UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
Commission File Number: 0-30031
MAIN STREET TRUST, INC.
(Exact name of Registrant as specified in its charter)
Illinois 37-1338484
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
100 West University, Champaign, Illinois 61820
(Address of principal executive offices)(Zip Code)
(Registrant's telephone number, including area code)
(217) 351-6500
Indicate by "X" whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ___
---
Indicate by "X" whether the registrant is an accelerated filer (as defined by
Rule 12b-2 of the Exchange Act).
Yes X No ___
---
Indicate the number of shares outstanding of the registrant's common stock,
as of August 1, 2004
Main Street Trust, Inc. Common Stock 9,473,116
Table of Contents
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 35
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(Unaudited, in thousands, except share data)
June 30, December 31,
2004 2003
------------------------
ASSETS
Cash and due from banks $ 45,553 $ 45,899
Federal funds sold and interest bearing deposits 12,294 30,004
------------------------
Cash and cash equivalents 57,847 75,903
------------------------
Investments in debt and equity securities:
Available-for-sale, at fair value 273,665 265,914
Held-to-maturity, at cost (fair value of
$102,834 and $96,628 at June 30, 2004 and
December 31, 2003, respectively) 103,950 97,056
Non-marketable equity securities 7,758 7,756
-----------------------
Total investments in debt and equity securities 385,373 370,726
-----------------------
Loans, net of allowance for loan
losses of $10,084 and $9,786 at June 30, 2004
and December 31, 2003, respectively 706,617 666,259
Mortgage loans held for sale 890 632
Premises and equipment 16,966 17,622
Accrued interest receivable 6,615 6,430
Other assets 20,369 16,602
-----------------------
Total assets $ 1,194,677 $ 1,154,174
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 161,753 $ 162,175
Interest bearing 797,671 736,297
------------------------
Total deposits 959,424 898,472
------------------------
Federal funds purchased, repurchase agreements
and notes payable 82,144 102,998
Federal Home Loan Bank advances and other
borrowings 29,920 29,980
Accrued interest payable 1,987 1,669
Other liabilities 9,509 9,605
------------------------
Total liabilities 1,082,984 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 55,199 55,271
Retained earnings 105,080 101,521
Accumulated other comprehensive income (loss) (313) 1,941
-----------------------
160,078 158,845
Less: treasury stock, at cost, 1,746,203
and 1,718,950 shares at June 30, 2004
and December 31, 2003, respectively (48,385) (47,395)
-----------------------
Total shareholders' equity 111,693 111,450
-----------------------
Total liabilities and shareholders' equity $ 1,194,677 $ 1,154,174
===========================
See accompanying notes to unaudited consolidated financial statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Six Months Ended June 30, 2004 and 2003
(Unaudited, in thousands, except share data)
Interest income: 2004 2003
-------------------------
Loans and fees on loans $ 20,064 $ 21,402
Investments in debt and equity securities
Taxable 5,413 5,772
Tax-exempt 979 1,166
Federal funds sold and interest bearing deposits 188 254
------------------------
Total interest income 26,644 28,594
------------------------
Interest expense:
Deposits 6,546 7,491
Federal funds purchased, repurchase agreements
and notes payable 557 547
Federal Home Loan Bank advances and other borrowings 797 764
------------------------
Total interest expense 7,900 8,802
------------------------
Net interest income 18,744 19,792
Provision for loan losses 660 660
------------------------
Net interest income after provision for loan losses 18,084 19,132
------------------------
Non-interest income:
Remittance processing 3,815 3,498
Trust and brokerage fees 3,287 2,795
Service charges on deposit accounts 1,201 1,240
Securities transactions, net 6 (43)
Gain on sales of mortgage loans, net 548 1,242
Other 1,462 1,038
------------------------
Total non-interest income 10,319 9,770
------------------------
Non-interest expense:
Salaries and employee benefits 9,251 9,243
Occupancy 1,283 1,206
Equipment 1,280 1,212
Data processing 1,087 1,058
Office supplies 617 628
Service charges from correspondent banks 458 465
Other 2,539 2,373
------------------------
Total non-interest expense 16,515 16,185
------------------------
Income before income taxes 11,888 12,717
Income taxes 4,227 4,287
------------------------
Net income $ 7,661 $ 8,430
========================
Per share data:
Basic earnings per share $ 0.81 $ 0.80
Weighted average shares of common stock outstanding 9,507,493 10,487,954
Diluted earnings per share $ 0.80 $ 0.80
Weighted average shares of common stock and
dilutive potential common shares outstanding 9,625,020 10,590,106
See accompanying notes to unaudited consolidated financial statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Six Months Ended June 30, 2004 and 2003
(Unaudited, in thousands)
2004 2003
--------------------------
Net income $ 7,661 $ 8,430
--------------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period, net of tax of ($1,501)
and $49, for June 30, 2004
and 2003, respectively (2,250) 73
Less: reclassification adjustment for gains
(losses) included in net income, net of
tax of ($2) and $17, for June 30, 2004 and
2003, respectively (4) 26
--------------------------
Other comprehensive income (loss) (2,254) 99
--------------------------
Comprehensive income $ 5,407 $ 8,529
==========================
See accompanying notes to unaudited consolidated financial statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended June 30, 2004 and 2003
(Unaudited, in thousands, except share data)
Interest income: 2004 2003
----------------------------
Loans and fees on loans $ 10,013 $ 10,348
Investments in debt and equity securities
Taxable 2,699 2,949
Tax-exempt 476 579
Federal funds sold and interest bearing deposits 75 152
----------------------------
Total interest income 13,263 14,028
----------------------------
Interest expense:
Deposits 3,344 3,618
Federal funds purchased, repurchase
agreements and notes payable 276 280
Federal Home Loan Bank advances and
other borrowings 398 384
----------------------------
Total interest expense 4,018 4,282
----------------------------
Net interest income 9,245 9,746
Provision for loan losses 330 330
----------------------------
Net interest income after provision
for loan losses 8,915 9,416
----------------------------
Non-interest income:
Remittance processing 1,923 1,732
Trust and brokerage fees 1,625 1,333
Service charges on deposit accounts 622 660
Securities transactions, net (2) -
Gain on sales of mortgage loans, net 345 698
Other 659 511
----------------------------
Total non-interest income 5,172 4,934
----------------------------
Non-interest expense:
Salaries and employee benefits 4,543 4,594
Occupancy 638 583
Equipment 647 563
Data processing 555 529
Office supplies 312 325
Service charges from correspondent banks 233 236
Other 1,390 1,291
----------------------------
Total non-interest expense 8,318 8,121
----------------------------
Income before income taxes 5,769 6,229
Income taxes 2,051 2,097
----------------------------
Net income $ 3,718 $ 4,132
============================
Per share data:
Basic earnings per share $ 0.39 $ 0.39
Weighted average shares of common
stock outstanding 9,505,500 10,496,736
Diluted earnings per share $ 0.39 $ 0.39
Weighted average shares of common stock
and dilutive potential common shares
outstanding 9,619,707 10,605,680
See accompanying notes to unaudited consolidated financial statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended June 30, 2004 and 2003
(Unaudited, in thousands)
2004 2003
--------------------------
Net income $ 3,718 $ 4,132
--------------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period,
net of tax of ($1,906) and $542, for June 30, 2004
and 2003, respectively (2,859) 813
Less: reclassification adjustment for
gains (losses) included in net income,
net of tax of $1 and $0, for
June 30, 2004 and 2003, respectively 1 -
--------------------------
Other comprehensive income (loss) (2,858) 813
--------------------------
Comprehensive income $ 860 $ 4,945
==========================
See accompanying notes to unaudited consolidated financial statements.
MAIN STREET TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ending June 30, 2004 and 2003
(Unaudited, in thousands)
2004 2003
------------------
Cash flows from operating activities:
Net income $ 7,661 $ 8,430
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,303 1,223
Amortization of bond discounts and premiums, net 1,206 922
Provision for loan losses 660 660
Securities transactions, net (6) 43
Federal Home Loan Bank stock dividend (126) (181)
Undistributed gain from non-marketable equity securities (10) -
Gain on sales of mortgage loans, net (548) (1,242)
Gain on disposal of premises and equipment (292) -
Proceeds from sales of mortgage loans originated for sale 43,988 115,484
Mortgage loans originated for sale (43,698) (119,145)
Other, net (2,293) (2,302)
------------------
Net cash provided by operating activities 7,845 3,892
------------------
Cash flows from investing activities:
Net (increase) decrease in loans (41,018) 38,215
Proceeds from maturities and calls of investment
in debt securities:
Held-to-maturity 7,755 7,436
Available-for-sale 104,120 127,974
Proceeds from sales of investments:
Available-for-sale 88 11,085
Purchases of investments in debt and equity securities:
Held-to-maturity (45,624) (57,569)
Available-for-sale (120,829) (175,284)
Other equity securities (125) (580)
Principal paydowns from mortgage-backed securities:
Held-to-maturity 30,331 13,673
Available-for-sale 4,558 10,526
Return of principal on other equity securities 258 115
Purchases of premises and equipment (978) (698)
Proceeds from sales of premises and equipment 623 -
------------------
Net cash used in investing activities (60,841) (25,107)
------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 60,952 (16,718)
Net (decrease) increase in federal funds purchased,
repurchase agreements, and notes payable (20,854) 15,056
Payments on Federal Home Loan Bank and other borrowings (60) (58)
Cash dividends paid (3,998) (3,145)
MSTI stock transactions, net (1,100) 235
-------------------
Net cash provided by (used in) financing activities 34,940 (4,630)
-------------------
Net decrease in cash and cash equivalents (18,056) (25,845)
Cash and cash equivalents at beginning of year 75,903 102,746
-------------------
Cash and cash equivalents at end of period $ 57,847 $ 76,901
===================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 7,582 $ 9,090
Income taxes 4,775 5,430
Real estate acquired through or in lieu
of foreclosure - 10
Dividends declared not paid 1,989 2,097
See accompanying notes to unaudited consolidated financial statements.
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 June 30, 2004 and for the
three-month and six-month periods ended June 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 six-month periods ended
June 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.
Note 3. Income per Share
Net income per common share has been computed as follows:
Six Months Ended Three Months Ended
-------------------------------------------------------------
June 30, June 30,
2004 2003 2004 2003
-------------------------------------------------------------
Net Income $ 7,661,000 $ 8,430,000 $ 3,718,000 $ 4,132,000
=============================================================
Shares:
Weighted average common shares outstanding 9,507,493 10,487,954 9,505,500 10,496,736
Dilutive effect of outstanding options,
as determined by the application of
the treasury stock method 117,527 102,152 114,207 108,944
-------------------------------------------------------------
Weighted average common shares oustanding,
as adjusted 9,625,020 10,590,106 9,619,707 10,605,680
=============================================================
Basic earnings per share $ 0.81 $ 0.80 $ 0.39 $ 0.39
=============================================================
Diluted earnings per share $ 0.80 $ 0.80 $ 0.39 $ 0.39
=============================================================
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.
Six Months Ended Three Months Ended
------------------------------------------
June 30, June 30,
2004 2003 2004 2003
------------------------------------------
Net income on common stock:
As reported $ 7,661 $ 8,430 $ 3,718 $ 4,132
Deduct total stock-based
compensation expense determined
under the fair value method for all
awards, net of related tax effects (195) (117) (100) (72)
------------------------------------------
Pro forma $ 7,466 $ 8,313 $ 3,618 $ 4,060
==========================================
Basic earnings per share:
As reported $ 0.81 $ 0.80 $ 0.39 $ 0.39
Pro forma 0.79 0.79 0.38 0.39
Diluted earnings per share:
As reported $ 0.80 $ 0.80 $ 0.39 $ 0.39
Pro forma 0.78 0.78 0.38 0.38
The fair value of the stock options granted has been estimated using
the Black-Scholes option-pricing model with the following weighted average
assumptions. The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions.
In addition, such models require the use of subjective assumptions, including
expected stock price volatility. In management's opinion, such valuation models
may not necessarily provide the best single measure of option value.
Six Months Ended
June 30,
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%
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 June 30, 2004 and 2003:
June 30,
2004 2003
--------- ---------
Financial instruments whose contract
amounts represent credit risk:
Commitments $ 221,953 $ 210,086
Standby letter 21,076 10,368
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 $3.315
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 June 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 $40.503 million, or 3.5%, to $1.195 billion at
June 30, 2004 compared to $1.154 billion at December 31, 2003. Increases in
loans, investments in debt and equity securities, other assets, mortgage loans
held for sale, and accrued interest receivable were partially offset by
decreases in federal funds sold and interest bearing deposits, premises and
equipment, and cash and due from banks.
Cash and due from banks decreased $346,000, or 0.8%, to $45.553 million
at June 30, 2004 compared to $45.899 million at December 31, 2003.
Federal funds sold and interest bearing deposits decreased $17.710
million, or 59.0%, to $12.294 million at June 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.
Total investments in debt and equity securities increased $14.647
million, or 4.0%, to $385.373 million at June 30, 2004 compared to $370.726
million at December 31, 2003. This overall increase was primarily due to an
increase in investments in securities available-for-sale of $7.751 million, or
2.9%, and an increase in securities held-to-maturity of $6.894 million, or 7.1%.
Investments fluctuate with loan demand, deposit volume and investment
opportunities.
Loans, net of allowance for loan losses, increased $40.358 million, or
6.1%, to $706.617 million at June 30, 2004 from $666.259 million at December 31,
2003. Commercial, financial and agricultural loans increased $43.300 million, or
17.3%, primarily as a result of the favorable rate environment, the Company's
emphasis on business development and relative improvement in the local economy
in recent months. Real estate loans decreased $7.124 million, or 2.0%, primarily
due to a decrease in commercial real estate loans of $7.645 million, or 2.6%.
During 2003, the Company experienced growth of $32.105 million or 12.1% in
commercial real estate loans,compared to 2004 when the Company experienced a
slowdown in demand, which, coupled with normal paydowns, resulted in the $7.645
million decrease. Installment and consumer loans increased $4.480 million,
or 5.8%. Included in the increase was an increase of $10.424 million, or 62.8%
in home equity loans. Home equity loans increased from $16.602 million at
December 31, 2003 to $27.026 million at June 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 $5.817 million, or
14.9%, in indirect lending. Indirect loans decreased from $39.073 million
at December 31, 2003 to $33.256 million at June 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 $258,000, or 40.8%, from
$632,000 at December 31, 2003 to $890,000 at June 30, 2004.
Premises and equipment decreased $656,000, or 3.7%, from $17.622
million at December 31, 2003 to $16.966 million at June 30, 2004. The decrease
included depreciation expense of $1.303 million and proceeds from the sale of
property of $623,000, offset somewhat by purchases of $978,000 and a gain on
disposal of property of $292,000.
Total liabilities increased $40.260 million, or 3.9%, to $1.083 billion
at June 30, 2004 from $1.043 billion at December 31, 2003. Increases in total
deposits and accrued interest payable were somewhat offset by decreases in
federal funds purchased, repurchase agreements and notes payable, Federal Home
Loan Bank advances and other borrowings, and other liabilities.
Total deposits increased $60.952 million, or 6.8%, to $959.424 million
at June 30, 2004 from $898.472 million at December 31, 2003. Interest bearing
deposits increased $61.374 million, or 8.3%. Included in this increase was an
increase of approximately $41 million related to the Company's Wealth Management
division. Non-interest bearing deposits decreased $422,000, or 0.3%.
Federal funds purchased, repurchase agreements and notes payable
decreased $20.854 million, or 20.2%, to $82.144 million at June 30, 2004
compared to $102.998 million at December 31, 2003. Included in this change were
decreases of $20.729 million in repurchase agreements and $125,000 in federal
funds purchased.
Federal Home Loan Bank advances and other borrowings decreased $60,000,
or 0.2%, to $29.920 million at June 30, 2004 compared to $29.980 million at
December 31, 2003.
Investment Securities
The carrying value of investments in debt and equity securities was as
follows for June 30, 2004 and December 31, 2003:
Carrying Value of Securities
(in thousands)
--------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
--------------------------------------------------------------------------------
Available-for-sale:
Federal agencies $ 218,563 $ 220,199
Mortgage-backed securities 33,130 23,007
State and municipal 16,307 17,317
Marketable equity securities 5,665 5,391
--------------------------------------------------------------------------------
Total available-for-sale $ 273,665 $ 265,914
================================================================================
Held-to-maturity:
Federal agencies $ 45,067 $ 10,704
Mortgage-backed securities 26,634 50,029
State and municipal 32,249 36,323
--------------------------------------------------------------------------------
Total held-to-maturity $ 103,950 $ 97,056
================================================================================
Non-marketable equity securities:
FHLB and FRB stock1 $ 4,385 $ 4,259
Other equity investments 3,373 3,497
--------------------------------------------------------------------------------
Total non-marketable equity securities $ 7,758 $ 7,756
================================================================================
Total investment securities $ 385,373 $ 370,726
================================================================================
1 FHLB and FRB are commonly used acronyms for Federal Home Loan Bank and Federal
Reserve Bank respectively.
The following table shows the maturities and weighted-average yields of
investment securities at June 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)
------------------------------------------------------------------------------------------------------------------------------
June 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 $ 95,478 3.48% $ 122,111 3.00% $ 974 2.61% $ - - $ 218,563 3.21%
Mortgage-backed
securities1 $ 9,741 1.96% $ 22,905 4.32% $ 484 6.95% $ - - $ 33,130 3.66%
State and municipal $ 4,137 3.62% $ 6,983 4.30% $ 4,112 5.02% $ 1,075 5.11% $ 16,307 4.36%
Marketable equity
securities2 $ - - $ - - $ - - $ - - $ 5,665 -
------------------------------------------------------------------------------------------------------------------------------
Total $ 109,356 $ 151,999 $ 5,570 $ 1,075 $ 273,665
------------------------------------------------------------------------------------------------------------------------------
Average Yield 3.35% 3.25% 4.77% 5.11% 3.33%
==============================================================================================================================
Securities held-
to-maturity:
Federal agencies $ 14,518 2.89% $ 27,024 2.85% $ 3,525 4.04% $ - - $ 45,067 2.96%
Mortgage-backed
securities1 $ 6,985 2.40% $ 18,736 3.95% $ 214 3.95% $ 699 6.32% $ 26,634 3.60%
State and municipal $ 11,863 3.82% $ 19,442 4.05% $ 439 4.73% $ 505 5.25% $ 32,249 3.99%
------------------------------------------------------------------------------------------------------------------------------
Total $ 33,366 $ 65,202 $ 4,178 $ 1,204 $ 103,950
==============================================================================================================================
Average Yield 3.12% 3.49% 4.11% 5.87% 3.42%
==============================================================================================================================
Non-marketable equity securities2:
FHLB and FRB stock $ - - $ - - $ - - $ - - $ 4,385 -
Other equity investments $ - - $ - - $ - - $ - - $ 3,373 -
-----------------------------------------------------------------------------------------------------------------------------
Total $ - - $ - - $ - - $ - - $ 7,758 -
==============================================================================================================================
1 Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties and certain securities require principal repayments prior
to maturity.
2 Due to the nature of these securities, they do not have a stated maturity date
or rate.
Loans
The following table presents the amounts and percentages of loans at
June 30, 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)
--------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
--------------------------------------------------------------------------------
Amount Percentage Amount Percentage
--------------------------------------------------------------------------------
Commercial, financial and
agricultural $ 293,095 40.90% $ 249,795 36.95%
Real estate 341,873 47.70% 348,997 51.62%
Installment and consumer 81,733 11.40% 77,253 11.43%
--------------------------------------------------------------------------------
Total loans $ 716,701 100.00% $ 676,045 100.00%
================================================================================
The balance of loans outstanding as of June 30, 2004 by maturity is
shown in the following table:
Maturity of Loans Outstanding
(dollars in thousands)
--------------------------------------------------------------------------------
June 30, 2004
--------------------------------------------------------------------------------
1 year 1 to 5 Over 5
or less years years Total
--------------------------------------------------------------------------------
Commercial, financial and
agricultural $ 189,781 $ 85,335 $ 17,979 $ 293,095
Real estate 52,221 172,432 117,220 341,873
Installment and consumer 25,495 42,429 13,809 81,733
--------------------------------------------------------------------------------
Total $ 267,497 $ 300,196 $149,008 $ 716,701
================================================================================
Percentage of total loans
outstanding 37.32% 41.89% 20.79% 100.00%
================================================================================
Capital
Total shareholders' equity increased $243,000 from December 31, 2003 to
June 30, 2004. The change in shareholders' equity is summarized as follows:
Shareholders' Equity (in thousands)
--------------------------------------------------------------------------------
Shareholders' equity, December 31, 2003 $ 111,450
Net income 7,661
Treasury stock transactions, net (1,100)
Stock appreciation rights (72)
Cash dividends declared (3,992)
Other comprehensive income (2,254)
--------------------------------------------------------------------------------
Shareholders' equity, June 30, 2004 $ 111,693
================================================================================
On June 15, 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 $1.989 million was paid on July 23, 2004 to holders of record on
July 9, 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 June 30, 2004, that the Company and its subsidiary banks exceeded all
capital adequacy requirements to which they are subject.
As of June 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
Actual adequacy prompt corrective
purposes: action provisions:
--------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------
As of June 30, 2004:
Total capital
(to risk-weighted assets)
Consolidated $121,720 13.9% $69,877 8.0% N/A
BankIllinois $ 62,489 11.5% $43,544 8.0% $54,430 10.0%
First National Bank of Decatur $ 36,599 11.8% $24,802 8.0% $31,002 10.0%
Tier I capital
(to risk-weighted assets)
Consolidated $111,528 12.8% $34,938 4.0% N/A
BankIllinois $ 56,308 10.4% $21,772 4.0% $32,658 6.0%
First National Bank of Decatur $ 32,722 10.6% $12,401 4.0% $18,601 6.0%
Tier I capital
(to average assets)
Consolidated $111,528 9.3% $47,891 4.0% N/A
BankIllinois $ 56,308 7.9% $28,553 4.0% $35,692 5.0%
First National Bank of Decatur $ 32,722 7.5% $17,468 4.0% $21,835 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.
The following table presents the Company's interest rate sensitivity at various
intervals at June 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 $ 12,294 $ - $ - $ - $ - $ 12,294
Debt and equity securities 17,759 21,364 28,461 49,798 267,991 385,373
Loans 2 287,466 41,470 35,728 53,804 299,123 717,591
-----------------------------------------------------------------------------------------------------------------
Total earning assets $ 317,519 $ 62,834 $ 64,189 $103,602 $ 567,114 $ 1,115,258
-----------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits $ 87,766 $ 1,622 $ 2,433 $ 4,864 $ 184,842 $ 281,527
Money market savings
deposits 159,753 - - - - 159,753
Time deposits 21,288 44,472 62,535 102,536 125,560 356,391
Federal funds purchased,
repurchase agreements,
and notes payable 81,372 - 58 129 585 82,144
FHLB advances and
other borrowings 7,268 10,000 92 - 12,560 29,920
-----------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities $ 357,447 $ 56,094 $ 65,118 $107,529 $ 323,547 $ 909,735
-----------------------------------------------------------------------------------------------------------------
Net asset (liability)
funding gap (39,928) 6,740 (929) (3,927) 243,567 205,523
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Repricing gap 0.89 1.12 0.99 0.96 1.75 1.23
Cumulative repricing gap 0.89 0.92 0.93 0.94 1.23 1.23
==================================================================================================================
1 Debt and equity securities include securities available-for-sale, securities
held-to-maturity, and non-marketable equity securites.
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 June 30, 2004, the Company was slightly 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 $399,000 in the 1-30 day category and approximately $332,000 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 June 30, 2004,
the Company's RSA/RSL was 0.94, 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 $56 million from the Federal Home Loan Bank on a secured
basis.
The Company uses financial forecasting/budgeting/reporting software
packages to perform interest rate sensitivity analysis for all product
categories. The Company's primary focus of its analysis is on the effect of
interest rate increases and decreases on net interest income. Management
believes that this analysis reflects the potential effects on current earnings
of interest rate changes. Call criteria and prepayment assumptions are taken
into consideration for investments in debt and equity securities. All of the
Company's financial instruments are analyzed by a software database which
includes each of the different product categories which are tied to key rates
such as prime, Treasury Bills, or the federal funds rate. The relationships of
each of the different products to the key rate that the product is tied to is
proportional. The software reprices the products based on current offering
rates. The software performs interest rate sensitivity analysis by performing
rate shocks of plus or minus 200 basis points in 100 basis point increments.
The following table shows projected results at June 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
------------------------------------------------------
June 30, 2004 12.3% 6.1% (6.1%) (12.2%)
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 six
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 decreased $18.056 million from December 31, 2003 to June 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.
The decrease in cash and cash equivalents came from cash used in
investing activities offset somewhat by cash provided by financing and
operating activities. There were differences in the sources and uses of cash
during the first six months of 2004 compared to the first six months of 2003.
More cash was used in investing activities during the first six months of 2004
compared to the same period in 2003. Cash was used in the area of loans during
the first six months of 2004 compared to cash provided by loans during the same
period in 2003 due to an increase in net loans during the first six months of
2004 compared to a decrease during the first six months of 2003. Somewhat
offsetting more cash used to fund loans was less cash used by net investment
portfolio activities during the first six months of 2004 compared to the same
period in 2003. During the first six months of 2004, cash used to purchase debt
and equity securities was $166.578 million, offset somewhat by proceeds of
$147.110 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. During the first six months of 2003, cash used to
purchase debt and equity securities was $233.433 million, offset somewhat by
proceeds of $170.809 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. Cash was provided by
financing activities during the first six months of 2004 compared to cash used
during the same period in 2003. This was mainly due to funds provided by an
increase in deposits during the first six months of 2004 compared to funds used
as a result of deposits decreasing during the same period in 2003. This was
offset somewhat by cash used during the first six months of 2004 due to a
decrease in the area of federal funds purchased, repurchase agreements and
notes payable compared to cash provided during the same period of 2003 due to
an increase in this area. Slightly more cash was provided by operating
activities during the first six months of 2004 compared to the same period in
2003.
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 $10.084 million at June
30, 2004 compared to $9.786 million at December 31, 2003, as net charge-offs
were $362,000 and provisions totaled $660,000 during the first six months of
2004. The allowance for loan losses as a percentage of gross loans, including
loans held-for-sale, was 1.41% at June 30, 2004, compared to 1.45% at December
31, 2003. Gross loans, including loans held-for-sale, increased 6.0% to $717.591
million at June 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 367.8% at June 30, 2004 compared to
959.4% at December 31, 2003. Nonperforming loans increased from $1.020 million
at December 31, 2003 to $2.742 million at June 30, 2004. The $1.722 million
increase in nonperforming loans during the first six months of 2004 resulted
from a $1.558 million increase in nonaccrual loans and an increase of $164,000
in loans past due 90 days or more. The increase in nonaccrual loans was
primarily the result of the addition of one commercial loan in the amount of
$1.505 million. As of June 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 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.
The following table summarizes changes in the allowance for loan losses
by loan categories for each period and additions to the allowance for loan
losses which have been charged to operations.
Allowance for Loan Losses
(dollars in thousands)
--------------------------------------------------------------------------------
June 30, 2004 June 30, 2003
--------------------------------------------------------------------------------
Allowance for loan losses at
beginning of year $ 9,786 $ 9,259
--------------------------------------------------------------------------------
Charge-offs during period:
Commercial, financial and agricultural $ - $ (7)
Residential real estate - (9)
Installment and consumer (603) (451)
--------------------------------------------------------------------------------
Total $ (603) $ (467)
--------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural $ 119 $ 181
Residential real estate 15 14
Installment and consumer 107 88
--------------------------------------------------------------------------------
Total $ 241 $ 283
--------------------------------------------------------------------------------
Net (charge-offs) recoveries $ (362) $ (184)
Provision for loan losses 660 660
--------------------------------------------------------------------------------
Allowance for loan losses at end of quarter $ 10,084 $ 9,735
================================================================================
Ratio of net charge-offs to
average net loans (0.05)% (0.03)%
================================================================================
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)
--------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
--------------------------------------------------------------------------------
Allocated:
Commercial, financial and agricultural $ 6,599 $ 5,973
Residential real estate 167 153
Installment and consumer 2,005 2,428
--------------------------------------------------------------------------------
Total allocated allowance $ 8,771 $ 8,554
Unallocated allowances 1,313 1,232
--------------------------------------------------------------------------------
Total 10,084 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)
--------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
================================================================================
Nonaccrual loans1 $ 1,957 $ 399
================================================================================
Loans past due 90 days or more $ 785 $ 621
================================================================================
Restructured loans $ 240 $ 18
================================================================================
1 Includes $415,000 at June 30, 2004 and $269,000 at December 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).
Other Nonperforming Assets (dollars in thousands)
--------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
================================================================================
Other real estate owned $ - $ -
================================================================================
Nonperforming other assets $ 126 $ 55
================================================================================
Results of Operations
Results of Operations for the Six Months Ended June 30, 2004
Net income for the first six months of 2004 was $7.661 million, a
$769,000, or 9.1%, decrease from $8.430 million for the same period in 2003.
Despite this decrease, basic earnings per share increased $0.01, or 1.3%, to
$0.81 per share year-to-date in 2004 from $0.80 per share year-to-date in 2003,
and diluted earnings per share remained unchanged at $0.80 per share
year-to-date in both 2004 and 2003. This was due to a decrease in weighted
average shares outstanding after the completion of the tender offer for
1,074,140 shares of the Company's outstanding common stock at the end of the
third quarter of 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)
---------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
---------------------------------------------------------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities1 $ 324,597 $ 5,413 3.35% $ 291,043 $ 5,772 4.00%
Tax-exempt investment securities1 (TE) 48,961 1,506 6.19% 56,961 1,794 6.35%
Federal funds sold and interest bearing
deposits2 32,514 188 1.16% 39,675 254 1.29%
Loans3,4 (TE) 692,128 20,070 5.83% 645,299 21,413 6.69%
----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) $ 1,098,200 $ 27,177 4.98% $ 1,032,978 $ 29,233 5.71%
----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 46,099 $ 46,539
Premises and equipment 17,303 18,051
Other assets 22,669 17,566
----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,184,271 $ 1,115,134
============================================================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 92,887 $ 305 0.66% $ 83,720 $ 326 0.79%
Savings 319,950 1,400 0.88% 278,354 1,367 0.99%
Time deposits 350,878 4,841 2.77% 338,553 5,798 3.45%
Federal funds purchased, repurchase
agreements, and notes payable 101,897 557 1.10% 89,619 547 1.23%
FHLB advances and other borrowings 29,948 797 5.35% 27,775 764 5.55%
----------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 895,560 $ 7,900 1.77% $ 818,021 $ 8,802 2.17%
----------------------------------------------------------------------------------------------------------------------------
Noninterest bearing demand deposits $ 100,166 $ 86,345
Noninterest bearing savings deposits 65,619 63,776
Other liabilities 9,991 9,861
----------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 1,071,336 $ 978,003
Shareholders' equity 112,935 137,131
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,184,271 $ 1,115,134
============================================================================================================================
Interest spread (average rate earned
minus average rate paid) (TE) 3.21% 3.54%
============================================================================================================================
Net interest income (TE) $19,277 $20,431
============================================================================================================================
Net yield on interest
earnings assets (TE) 3.53% 3.99%
============================================================================================================================
See next page for Notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits included approximately
$30,000 in 2004 and 2003 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 $699,000 and $931,000 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)
--------------------------------------------------------------------------------
Six Months Ended June 30, 2004
--------------------------------------------------------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
--------------------------------------------------------------------------------
Interest Income
Taxable investment securities $ (359) $ 1,416 $ (1,775)
Tax-exempt investment securities (TE) (288) (243) (45)
Federal funds sold and interest earning deposits (66) (42) (24)
Loans (TE) (1,343) 3,521 (4,864)
--------------------------------------------------------------------------------
Total interest income (TE) $ (2,056) $ 4,652 $ (6,708)
--------------------------------------------------------------------------------
Interest Expense
Interest bearing demand and savings deposits $ 12 $ 446 $ (434)
Time deposits (957) 569 (1,526)
Federal funds purchased,
repurchase agreements and notes payable 10 138 (128)
FHLB advances and other borrowings 33 97 (64)
--------------------------------------------------------------------------------
Total interest expense $ (902) $ 1,250 $ (2,152)
--------------------------------------------------------------------------------
Net Interest Income (TE) $ (1,154) $ 3,402 $ (4,556)
================================================================================
Net interest income on a tax equivalent basis was $1.154 million, or
5.6%, lower for the first six months of 2004 compared to the same period of
2003. Total tax-equivalent interest income was $2.056 million, or 7.0%, lower in
2004 compared to 2003, and interest expense decreased $902,000, or 10.2%. The
decrease in tax-equivalent interest income and interest expense was mainly due
to lower rates, offset somewhat by increases in average volume.
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 and federal funds sold and interest
earning deposits was due to lower rates and lower volume.
The decrease in total interest expense was due to a decrease in
interest expense from time deposits, offset slightly by increases in interest
expense on FHLB advances and other borrowings, interest bearing demand and
savings deposits and federal funds purchased, repurchase agreements and notes
payable. Interest expense on time deposits decreased due to lower rates, offset
somewhat by an increase in volume. Interest expense on FHLB advances and other
borrowings, interest bearing demand and savings deposits and federal funds
purchased, repurchase agreements and notes payable increased primarily due to
higher volume, offset somewhat by a decrease in rates.
The provision for loan losses recorded was $660,000 during the first
six months of 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 Six Months Ended
June 30, 2004 and 2003
(in thousands)
--------------------------------------------------------------------------------
Non-interest Income 06/30/2004 06/30/2003 $ change % change
--------------------------------------------------------------------------------
Remittance processing 1 $ 3,815 $ 3,498 $ 317 9.1%
Trust and brokerage fees 2 3,287 2,795 492 17.6%
Service charges on deposit accounts 1,201 1,240 (39) (3.1%)
Securities transactions, net 6 (43) 49 114.0%
Gain on sales of mortgage loans, net 3 548 1,242 (694) (55.9%)
Other 4 1,462 1,038 424 40.8%
--------- --------- -------- -------
Total non-interest income $ 10,319 $ 9,770 $ 549 5.6%
========= ========= ======== =======
--------------------------------------------------------------------------------
Non-interest Expense 06/30/2004 06/30/2003 $ change % change
--------------------------------------------------------------------------------
Salaries and employee benefits $ 9,251 $ 9,243 $ 8 0.1%
Occupancy 1,283 1,206 77 6.4%
Equipment 5 1,280 1,212 68 5.6%
Data processing 1,087 1,058 29 2.7%
Office supplies 617 628 (11) (1.8%)
Service charges from correspondent banks 458 465 (7) (1.5%)
Other 6 2,539 2,373 166 7.0%
--------- --------- -------- --------
Total non-interest expense $ 16,515 $ 16,185 $ 330 2.0%
========= ========= ======== ========
1 In August 2003, FirsTech introduced a new product called Internet Agent for
one new customer. Since then, six existing customers have switched from
mechanical processing to this product. Internet Agent income accounted for
$1.114 million of total remittance processing income in the first six months
of 2004. This increase was offset somewhat by decreases in mechanical
collection, lockbox processing and electronic payment income. Emphasis has
continued to be placed on new sales of, and conversion of existing customers
to, Internet Agent processing, as it is a better product and more profitable
compared to mechanical, lockbox and electronic processing.
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 $154 million to $1.615 billion at June 30,
2004 compared to $1.461 billion at June 30, 2003.
3 The decrease in gains on sales of mortgage loans reflected a $71.496 million,
or 61.9%, decrease in funded mortgage loans sold, from $115.484 million in
the first six months of 2003 to $43.988 million in the first six 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.
4 Other non-interest income included a gain of $291,000 on the sale of two
parking lots.
5 The increase in equipment expense included additional costs associated with
the new Internet Agent product.
6 Other non-interest expense included $76,000 in additional direct loan costs
related primarily to the increased volume in home equity loans.
Income tax expense decreased $60,000, or 1.4%, during the first six
months of 2004 compared to the same period in 2003. The effective tax rate
increased to 35.6% during the first six months of 2004 from 33.7% from the
same period in 2003.
Results of Operations For the Three Months Ended June 30, 2004
Net income for the second quarter of 2004 was $3.718 million, a
$414,000, or 10.0%, decrease from $4.132 million for the same period in 2003.
Despite this decrease, basic and diluted earnings per share remained
unchanged at $0.39 per share in both the second quarters of 2004 and 2003.
This was due to a decrease in weighted average shares outstanding after the
completion of the tender offer for 1,074,140 shares of the Company's common
stock at the end of the third quarter 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 June 30,
---------------------------------------------------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------
Assets
Taxable investment securities1 $ 341,868 $ 2,699 3.18% $ 306,427 $ 2,949 3.86%
Tax-exempt investment securities1 (TE) 47,787 732 6.16% 57,066 891 6.26%
Federal funds sold and interest bearing
deposits2 24,460 75 1.23% 47,245 152 1.29%
Loans3,4 (TE) 697,628 10,017 5.78% 632,220 10,355 6.57%
---------------------------------------------------------------------------------------------------------------------
Total interest earning assets
and interest income (TE) $ 1,111,743 $13,523 4.89% $ 1,042,958 $14,347 5.52%
---------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 44,416 $ 43,583
Premises and equipment 17,088 17,899
Other assets 24,096 18,172
---------------------------------------------------------------------------------------------------------------------
Total assets $ 1,197,343 $ 1,122,612
=====================================================================================================================
Liabilities and Shareholders' Equity
Interest bearing demand deposits $ 92,583 $ 154 0.67% $ 84,498 $ 129 0.61%
Savings 335,759 762 0.91% 278,523 684 0.99%
Time deposits 354,475 2,428 2.75% 339,715 2,805 3.31%
Federal funds purchased, repurchase
agreements, and notes payable 95,956 276 1.16% 93,360 280 1.20%
FHLB advances and other borrowings 29,930 398 5.35% 27,757 384 5.55%
---------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities and interest expense $ 908,703 $ 4,018 1.78% $ 823,853 $ 4,282 2.08%
---------------------------------------------------------------------------------------------------------------------
Noninterest bearing demand deposits $ 100,588 $ 82,832
Noninterest bearing savings deposits 65,085 67,401
Other liabilities 10,158 10,006
---------------------------------------------------------------------------------------------------------------------
Total liabilities $ 1,084,534 $ 984,092
Shareholders' equity 112,809 138,520
---------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,197,343 $ 1,122,612
=====================================================================================================================
Interest spread (average rate earned
minus average rate paid) (TE) 3.11% 3.43%
=====================================================================================================================
Net interest income (TE) $ 9,505 $ 10,065
=====================================================================================================================
Net yield on interest
earnings assets (TE) 3.44% 3.87%
=====================================================================================================================
See next page for Notes 1-4.
Notes to Consolidated Average Balance Sheet and Interest Rate Tables:
1 Investments in debt securities are included at carrying value.
2 Federal funds sold and interest bearing deposits included approximately
$13,000 and $16,000 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 $403,000 and $433,000 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 June 30, 2004
--------------------------------------------------------------------------------
Increase
(Decrease)
from
Previous Due to Due to
Year Volume Rate
--------------------------------------------------------------------------------
Interest Income
Taxable investment securities $ (250) $ 1,557 $ (1,807)
Tax-exempt investment securities (TE) (159) (145) (14)
Federal funds sold and interest
earning deposits (77) (71) (6)
Loans (TE) (338) 4,476 (4,814)
--------------------------------------------------------------------------------
Total interest income (TE) $ (824) $ 5,817 $ (6,641)
--------------------------------------------------------------------------------
Interest Expense
Interest bearing demand and savings
deposits $ 103 $ 317 $ (214)
Time deposits (377) 700 (1,077)
Federal funds purchased,
repurchase agreements and notes payable (4) 34 (38)
FHLB advances and other borrowings 14 86 (72)
--------------------------------------------------------------------------------
Total interest expense $ (264) $ 1,137 $ (1,401)
--------------------------------------------------------------------------------
Net Interest Income (TE) $ (560) $ 4,680 $ (5,240)
================================================================================
Net interest income on a tax equivalent basis was $560,000, or 5.6%,
lower for the second quarter of 2004 compared to the second quarter of 2003.
Total tax-equivalent interest income was $824,000, or 5.7%, lower in 2004
compared to 2003, and interest expense decreased $264,000, or 6.2%. The decrease
in interest income and interest expense was due to a decrease in rates offset
somewhat by increases in volume.
The decrease in total interest income was due to decreases in interest
income from all categories of interest earning assets. The decreases in interest
income from loans and taxable investment securities were due to decreases in
rates, offset somewhat by increases in volume during the second quarter of 2004
compared to the same period in 2003. The decreases in interest income from
tax-exempt investment securities and federal funds sold and interest earning
deposits were due to decreases in both rates and volume during the second
quarter of 2004 compared to the second quarter of 2003.
The decrease in total interest expense was due to decreases in interest
expense on time deposits and federal funds purchased, repurchase agreements and
notes payable, offset somewhat by increases in interest expense on interest
bearing demand and savings deposits and FHLB advances and other borrowings. The
decreases in interest expense on time deposits and federal funds purchased,
repurchase agreements and notes payable were due to decreases in rates offset
somewhat by increases in volume during the second quarter of 2004 compared to
the same period in 2003. The increase in interest expense from interest bearing
demand and savings deposits and FHLB advances and other borrowings were due to
an increase in volume, offset slightly by lower rates during the second quarter
of 2004 compared to the same period in 2003.
The provision for loan losses recorded was $330,000 during both the
second 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
June 30, 2004 and 2003
(in thousands)
-----------------------------------------------------------------------------------------------------
Non-interest Income 06/30/2004 06/30/2003 $ change % change
-----------------------------------------------------------------------------------------------------
Remittance processing 1 $ 1,923 $ 1,732 $ 191 11.0%
Trust and brokerage fees 2 1,625 1,333 292 21.9%
Service charges on deposit accounts 622 660 (38) (5.8%)
Securities transactions, net (2) - (2) -
Gain on sales of mortgage loans, net 3 345 698 (353) (50.6%)
Other 659 511 148 29.0%
----------- ----------- ---------- -----------
Total non-interest income $ 5,172 $ 4,934 $ 238 4.8%
=========== =========== ========== ===========
-----------------------------------------------------------------------------------------------------
Non-interest Expense 06/30/2004 06/30/2003 $ change % change
-----------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 4,543 $ 4,594 $ (51) (1.1%)
Occupancy 638 583 55 9.4%
Equipment 4 647 563 84 14.9%
Data processing 555 529 26 4.9%
Office supplies 312 325 (13) (4.0%)
Service charges from correspondent banks 233 236 (3) (1.3%)
Other 5 1,390 1,291 99 7.7%
---------- ---------- --------- ---------
Total non-interest expense $ 8,318 $ 8,121 $ 197 2.4%
========== ========== ========= =========
1 In August 2003, FirsTech introduced a new product called Internet Agent for
one new customer. Since then, six existing customers have switched from
mechanical processing to this product. Internet Agent income accounted for
$713,000 of total remittance processing income in the second quarter of 2004.
This increase was offset somewhat by decreases in mechanical collection,
lockbox processing and electronic payment income. Emphasis has continued to
be placed on new sales of, and conversion of existing customers to, Internet
Agent processing, as it is a better product and more profitable compared to
mechanical, lockbox and electronic processing.
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 $154 million to $1.615 billion at June 30,
2004 compared to $1.461 billion at June 30, 2003.
3 The decrease in gains on sales of mortgage loans reflected a $38.271 million,
or 58.5%, decrease in funded mortgage loans sold, from $65.425 million in the
second quarter of 2003 to $27.154 million in the second 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 Other non-interest expense included a $42,000 increase in direct loan
promotional costs related primarily to the increased volume in home equity
loans.
Income tax expense decreased $46,000, or 2.2%, during the second
quarter of 2004 compared to the same period in 2003. The effective tax rate
increased to 35.6% during the second quarter of 2004 from 33.7% 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; discount brokerage services and purchases of installment obligations
from retailers, primarily without recourse. The other industry segment involves
retail payment processing. FirsTech provides the following services to electric,
water and gas utilities, telecommunication companies, cable television firms and
charitable organizations: retail lockbox processing of payments delivered by
mail on behalf of the biller; processing of payments delivered by customers to
pay agents such as grocery stores, convenience stores and currency exchanges;
and concentration of payments delivered by the Automated Clearing House network,
money management software such as Quicken and through networks such as 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
Six Months Ended: Services Services Company Eliminations Total
---------------------------------------------------------------------------------------------------------------------
June 30, 2004
Total interest income $ 26,593 $ 9 $ 95 $ (53) $ 26,644
Total interest expense 7,921 - 32 (53) 7,900
Provision for loan losses 660 - - - 660
Total non-interest income 6,555 3,858 2,359 (2,453) 10,319
Total non-interest expense 13,242 2,658 3,068 (2,453) 16,515
Income before income tax 11,325 1,209 (646) - 11,888
Income tax expense 3,980 508 (261) - 4,227
Net income 7,345 701 (385) - 7,661
Total assets 1,175,652 4,409 118,469 (103,853) 1,194,677
Depreciation and amortization 764 318 221 - 1,303
June 30, 2003
Total interest income $ 28,403 $ 34 $ 206 $ (49) $ 28,594
Total interest expense 8,851 - - (49) 8,802
Provision for loan losses 660 - - - 660
Total non-interest income 6,471 3,543 2,337 (2,581) 9,770
Total non-interest expense 13,384 2,364 3,018 (2,581) 16,185
Income before income tax 11,979 1,213 (475) - 12,717
Income tax expense 3,987 485 (185) - 4,287
Net income 7,992 728 (290) - 8,430
Total assets 1,111,927 6,972 144,020 (136,437) 1,126,482
Depreciation and amortization 779 199 245 - 1,223
Recent Regulatory Developments
Trust Preferred Securities. On May 6, 2004, the Board of Governors of
the Federal Reserve System (the "Board") issued a Notice of Proposed Rulemaking
in which it proposed to allow the continued inclusion of trust preferred
securities in the tier 1 capital of bank holding companies, subject to stricter
standards. The Board is proposing to limit the aggregate amount of a bank
holding company's cumulative perpetual preferred stock, trust preferred
securities and other minority interests to 25% of the company's core capital
elements, net of goodwill. Current regulations do not require the deduction of
goodwill. The proposal also provides that amounts of qualifying trust preferred
securities and certain minority interests in excess of the 25% limit may be
included in tier 2 capital but would be limited, together with subordinated debt
and limited-life preferred stock, to 50% of tier 1 capital. The proposal
provides a three-year transition period for bank holding companies to meet these
quantitative limitations. At this time, it is not possible to predict the impact
that this proposal would have on the Company.
Bank Sales of Securities. On June 17, 2004, the Securities and Exchange
Commission (the "SEC") issued a Proposed Rule in which it described the
parameters under which banks may sell securities to their customers without
having to register as broker-dealers with the SEC in accordance with Title II of
the Gramm-Leach-Bliley Act of 1999. The proposal, which is designated as
Regulation B, clarifies, among other things: (i) the limitations on the amount
that unregistered bank employees may be compensated for making referrals in
connection with a third-party brokerage arrangement; (ii) the manner by which
banks may be compensated for effecting securities transactions for its customers
in a fiduciary capacity; and (iii) the extent to which banks may engage in
certain securities transactions as a custodian. At this time, it is not possible
to predict the impact that this proposal would have on the Company and its
subsidiaries.
Illinois Department of Financial and Professional Regulation. On July
1, 2004, the Office of Banks and Real Estate (the "OBRE"), the Department of
Financial Institutions, the Department of Insurance and the Department of
Professional Regulation were consolidated into a new agency known as the
Illinois Department of Financial and Professional Regulation ("IDFPR"). The OBRE
is now designated as the Division of Banks and Real Estate within the IDFPR.
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.
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
June 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. Changes in Securities, Use of Proceeds and Issuer Purchase of Equity
Securities
--------------------------------------------------------------------------------
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 Share Programs 1 Programs 1
----------------------- ----------------- ----------------- ----------------- --------------------
April 1 -
April 30, 2004 - $ - - 498,000
May 1 -
May 31, 2004 69,300 $ 30.93 69,300 428,700
June 1 -
June 30, 2004 - $ - - 428,700
----------------- ----------------- ----------------- --------------------
Total 69,300 $ 30.93 69,300 428,700
================= ================= ================= ====================
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
------------------------------------------------------------
On May 11, 2004, the Company's annual meeting of shareholders was held.
At the meeting, one item was put to a vote of the security holders. There were
9,534,243 issued and outstanding shares of common stock entitled to vote at the
annual meeting. The voting presented at the annual meeting was as follows:
1. David J. Downey, Van A. Dukeman, Larry D. Haab, Frederic L. Kenney, Gregory
B. Lykins, August C. Meyer, Jr., Gene A. Salmon, George T. Shapland, Thomas
G. Sloan, and H. Gale Zacheis, M.D. were elected to serve as directors for
one year with terms expiring at the next annual meeting in 2005.
Election of Directors: Votes For Votes Withheld
David J. Downey 7,695,378 9,923
Van A. Dukeman 7,692,639 12,662
Larry D. Haab 7,697,158 8,143
Frederic L. Kenney 7,698,169 7,132
Gregory B. Lykins 7,692,639 12,662
August C. Meyer, Jr. 7,699,324 5,977
Gene A. Salmon 7,699,324 5,977
George T. Shapland 7,697,239 8,062
Thomas G. Sloan 7,697,158 8,143
H. Gale Zacheis, M.D. 7,698,104 7,197
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
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.
b. Reports
On April 26, 2004, the Company filed a report on Form 8-K pursuant
to Item 12 that reported the Company's financial information for
the fiscal quarter ended March 31, 2004.
On July 27, 2004, the Company filed a report on Form 8-K pursuant
to Item 12 that reported the Company's financial information for
the fiscal quarter ended June 30, 2004.
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: August 6, 2004
By: /s/ David B. White
----------------------------------------
David B. White, Executive Vice President
and Chief Financial Officer
By: /s/ Van A. Dukeman
----------------------------------------
Van. A. Dukeman, President
and Chief Executive Officer