $ 289,443
Money market savings
deposits ............................. 187,065 -- -- -- -- 187,065
Time deposits .......................... 22,550 46,088 77,407 79,798 126,909 352,752
Federal funds purchased,
repurchase agreements,
and notes payable .................... 85,291 24 3,850 4,944 585 94,694
FHLB advances and
other borrowings ..................... 7,360 10,000 -- -- 12,542 29,902
------------------------------------------------------------------------------
Total interest bearing liabilities $ 397,582 $ 57,734 $ 83,690 $ 89,614 $ 325,236 $ 953,856
------------------------------------------------------------------------------
Net asset (liability) funding gap ........ (18,190) (485) (24,380) 22,890 234,540 214,375
------------------------------------------------------------------------------
Repricing gap ............................ 0.95 0.99 0.71 1.26 1.72 1.22
Cumulative repricing gap ................. 0.95 0.96 0.92 0.97 1.22 1.22
==============================================================================
1 Debt and equity securities include securities available-for-sale,
securities held-to-maturity, and non-marketable equity securities.
2 Loans are gross and include mortgage loans held-for-sale.
Included in the 1-30 day category of savings and interest-bearing demand
deposits are non-core deposits plus a percentage, based upon industry-accepted
assumptions and Company analysis, of the core deposits. "Core deposits" are the
lowest average balance of the prior twelve months of each product type included
in this category. "Non-core deposits" are the difference between the current
balance and core deposits. The time frames include a percentage, based upon
industry-accepted assumptions and Company analysis, of the core deposits, as
follows:
1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
----------------------------------------------------------------------------
Savings and interest-bearing
demand deposits .............. 0.45% 0.85% 1.25% 2.45% 95.00%
At September 30, 2004, the Company was liability-sensitive due to the level of
savings and interest bearing demand deposits, money market savings deposits and
time deposits. As such, the effect of a decrease in the prime rate of 100 basis
points would increase annualized net interest income by approximately $182,000
in the 1-30 day category and approximately $187,000 in the 1-90 days category
assuming no management intervention. An increase 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 September 30, 2004, the Company's RSA/RSL
was 0.97, which was within the established guidelines.
In addition to managing interest rate sensitivity and liquidity through the use
of gap reports, the Company has provided for emergency liquidity situations with
informal agreements with correspondent banks that permit the Company to borrow
federal funds on an unsecured basis. Additionally, the Company has a $10 million
unsecured line of credit with a correspondent bank, and can borrow approximately
$57 million from the Federal Home Loan Bank on a secured basis.
18
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 September 30, 2004 and December
31, 2003 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, all of which are within the Company's
guideline of a maximum change of -15% from a 200 basis point change in interest
rates.
Basis Point Change
-------------------------------------------
+200 +100 -100 -200
-------------------------------------------
September 30, 2004 .............. 11.1% 5.6% (5.5%) (11.1%)
December 31, 2003 ............... 11.7% 5.9% (5.9%) (11.7%)
The foregoing computations are based on numerous assumptions, including relative
levels of market interest rates, prepayments and deposit mix. The computed
estimates should not be relied upon as a projection of actual results. Despite
the limitations on preciseness inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to enhance earnings
potential while positioning the Company to minimize the effect of a prolonged
shift in interest rates that would adversely affect future results of
operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
Liquidity and Cash Flows
The Company was able to meet liquidity needs during the first nine months of
2004. A review of the consolidated statement of cash flows included in the
accompanying financial statements shows that the Company's cash and cash
equivalents increased $25.172 million from December 31, 2003 to September 30,
2004.
In general, funds provided by customer deposits, federal funds purchased,
repurchase agreements, and notes payable, and maturities, calls and paydowns of
investment securities are used to fund loans and purchase investment securities.
Available funds are used to fund demand for loans that meet the Company's credit
quality guidelines, with the remaining funds used to purchase investment
securities and/or federal funds sold.
19
The increase in cash and cash equivalents came from cash provided by financing
and operating activities, offset somewhat by cash used in investing activities.
There were differences in the sources and uses of cash during the first nine
months of 2004 compared to the first nine months of 2003. More cash was provided
by financing activities during the first nine months of 2004 compared to the
same period in 2003. Cash was provided by deposits during the first nine months
of 2004 compared to cash used by deposits during the same period in 2003 due, in
part, to an increase of approximately $43 million in deposits attributable to
the Company's Wealth Management division. Somewhat offsetting cash provided by
deposits was cash used by federal funds purchased, repurchase agreements, and
notes payable during the first nine months of 2004 compared to cash provided
during the same period in 2003. Slightly more cash was provided by operating
activities during the first nine months of 2004 compared to the same period in
2003. More cash was used in investing activities during the first nine months of
2004 compared to the same period in 2003. This was mainly due to cash used in
the area of loans in 2004 as a result of an increase in loans, compared to cash
provided by loans in 2003 when loans decreased. Less cash was used in investment
portfolio activities during the first nine months of 2004 compared to the same
period in 2003. In 2004, cash used to purchase debt and equity securities was
$238.496 million, offset somewhat by proceeds of $236.679 million from
maturities, calls and sales of debt and equity securities, principal paydowns on
mortgage-backed securities and return of principal on other equity securities.
In 2003, cash used to purchase debt and equity securities was $252.308 million,
offset somewhat by proceeds of $193.875 million from maturities, calls and sales
of debt and equity securities, principal paydowns on mortgage-backed securities
and return of principal on other equity securities.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting standards
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the related disclosures of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions and conditions. The Company believes that it has one
critical accounting policy, allowance for loan losses, that is subject to
estimates and judgements used in the preparation of its consolidated financial
statements.
Provision and Allowance for Loan Losses
The provision for loan losses is based on management's evaluation of the loan
portfolio in light of national and local economic conditions, changes in the
composition and volume of the loan portfolio, changes in the volume of past due
and nonaccrual loans, and other relevant factors. The allowance for loan losses,
which is reported as a deduction from loans, is available for loan charge-offs.
The allowance is increased by the provision charged to expense and is reduced by
loan charge-offs net of loan recoveries. The allowance is allocated between the
commercial, financial and agricultural, commercial and residential real estate
and installment and consumer loan portfolios according to the historical losses
experienced in each of these portfolios as well as the current level of watch
list loans and nonperforming loans for each portfolio. Loans for which borrower
cash flow and the estimated liquidation value of collateral are inadequate to
repay the total outstanding balance are evaluated separately and assigned a
specific allocation. The unallocated portion of the allowance is determined by
economic conditions and other factors mentioned above. The balance of the
allowance for loan losses was $9.963 million at September 30, 2004 compared to
$9.786 million at December 31, 2003, as net charge-offs were $813,000 and
provisions totaled $990,000 during the first nine months of 2004. The allowance
for loan losses as a percentage of gross loans, including loans held-for-sale,
was 1.35% at September 30, 2004, compared to 1.45% at December 31, 2003. Gross
loans, including loans held-for-sale, increased 8.9% to $737.183 million at
September 30, 2004 from $676.677 million at December 31, 2003.
One measure of the adequacy of the allowance for loan losses is the ratio of the
allowance to nonperforming loans. The allowance for loan losses as a percentage
of nonperforming loans was 369.6% at September 30, 2004 compared to 959.4% at
December 31, 2003. Nonperforming loans increased from $1.020 million at December
31, 2003 to $2.696 million at September 30, 2004. The $1.676 million increase in
nonperforming loans during the first nine months of 2004 resulted from a $1.428
million increase in nonaccrual loans and an increase of $247,000 in loans past
due 90 days or more. The increase in nonaccrual loans was primarily the result
of the addition in the first quarter of 2004 of one commercial loan in the
amount of $1.328 million. As of September 30, 2004, a specific valuation
allowance of $300,000 had been assigned to this loan, and the remaining balance
was considered adequately collateralized by real estate and by business and
personal property. The Company has been working with the borrower to liquidate
collateral in an attempt to satisfy the outstanding obligation. Management
believes that nonperforming and potential problem loans are appropriately
identified and monitored based on the extensive loan analysis performed by the
credit administration department, the internal loan committees and the board of
directors. Historically, there have not been a significant amount of loans
charged off which had not been previously identified as problem loans by the
credit administration department or the loan committee.
20
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)
September 30,
-----------------------
2004 2003
-----------------------
Allowance for loan losses at
beginning of year ................................ $ 9,786 $ 9,259
---------------------
Charge-offs during period:
Commercial, financial and agricultural ........... $ (279) $ (138)
Residential real estate .......................... -- (9)
Installment and consumer ......................... (856) (799)
---------------------
Total ...................................... $(1,135) $ (946)
---------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ........... $ 157 $ 209
Residential real estate .......................... 15 46
Installment and consumer ......................... 150 135
---------------------
Total ...................................... $ 322 $ 390
---------------------
Net charge-offs ............................ $ (813) $ (556)
Provision for loan losses .......................... 990 990
---------------------
Allowance for loan losses at end of quarter ........ $ 9,963 $ 9,693
=====================
Ratio of net charge-offs to
average net loans ................................ (0.12)% (0.09)%
=====================
The following table shows the allocation of the allowance for loan losses
allocated to each loan category.
Allocation of the Allowance for Loan Losses
(in thousands)
----------------------------------------
September 30, 2004 December 31, 2003
----------------------------------------
Allocated:
Commercial, financial and agricultural ............. $6,590 $5,973
Residential real estate ............................ 185 153
Installment and consumer ........................... 1,819 2,428
---------------------------
Total allocated allowance .................... $8,594 $8,554
Unallocated allowances ............................... 1,369 1,232
---------------------------
Total ........................................ 9,963 9,786
===========================
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
(dollars in thousands)
---------------------------
September 30, December 31,
2004 2003
---------------------------
Nonaccrual loans1 ................................ $1,827 $ 399
=====================
Loans past due 90 days or more ................... $ 868 $ 621
=====================
Restructured loans ............................... $ 517 $ 18
=====================
1 Includes $194,000 at September 30, 2004 and $269,000 at December 31, 2003
of real estate and consumer loans which management does not consider
impaired as defined by the Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114).
21
Other Nonperforming Assets
(dollars in thousands)
--------------------------------------
September 30, 2004 December 31, 2003
--------------------------------------
Other real estate owned ............... $ 40 $ --
========================
Nonperforming other assets ............ $145 $ 55
=======================
Results of Operations
Results of Operations for the Nine Months Ended September 30, 2004
Net income for the first nine months of 2004 was $11.216 million, a $1.479
million, or 11.7%, decrease from $12.695 million for the same period in 2003.
Basic earnings per share decreased $0.03, or 2.5%, to $1.18 per share
year-to-date in 2004 from $1.21 per share year-to-date in 2003. Diluted earnings
per share decreased $0.03, or 2.5%, to $1.17 per share year-to-date in 2004 from
$1.20 per share year-to-date in 2003.
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)
------------------------------------------------------------------------
Nine Months Ended September 30,
------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------
Assets
Taxable investment securities1 ......... $ 328,765 $ 7,973 3.24% $ 300,672 $ 8,647 3.85%
Tax-exempt investment securities1 (TE) . 47,467 2,191 6.17% 55,916 2,649 6.33%
Federal funds sold and interest bearing
deposits2 ............................ 33,754 339 1.34% 39,493 363 1.23%
Loans3,4 (TE) .......................... 702,101 30,579 5.82% 643,594 31,562 6.56%
----------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,112,087 $ 41,082 4.93% $1,039,675 $ 43,221 5.56%
-----------------------------------------------------------------------
Cash and due from banks ................ $ 46,102 $ 46,310
Premises and equipment ................. 17,196 17,940
Other assets ........................... 23,664 18,794
-----------------------------------------------------------------------
Total assets ................... $1,199,049 $1,122,719
=======================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ....... $ 96,018 $ 497 0.69% $ 85,187 $ 468 0.73%
Savings ................................ 333,124 2,342 0.94% 279,874 1,964 0.94%
Time deposits .......................... 352,729 7,350 2.78% 338,320 8,405 3.32%
Federal funds purchased, repurchase
agreements, and notes payable ........ 98,827 893 1.21% 92,426 817 1.18%
FHLB advances and other borrowings ..... 29,936 1,202 5.36% 27,987 1,156 5.52%
----------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 910,634 $ 12,284 1.80% $ 823,794 $ 12,810 2.08%
----------------------------------------------------------------------
Noninterest bearing demand deposits .... $ 100,120 $ 87,994
Noninterest bearing savings deposits ... 65,430 63,036
Other liabilities ...................... 10,113 9,899
----------------------------------------------------------------------
Total liabilities .............. $1,086,297 $ 984,723
Shareholders' equity ................... 112,752 137,996
----------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,199,049 $1,122,719
======================================================================
Interest spread (average rate earned
minus average rate paid) (TE) ........ 3.13% 3.48%
======================================================================
Net interest income (TE) ............... $ 28,798 $ 30,411
=======================================================================
Net yield on interest
earnings assets (TE) ................. 3.46% 3.91%
=======================================================================
See next page for Notes 1-4.
22
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits included approximately
$45,000 and $47,000 in 2004 and 2003, respectively, of interest income from
third party processing of cashier checks.
3 Loans are net of allowance for loan losses and include mortgage loans
held-for-sale. Nonaccrual loans are included in the total.
4 Loan fees of approximately $1.082 million and $1.368 million in 2004 and
2003, respectively, are included in total loan income.
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 the 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%. The following table
presents, on a tax equivalent (TE) basis, an analysis of changes in net interest
income resulting from changes in average volumes of earning assets and interest
bearing liabilities and average rates earned and paid. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume and Rate Changes
(in thousands)
-----------------------------------
Nine Months Ended
September 30, 2004
------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
-----------------------------
Interest Income
Taxable investment securities .................. $ (674) $ 1,105 $(1,779)
Tax-exempt investment securities (TE) .......... (458) (390) (68)
Federal funds sold and interest earning deposits (24) (68) 45
Loans (TE) ..................................... (983) 3,807 (4,791)
-----------------------------
Total interest income (TE) ............... $(2,139) $ 4,454 $(6,593)
-----------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ 407 $ 439 $ (32)
Time deposits .................................. (1,055) 539 (1,594)
Federal funds purchased,
repurchase agreements and notes payable ...... 76 58 18
FHLB advances and other borrowings ............. 46 95 (49)
-----------------------------
Total interest expense ................... $ (526) $ 1,131 $(1,657)
-----------------------------
Net Interest Income (TE) ......................... $(1,613) $ 3,323 $(4,936)
=============================
Net interest income on a tax equivalent basis was $1.613 million, or 5.3%, lower
for the first nine months of 2004 compared to the same period of 2003. Total
tax-equivalent interest income was $2.139 million, or 4.9%, lower in 2004
compared to 2003, and interest expense decreased $526,000, or 4.1%. The decrease
in tax-equivalent interest income and interest expense was mainly due to lower
rates, offset somewhat by increases in average volume.
23
The decrease in total tax-equivalent interest income was due to a decrease in
interest income from all categories of interest earning assets. The decrease in
interest income from loans and taxable investment securities was due to lower
rates, offset somewhat by increases in volume. The decrease in interest income
from tax-exempt investment securities was due to lower rates and lower volume.
The decrease in interest income on federal funds sold was due to a decrease in
volume, offset somewhat by an increase in rate.
The decrease in total interest expense was due to a decrease in interest expense
from time deposits, offset somewhat by increases in interest expense on interest
bearing demand and savings deposits, federal funds purchased, repurchase
agreements and notes payable and FHLB advances and other borrowings. Interest
expense on time deposits decreased due to lower rates, offset somewhat by an
increase in volume. Interest expense on interest bearing demand and savings
deposits increased primarily due to higher volume. Interest expense on federal
funds purchased, repurchase agreements and notes payable increased due to both
higher volume and rates. Interest expense on FHLB advances and other borrowings
increased due to higher volume, offset somewhat by a decrease in rates.
The provision for loan losses recorded was $990,000 during the first nine months
of both 2004 and 2003. The provision during both periods was based on
management's analysis of the loan portfolio, as discussed in the provision for
loan losses section above.
-----------------------------------------------
Noninterest Income and Expense
for the Nine Months Ended
September 30, 2004 and 2003
(in thousands)
----------------------------------------------
Non-interest Income 09/30/2004 09/30/2003 $ change % change
----------------------------------------------
Remittance processing 1 ................ $ 5,635 $ 5,312 $ 323 6.1%
Trust and brokerage fees 2 ............. 4,831 4,230 601 14.2%
Service charges on deposit accounts .... 1,820 1,906 (86) (4.5%)
Securities transactions, net 3 ......... 139 (49) 188 383.7%
Gain on sales of mortgage loans, net 4 . 777 2,214 (1,437) (64.9%)
Other 5 ................................ 2,075 1,577 498 31.6%
--------------------------------------------
Total non-interest income ...... $ 15,277 $ 15,190 $ 87 0.6%
============================================
Non-interest Expense
----------------------------------------------------------------------------------------
Salaries and employee benefits ......... $ 13,978 $ 13,893 $ 85 0.6%
Occupancy .............................. 1,968 1,847 121 6.6%
Equipment 6 ............................ 1,886 1,787 99 5.5%
Data processing ........................ 1,633 1,563 70 4.5%
Office supplies ........................ 887 962 (75) (7.8%)
Service charges from correspondent banks 652 698 (46) (6.6%)
Other 7 ................................ 3,953 3,685 268 7.3%
--------------------------------------------
Total non-interest expense ..... $ 24,957 $ 24,435 $ 522 2.1%
============================================
1 In August 2003, FirsTech introduced a new remittance processing product
called Internet Agent. Internet Agent income accounted for $1.951 million,
or 34.6%, of total remittance processing income in the first nine months of
2004. A portion of the additional income generated by the Internet Agent
product was partially offset by decreases in mechanical collection, lockbox
processing and electronic payment income. FirsTech has continued to
experience success in the expansion of the Internet Agent product among new
and existing customers, who consider it to be at the forefront of
technology compared to similar products within the payment industry.
2 The increase in trust and brokerage fees was the result of strong
investment performance for existing clients and obtaining new investment
accounts. Assets under management increased $209 million to $1.647 billion
at September 30, 2004 compared to $1.438 billion at September 30, 2003.
3 Included in securities transactions in 2004 was a $133,000 gain on the sale
of one security.
4 The decrease in gains on sales of mortgage loans reflected a $128.834
million, or 68.4%, decrease in funded mortgage loans sold, from $188.245
million in the first nine months of 2003 to $59.411 million in the first
nine months of 2004. The volume of funded mortgage loans, which peaked in
the third quarter of 2003, has decreased mainly due to a decline in demand
for refinancing.
5 Other non-interest income year-to-date in 2004 included a gain of $291,000
on the sale of two parking lots.
24
6 The increase in equipment expense included additional costs associated with
the new Internet Agent product.
7 Included in other non-interest expense in 2004 was approximately $225,000
of expenses incurred related to the anticipated merger of the Company's two
banking subsidiaries for purposes of marketing, promotion and branding of
the new entity, Main Street Bank and Trust, and $111,000 in direct loan
costs relating primarily to the increase in home equity loans.
Income tax expense decreased $403,000, or 6.2%, during the first nine months of
2004 compared to the same period in 2003. The effective tax rate increased to
35.4% during the first nine months of 2004 from 34.0% for the same period in
2003.
Results of Operations For the Three Months Ended September 30, 2004
Net income for the second quarter of 2004 was $3.555 million, a $710,000, or
16.6%, decrease from $4.265 million for the same period in 2003. Basic earnings
per share decreased $0.03, or 7.3%, to $0.38 per share during the third quarter
of 2004 from $0.41 per share during the same period in 2003. Diluted earnings
per share decreased $0.03, or 7.5%, to $0.37 per share during the third quarter
of 2004 from $0.40 per share during the same period of 2003.
The following scheduled "Consolidated Average Balance Sheet and Interest Rates"
provides details of average balances, interest income or interest expense, and
the average rates for the Company's major asset and liability categories.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
--------------------------------------------------------------------
Three Months Ended September 30,
--------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------
Assets
Taxable investment securities1 ......... $ 337,101 $ 2,560 3.02% $ 319,930 $ 2,875 3.57%
Tax-exempt investment securities1 (TE) . 44,479 685 6.13% 53,826 855 6.30%
Federal funds sold and interest bearing
deposits2 ............................ 36,234 151 1.66% 39,129 109 1.11%
Loans3,4 (TE) .......................... 722,047 10,509 5.79% 640,184 10,149 6.29%
--------------------------------------------------------------------
Total interest earning assets
and interest income (TE) ....... $1,139,861 $ 13,905 4.85% $1,053,069 $ 13,988 5.27%
--------------------------------------------------------------------
Cash and due from banks ................ $ 46,108 $ 45,852
Premises and equipment ................. 16,982 17,718
Other assets ........................... 25,654 21,250
--------------------------------------------------------------------
Total assets ................... $1,228,605 $1,137,889
====================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits ....... $ 102,280 $ 192 0.75% $ 88,121 $ 142 0.64%
Savings ................................ 359,472 942 1.04% 282,914 597 0.84%
Time deposits .......................... 356,431 2,509 2.80% 337,854 2,607 3.06%
Federal funds purchased, repurchase
agreements, and notes payable ........ 92,687 336 1.44% 98,040 270 1.09%
FHLB advances and other borrowings ..... 29,912 405 5.39% 28,411 392 5.47%
--------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 940,782 $ 4,384 1.85% $ 835,340 $ 4,008 1.90%
--------------------------------------------------------------------
Noninterest bearing demand deposits .... $ 100,028 $ 91,292
Noninterest bearing savings deposits ... 65,052 61,556
Other liabilities ...................... 10,357 9,975
--------------------------------------------------------------------
Total liabilities .............. $1,116,219 $ 998,163
Shareholders' equity ................... 112,386 139,726
--------------------------------------------------------------------
Total liabilities and
shareholders' equity ........... $1,228,605 $1,137,889
====================================================================
Interest spread (average rate earned
minus average rate paid) (TE) .......... 3.00% 3.37%
====================================================================
Net interest income (TE) ............... $ 9,521 $ 9,980
====================================================================
Net yield on interest
earnings assets (TE) ................. 3.32% 3.76%
====================================================================
See next page for Notes 1-4.
25
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits included approximately
$15,000 and $17,000 in 2004 and 2003, respectively, of interest income from
third party processing of cashier checks.
3 Loans are net of allowance for loan losses and include mortgage loans
held-for-sale. Nonaccrual loans are included in the total.
4 Loan fees of approximately $383,000 and $437,000 in 2004 and 2003,
respectively, are included in total loan income.
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 the 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%. The following table
presents, on a tax equivalent (TE) basis, an analysis of changes in net interest
income resulting from changes in average volumes of earning assets and interest
bearing liabilities and average rates earned and paid. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
Analysis of Volume
and Rate Changes
(in thousands)
-------------------------------
Three Months Ended
September 30, 2004
-------------------------------
Increase
(Decrease)
From
Previous Due to Due to
Year Volume Rate
------------------------------
Interest Income
Taxable investment securities .................. $ (315) $ 824 $(1,139)
Tax-exempt investment securities (TE) .......... (170) (147) (23)
Federal funds sold and interest earning deposits 42 (50) 92
Loans (TE) ..................................... 360 4,167 (3,807)
------------------------------
Total interest income (TE) ............... $ (83) $ 4,794 $(4,877)
------------------------------
Interest Expense
Interest bearing demand and savings deposits ... $ 395 $ 202 $ 193
Time deposits .................................. (98) 653 (751)
Federal funds purchased,
repurchase agreements and notes payable ...... 66 (90) 156
FHLB advances and other borrowings ............. 13 48 (35)
------------------------------
Total interest expense ................... $ 376 $ 813 $ (437)
------------------------------
Net Interest Income (TE) ......................... $ (459) $ 3,981 $(4,440)
==============================
Net interest income on a tax equivalent basis was $459,000, or 4.6%, lower for
the third quarter of 2004 compared to the third quarter of 2003. Total
tax-equivalent interest income was $83,000, or 0.6%, lower in 2004 compared to
2003, but interest expense increased $376,000, or 9.4%. The decrease in interest
income was due to a decrease in rates, offset somewhat by an increase in volume.
The increase in interest expense was due to an increase in volume offset
somewhat by a decrease in rates.
26
The decrease in total interest income was due to decreases in interest income
from taxable and tax-exempt investment securities, offset somewhat by increases
in interest income from loans and federal funds sold and interest earning
deposits. The decreases in interest income from taxable investment securities
was due to a decrease in rates, offset somewhat by an increase in volume during
the third quarter of 2004 compared to the same period in 2003. The decrease in
interest income from tax-exempt investment securities was due to decreases in
both volume and rates. The increase in interest income from loans was due to an
increase in volume, offset somewhat by a decrease in rates. The increase in
interest income from federal funds sold and interest earning deposits was due to
an increase in rates, offset somewhat by a decrease in volume.
The increase in total interest expense was due to increases in interest expense
on interest bearing demand and savings deposits, federal funds purchased,
repurchase agreements and notes payable and FHLB advances and other borrowings,
offset somewhat by a decrease in interest expense on time deposits in the third
quarter of 2004 compared to the same period in 2003. The increases in interest
expense on interest bearing demand and savings deposits was due to an increase
in both volume and rates. The increase in interest expense on federal funds
purchased, repurchase agreements and notes payable was due to an increase in
rates, offset somewhat by a decrease in volume. The increase in interest expense
from FHLB advances and other borrowings was due to an increase in volume, offset
somewhat by lower rates. The decrease in interest expense on time deposits was
due to a decrease in rates, offset somewhat by an increase in volume.
The provision for loan losses recorded was $330,000 during both the third
quarter of 2004 and 2003. The provision during both periods was based on
management's analysis of the loan portfolio, as discussed in the provision and
allowance for loan losses section above.
Noninterest Income and Expense
for the Three Months Ended
September 30, 2004 and 2003
(in thousands)
----------------------------------------------
Non-interest Income 09/30/2004 09/30/2003 $ Change % Change
-----------------------------------------------------------------------------------------
Remittance processing .................. $ 1,820 $ 1,814 $ 6 0.3%
Trust and brokerage fees 1 ............. 1,544 1,435 109 7.6%
Service charges on deposit accounts .... 619 666 (47) (7.1%)
Securities transactions, net 2 ......... 133 (6) 139 2316.7%
Gain on sales of mortgage loans, net 3 . 229 972 (743) (76.4%)
Other .................................. 613 539 74 13.7%
--------------------------------------------
Total non-interest income ...... $ 4,958 $ 5,420 $ (462) (8.5%)
============================================
Non-interest Expense
----------------------------------------------------------------------------------------
Salaries and employee benefits ......... $ 4,727 $ 4,650 $ 77 1.7%
Occupancy .............................. 685 641 44 6.9%
Equipment 4 ............................ 606 575 31 5.4%
Data processing 5 ...................... 546 505 41 8.1%
Office supplies ........................ 270 334 (64) (19.2%)
Service charges from correspondent banks 194 233 (39) (16.7%)
Other 6 ................................ 1,414 1,312 102 7.8%
--------------------------------------------
Total non-interest expense ..... $ 8,442 $ 8,250 $ 192 2.3%
============================================
1 The increase in trust and brokerage fees was the result of strong
investment performance for existing clients and obtaining new investment
accounts. Assets under management increased $209 million to $1.647 billion
at September 30, 2004 compared to $1.438 billion at September 30, 2003.
2 Included in securities transactions in 2004 was a $133,000 gain on the sale
of one security.
3 The decrease in gains on sales of mortgage loans reflected a $57.338
million, or 78.8%, decrease in funded mortgage loans sold, from $72.761
million in the third quarter of 2003 to $15.423 million in the third
quarter of 2004. The volume of funded mortgage loans, which peaked in the
third quarter of 2003, decreased mainly due to a decline in demand for
refinancing.
4 The increase in equipment expense included costs associated with the new
Internet Agent product.
5 Data processing expense included a $49,000 increase in internet expense in
the third quarter of 2004 compared to the same period in 2003. This
increase reflected an increase in internet banking, internet bill pay and
internet cash management users in 2004 compared to 2003.
6 Included in other non-interest expense in the third quarter of 2004 was
approximately $160,000 of expenses incurred related to the anticipated
merger of the Company's two banking subsidiaries for purposes of marketing,
promotion and branding of the new entity, Main Street Bank and Trust.
27
Income tax expense decreased $343,000, or 15.2%, during the third quarter of
2004 compared to the same period in 2003. The effective tax rate increased to
34.9% during the third quarter of 2004 from 34.6% in the second quarter of 2003.
Business Segment Information
The Company currently operates in two industry segments. The primary business
involves providing banking services to central Illinois. The company's
subsidiary 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; full service brokerage 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 Internet
Agent, 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. Certain administrative,
audit, compliance, accounting, finance, property management, human resources,
sales management and marketing, courier, information systems and other support
services are performed by the Company. The net expenses of these functions are
allocated to the subsidiaries by charging a monthly maintenance fee.
As of and for the Banking Remittance
Nine Months Ended: Services Services Company Eliminations Total
--------------------------------------------------------------------------------------------------
September 30, 2004
Total interest income ....... $ 40,196 $ 15 $ 172 $ (76) $ 40,307
Total interest expense ...... 12,309 -- 51 (76) 12,284
Provision for loan losses ... 990 -- -- -- 990
Total non-interest income ... 9,732 5,696 3,529 (3,680) 15,277
Total non-interest expense .. 20,009 3,905 4,723 (3,680) 24,957
Income before income tax .... 16,620 1,806 (1,073) -- 17,353
Income tax expense .......... 5,810 759 (432) -- 6,137
Net income .................. 10,810 1,047 (641) -- 11,216
Total assets ................ 1,221,464 4,730 119,906 (106,502) 1,239,598
Depreciation and amortization 1,142 471 301 -- 1,914
September 30, 2003
Total interest income ....... $ 42,063 $ 43 $ 257 43 $ (83) $ 42,280
Total interest expense ...... 12,888 -- 5 (83) 12,810
Provision for loan losses ... 990 -- -- -- 990
Total non-interest income ... 10,115 5,372 3,495 (3,792) 15,190
Total non-interest expense .. 20,105 3,680 4,442 (3,792) 24,435
Income before income tax .... 18,195 1,735 (695) -- 19,235
Income tax expense .......... 6,118 698 (276) -- 6,540
Net income .................. 12,077 1,037 (419) -- 12,695
Total assets ................ 1,130,724 3,359 148,339 (134,949) 1,147,473
Depreciation and amortization 1,159 304 363 -- 1,826
Recent Regulatory Developments
On August 20, 2004, Illinois Governor Blagojevich signed legislation that
permits state-chartered banks and national banks that are headquartered outside
of Illinois to establish de novo branches and to acquire branches in Illinois,
provided that the states in which they are headquartered grant reciprocal
privileges to banks that are headquartered in Illinois. This legislation will
allow state-chartered banks and national banks headquartered in Illinois to
establish de novo branches and to acquire branches in states that have similar
reciprocity laws. On September 13, 2004, the Illinois Department of Financial
and Professional Regulation published guidance, in the form of Interpretive
Letter 2004-01, that lists those states that have similar reciprocity laws. At
this time, it is not possible to predict the impact this legislation will have
on the Company.
28
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This document contains, and future oral and written statements of the Company
and its management may contain, forward-looking statements, within the meaning
of such terms in the Private Securities Litigation Reform Act of 1985, 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.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
o The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
o The economic impact of past and any future terrorist attacks, acts of war
or threats thereof, and the response of the United States to any such
threats and attacks.
o The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
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.
29
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the "Interest Rate Sensitivity" section above.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
September 30, 2004. Based on that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective. There have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
-------------------------------------------------------------------------------------------
(c) Total (d) Maximum
Number of Number
Shares of Shares
Purchased as that May
Part of Yet Be
(a) Total Publicly Purchased
Number of (b) Average Announced Under the
Shares Price Paid per Plans or Plans or
Period Purchased Shares Programs 1 Programs 1
--------------------------------------------------------------------------------------------
July 1-
July 31, 2004 ............... -- $ -- -- 428,700
August 1 -
August 31, 2004 ............. 36,000 $ 30.96 36,000 392,700
September 1 -
September 30, 2004 .......... 3,000 $ 31.00 3,000 389,700
-----------------------------------------------------------
Total ....................... 39,000 $ 30.96 39,000 389,700
===========================================================
1 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. The program will expire
when the Company repurchases all of the shares covered.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
30
Item 6. Exhibits
a. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13-a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18. U.S.S.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf of the undersigned, thereunto duly
authorized.
MAIN STREET TRUST, INC.
Date: November 8, 2004
By: /s/ David B. White
----------------------------------------
David B. White, Executive Vice President
and Chief Financial Officer
By: /s/ Van A. Dukeman
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Van. A. Dukeman, President
and Chief Executive Officer
32